Tuesday, August 29, 2006

An Effective Board Member

Excerpts from speech by Commissioner Roel C. Campos
U.S. Securities and Exchange Commission
HACR Program on Corporate Responsibility
Boston, Mass. August 15, 2006
(Emphasis added.)

I must disclose that the comments I make tonight are my own and do not represent the Commission or my colleagues on the Commission or staff.

And most importantly, when something that should raise an eyebrow comes to the attention of a director, that director must follow up and investigate. The director cannot ignore red flags, or even pink ones.

As fiduciaries, directors must exercise a duty of care and a duty of loyalty. . . This obligation includes an oversight responsibility to see that the corporation functions within the law to achieve its purposes.

The breadth of these obligations is tempered by the "business judgment" rule. . . the Commission, will not second guess the director's decision if there is a good faith business determination - even if the business result was not a good one.

There have not been any new or different theories or standards of liability imposed on directors in the aftermath of Sarbanes Oxley by Commission or SRO rules.

From the perspective of the SEC, let me say again - participating in, overlooking, or ignoring red flags indicating possible fraudulent accounting is not a business decision.

Directors need to be involved in order to act in good faith. . . Passivity is not an option.

Directors should not settle for what is acceptable but should strive for what best benefits the company's shareholders as a whole. Those who don't should be taken to task for their lackluster, albeit possibly legal, conduct.

I know that the vast majority of directors perform their duties and services exceptionally well and with the utmost integrity.

Finally, let me discuss briefly stock option backdating cases. . . As yet, we have charged only officers in option backdating cases. However, if the facts permit - and I want to emphasize that all of our Enforcement cases are very fact specific - it wouldn't surprise me to see charges brought against outside directors.

I also think that the backdating cases can provide a few lessons in terms of "do's and don'ts" for directors. In my opinion, the two big "don'ts" are: (1) don't use "as of" dates unless you have carefully thought about the consequences and have explicit approval from legal counsel that it is acceptable to use an "as of" date; and (2) don't assign critical board functions to "committees of one," unless you're extremely careful to adopt procedures to ensure that there are appropriate checks and balances in place.

I think my advice to "don't assign critical decisions to committees of one" is fairly self-explanatory, but apparently it's advice that's also been ignored. Again, I'm not suggesting that committees of one are per se wrong - Delaware law permits it, after all. However, at best, it's far from being a "best practice" in good corporate governance. And at worst, it's a signal to the company's officers that directors are not taking their obligations as a director seriously and are willing to let expediency guide their decision-making.

Read Commissioner Roel C. Campos' speech in its entirety linked here.

Hat tip to AAO Weblog.

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