Issues in Corporate Governance: Board Structures and Functions

1. Issues in Corporate Governance: Board Structures and Functions Based on a Student Presentation by Joshua Shullaw and Matthew Domeyer

2. What is a board of directors? • A group of individuals who govern the affairs of a corporation (“corporate governance”) • Members of the board are elected by shareholders. • The board is run by the chairman, often the CEO. • Directors form committees, each with its own chair.

3. Owners Owners Owners Owners Owners Directors Directors Directors CEO Executives Executives Executives Employees Employees Employees Employees Employees The Double Pyramid of Corporate Governance

4. Types of Directors • Outside or Independent Directors • Receive compensation for service on the board, but no other consulting, advisory, or compensatory fee from the company, and • Are not affiliated with or employed by the company or any of its subsidiaries. • Inside Directors • are also top corporate executives, consultants, or other compensated personnel.

5. Purpose of the Board • The Board of Directors is intended to monitor the managers of a corporation, acting as an advocate for shareholders. • Legal obligation to represent and protect shareholder interest. • The Board hires, compensates, and dismisses the CEO. • The Board sets broad policy and objectives.

6. Purpose, continued • The Board nominates directors and elects a chair. • The Board makes certain that the CEO provides satisfactory leadership, planning, results, organization, control, and succession. • The Board approves short and medium term tactical, technical, operational, and financial plans.

7. Purpose, continued • The Board monitors corporate performance against agreed-upon goals. • The Board checks that stakeholders get a fair deal from the organization and that a proper balance exists among their interests. • The Board Account to stakeholders for the company’s results. • The Board looks out for the organization's continuity. • When necessary, the Board removes the chairman or CEO.

8. Board Member Duties • Take reasonable steps to place themselves in a position to monitor management of the organization. • Attend board meetings whenever they are reasonably able to do so, but are not bound to attend all meetings. • Obtain a general understanding of the business of the organization and the effect which the changing economy may have on that business. • Rely upon expert or professional advice in situations which require specialist knowledge.

9. Duties, continued • Keep themselves informed about the activities of the organization. • Generally monitor the corporate affairs and policies of the organization. • Undertake a regular review of the financial statements, and make further enquiry from that review if necessary.

10. Duties, continued • The Board may initiate policies, practices, or other decisions – the highest level of involvement, • Or, the Board may approve initiatives brought by executive management – the lowest level of involvement.

11. Sarbanes-Oxley Act of 2002 • Requires management to certify financial statements. • Requires that Audit Committee consist of solely independent directors. • At least one member of audit committee must be a “financial expert” • Employees of companies and accounting firms are extended "whistleblower protection" that would prohibit the employer from taking certain actions against employees who lawfully disclose private employer information to, among others, parties in a judicial proceeding involving a fraud claim. Whistle blowers are also granted a remedy of special damages and attorney's fees.

12. The Audit Committee • …is directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that company. • …establishes procedures for the "receipt, retention, and treatment of complaints" received by the company regarding accounting, internal controls, and auditing. • …has the authority to engage independent counsel or other advisors, as it determines necessary to carry out its duties. • …must be allowed appropriate funding.

13. Examples of Board Structures • Wal Mart http://investor.walmartstores.com/phoenix.zhtml?c=112761&p=irol-govCommComp • Canon http://www.canon.com/ir/annual/2004/p07b.html

14. Canon’s Corporate Structure

15. The Future of Corporate Governance 21st Century Governance Principles for U.S. Public Companies • Interaction – Sound governance requires effective interaction among the board, management, the external auditor, and the internal auditor. • Board Purpose – The board of directors should understand that its purpose is to protect the interests of the corporation’s stockholders, while considering the interests of other stakeholders (e.g., creditors, employees, etc.).

16. 3. Independence – The major stock exchanges should define an “independent” director as one who has no professional or personal ties (either current or former) to the corporation or its management other than service as a director.  The vast majority of the directors should be independent in both fact and appearance so as to promote arms-length oversight.

17. 4. Board Responsibilities – The board’s major areas of responsibility should be monitoring the CEO, overseeing the corporation’s strategy, and monitoring risks and the corporation’s control system.  Directors should employ healthy skepticism in meeting these responsibilities.

18. Future, continued 5. Expertise – The directors should possess relevant industry, company, functional area, and governance expertise.  The directors should reflect a mix of backgrounds and perspectives.  All directors should receive detailed orientation and continuing education to assure they achieve and maintain the necessary level of expertise.

19. Future, continued 6. Meetings and Information – The board should meet frequently for extended periods of time and should have access to the information and personnel it needs to perform its duties. 7. Leadership – The roles of Board Chair and CEO should be separate. 8. Disclosure – Proxy statements and other board communications should reflect board activities and transactions (e.g., insider trades) in a transparent and timely manner.

20. Future, continued 9. Committees – The nominating, compensation, and audit committees of the board should be composed only of independent directors. 10. Internal Audit – All public companies should maintain an effective, full-time internal audit function that reports directly to the audit committee.

21. Sources • AICPA. “Summary of Sarbanes-Oxley Act of 2002” http://www.aicpa.org/info/sarbanes_oxley_summary.htm http://www.ausport.gov.au/fulltext/2002/nsw/r_a-z_cgboards.asp • CPEonline.com. “Sarbanes-Oxley Act of 2002” http://www.cpeonline.com/cpenew/sarox.asp • Corporate Governance Center, Kennesaw State University. “21st Century Governance Principles for U.S. Public Companies” http://ksumail.kennesaw.edu/~dhermans/principl.htm

22. Questions? • What makes Boards of Directors more or less effective? • Do you think Sarbanes-Oxley should have placed more responsibility on the Board? • Would you feel comfortable “blowing the whistle” to an independent director?