Gary P. Schmidt, JD
Corporate governance, the system by which business corporations are directed and controlled, is being hit by a tsunami of change. The storm started in 2002 with the passage of the Sarbanes-Oxley Act and has been intensifying since then with the Dodd-Frank Wall Street Reform and Consumer Protection Act, an updated NYSE listing requirement, amended federal sentencing guidelines, and the list goes on.
These new requirements – combined with traditional director obligations under a corporation’s state of incorporation, articles of incorporation, by-laws, various plan documents, and committee charters – have created so much additional work that directors feel they are not focusing enough time fulfilling their primary responsibilities of strategy and management oversight.
Just as an example, the Dodd-Frank legislation imposes more than 400 new regulations with which corporations must comply. The legislation requires that the Federal Reserve issue new regulations. Contained in these new regulations is a new “standard of corporate governance” for public Boards. These standards will undoubtedly create new requirements, and most commentators expect that the escalation of corporate governance standards will continue for the foreseeable future.
How have boards responded? Some have created or expanded nominating or governance committees to manage this process. Others have created new committees such as “regulatory” or “compliance” committees to meet the new requirements.
In addition to these responses, Boards should consider adding directors with extensive corporate governance/legal backgrounds. These candidates would have certain advantages:
- Individual directors could concentrate on areas with which they are most qualified by virtue of their business background and experience (e.g., sales, accounting, human resources, R&D, computer technology, distribution/supply chain);
- Directors could specifically rely on a member with a legal/corporate governance background to help oversee Board and corporate management efforts required to comply with the avalanche of new or expanded legal requirements and oversight obligations;
- Corporate management could turn to a legal/corporate governance-qualified Board member to evaluate and communicate the complex and sometimes confusing legal environment in which all corporations must now operate.
Public companies today live in a treacherous business environment, an environment filled with legal risks and exposures. Even some of the most routine board functions now contain a legal component or standard. The criminalization of regulation violations (EPA, trade, FDA, antitrust, etc.) and aggressive law enforcers (state attorney generals, agency administrators, whistle blowers, or private law firms) have clearly created the need for legal expertise on corporate boards like never before.
So, how can corporate boards surf a Tsunami of corporate governance issues? With legal representation.