Understanding that serving the board can improve its business judgment is key to corporate secretary’s success
The ever-changing reforms to public company governance have been driven partly by institutional investor demand, but are mostly shaped by scandal and financial disaster, such as the failures of Enron and Worldcom in 2002 that ushered in Sarbanes Oxley and the global financial crisis in 2008 that led to the sprawling reforms mandated by the Dodd-Frank Act in 2010.
With that as an introduction, the Society of Corporate Secretaries and Governance Professionals kicked off its annual Essentials conference in Orlando, Florida. The conference, held this year from January 29 through 31, is designed as a primer on the basics of corporate governance for newer members of the profession.
Although the board of directors’ fiduciary duties to stockholders are well established, especially under Delaware law, in reality there’s very little direction as to how the board should act, so the gaps typically get filled in by litigation, with ‘the plaintiffs’ bar exercis[ing] discipline, for the good or bad, on corporate governance,’ said Keith Bishop, a partner at Allen Matkins Leck Gamble Mallory & Natsis.
‘There’s nothing that teaches you what corporate governance means as when your company is sued,’ said Robert Lamm, a principal at Robert B. Lamm P.A. and chair of the SCSGP’s securities law committee.
After summarizing the duties of care, loyalty and good faith that comprise the board’s fiduciary duties, Lamm said that the courts mostly try not to second guess actions by the board, using the business judgment rule as the basis for assuming that directors are fulfilling their fiduciary duties, except in ‘interested party’ transactions.
‘The corporate secretary needs to make sure the board has the correct information in a timely manner so the board can use the business judgment rule as a defense in a lawsuit,’ said Lamm.
A panel on ‘Internal sources and limits on governance authority’ outlined sources of governance authority such as articles of incorporation, company by-laws, amendments to bylaws by stockholders, resolutions, consents and rules for delegations of authority by the board to senior management and heads of board committees.
Kari Endries, assistant secretary and managing counsel at Chevron, discussed the responsibilities the board must reserve for its own authority, as well as the rules defining how authority for certain kinds of decisions may be delegated by the board and to whom within the company. The board typically delegates to the CEO decisions related to capital budget overruns up to specified amounts, borrowings below certain thresholds and contracts in the ordinary course of business. The CEO in turn can re-delegate certain matters to other senior managers.
‘Re-delegation authority is discoverable [in litigation] so make sure it follows the rules,’ Endries said.
Chevron provides computer-based training for its delegation authority covering a wide range of topics, including signature authority and commitment authority, she added.
The corporate secretary’s responsibilities, she noted, include the design, drafting and periodic review of delegations from the board and sub-delegations from the CEO, which provides ‘an audit trail of what authority looked like in past years in the event of an audit.
A panel focusing on the responsibilities, rights, agenda and culture of the board of directors offered practical tips for corporate secretaries in preparing boards for meetings and their other responsibilities .
Clarifying the culture of the board, Holly Gregory, a partner at Sidley Austin, said they are meant to be organs of consensus, not legislation, and therefore must ensure that a wide variety of viewpoints are considered in reaching decisions.
‘The corporate secretary should keep an eye on things and coach where you can to make sure dissenting views are being heard,’ while keeping the board focused on aiming for consensus, she said.
James Brashear, general counsel and corporate secretary at Ziv Corp., said the purpose of drafting minutes of board meetings is to demonstrate ‘on the written record that directors exercised appropriate care in the decisions they’re making.’ This includes showing that a quorum of directors was present and that directors were properly skeptical and asked questions of management. Ensuring directors received and had sufficient time to review materials before a board meeting is another critical aspect of their role, he added.
It’s critical for corporate secretaries to be clear as to who their client is. ‘In my mind, my client is the company,’ said Lucy Fato, deputy general counsel and corporate secretary at Marsh & McLennan. CEOs come and go, shareholders come and go. [When there are opposing viewpoints] you can’t please everyone, but if you just keep the company in your head at all times, sometimes those interests are aligned. Then you’ll be able to give good advice and protect your board.’
