SOX, Corporate Governance and Working with the Board

Transcription

1 SOX, Corporate Governance and Working with the Board HCCA Compliance Institute New Orleans, Louisiana April 18, 2005 Lisa Murtha Parente Randolph, LLC Two Penn Center Plaza Suite 1800 Philadelphia, PA (215) (?) (215) (?) Michael Kendall McDermott Will & Emery LLP 28 State Street Boston, MA (617)

2 Agenda Basics of Corporate Governance Recent Considerations, including Sarbanes-Oxley Recommendations Client Relations Questions? 2

3 Basics of Corporate Governance Board of Directors/Trustees: Membership Independent directors Inside directors Key Committees Audit Committee Compensation Committee **Qualified Legal Compliance Committee 3

4 Basics: Directors Fiduciary Duties The Fiduciary Good Faith Obligation Question of Director s state of mind Director must put best interests of corporation first Director must not violate known applicable law Director must not consciously or intentionally disregard her responsibilities Lack of good faith may be inferred from a Board decision that is irrational, irresponsible, or beyond reason Note: exculpatory provisions in Delaware statutes that allow corporate charters to protect Directors who have violated the duty of care do not allow protection of Directors who have violated the good faith obligation 4

5 Basics: Directors Fiduciary Duties The Fiduciary Duty of Care Generally requires reasonable diligence in: Becoming informed about the subject matter of Board decisions and Continued monitoring and oversight of corporate activities Triggers protection of the Business Judgment Rule Caremark compels Directors to assure that an adequate information and reporting compliance system is in place 5

6 Basics: Directors Fiduciary Duties The Fiduciary Duty of Loyalty Directors may not usurp opportunities that are made available to the corporation Directors may not use corporate assets for personal gain Directors may not participate in transactions in which they have interests other than their interests as Directors 6

7 Basics: Directors Fiduciary Duties The Fiduciary Duty of Obedience to Purpose Applies only in the not-for-profit context Board actions and decisions must have bases in educational or charitable purpose for which entity was incorporated 7

8 Agenda Basics of Corporate Governance Recent Considerations, including Sarbanes-Oxley Recommendations Client Relations Questions? 8

9 Recent Considerations Expanding application of the obligation of good faith in caselaw: Walt Disney Co. (Del. Ch. 2003) knowing or deliberate indifference to fiduciary duties of care or loyalty = bad faith Emerald Partners (Del. 2003) we don t care about the risks attitude = bad faith 9

10 Recent Considerations USDOJ Corporate Leniency Policy corporation may not be criminally charged where it Reports illegal/noncompliant activity to government before it finds out from other source Takes prompt and effective action to terminate such activity (including corporate compliance program) Reports such activity with candor and completeness Makes its report a corporate act, rather than a series of individual ones Makes restitution as appropriate Does not coerce nor lead other parties to participate in illegal/noncompliant activity 10

11 Recent Considerations SEC Enforcement Model corporation may not be charged by the SEC where it Establishes effective compliance and self-policing procedures Conducts a thorough internal investigation and promptly and completely discloses the results Undertakes appropriate remedial and disciplinary actions Cooperates with SEC in a timely fashion 11

12 Recent Considerations Sarbanes-Oxley Act of 2002 Applies directly to public companies, but also affects private and not-for-profit companies by: Establishing new norms and best practices Possibly serving as a model for state laws of broader application Possibly providing content for reasonableness standards embodied in fiduciary duties Possibly providing safe harbors under other rules, regulations, and duties Serving as a model for forthcoming federal legislation governing not-for-profit entities 12

13 Recent Considerations: Sarbanes-Oxley Requirements Audit Committee Must be made up of only independent directors (those not employed by or under contract with the corporation other than for service on committee) Must include at least one financial expert or must disclose absence of such with explanation Must be given sufficient budget and authority to hire counsel and advisors and to oversee outside auditors Must pre-approve all audit and non-audit services provided by outside audit firms Must consider all reports of material violations of securities laws or fiduciary duties (unless Qualified Legal Compliance Committee fills this role) 13

14 Recent Considerations: Sarbanes-Oxley Requirements Qualified Legal Compliance Committee Creation is optional, but it would replace requirement for noisy withdrawal of attorney reporting material violation Must be comprised of at least one member of the Audit Committee and two or more other independent directors Must be given authority to receive reports of material violations and require corrective action by the corporation If corrective action is not taken, members must report material violation to SEC 14

15 Recent Considerations: Sarbanes-Oxley Requirements Compensation and Nominating Committees NYSE and NASDAQ rules adopted pursuant to Sarbanes-Oxley require Boards to adopt updated committee charters spelling out purposes and responsibilities Boards must prepare and adopt: Corporate Governance Guidelines Codes of Ethics and Business Conduct 15

16 Recent Considerations: Sarbanes-Oxley Requirements Senior Officers (CEO and CFO) Must certify that financial statements fairly present in all material aspects the financial condition of the corporation Must certify that disclosure controls and procedures have been put in place and must assess their effectiveness annually Must return bonuses and equity income if the corporation has to amend financial statements due to material noncompliance of company as a result of misconduct 16

17 Recent Considerations: Sarbanes-Oxley Requirements Corporate Counsel Inside and outside counsel must report known or reasonably suspected material violations of fiduciary duties up the ladder (including noisy withdrawal or report to Qualified Legal Compliance Committee) 17

18 Recent Considerations: Sarbanes-Oxley Requirements Outside Auditors Cannot cross-sell other services to corporations that they audit Must rotate audit partners every five years May not be fraudulently coerced or influenced by Directors, Officers, or employees 18

19 Recent Considerations: Sarbanes-Oxley Requirements Miscellaneous Provisions Corporation cannot make loans to Directors or Senior Officers (except generally available commercial loans) Shareholders must approve material changes in equity compensation plans Corporation must provide protection for internal whistleblowers Criminal penalties for destruction, falsification, alteration, or concealment of documents 19

20 Agenda Basics of Corporate Governance Recent Considerations, including Sarbanes-Oxley Recommendations Client Relations Questions? 20

21 Recommendations Focus on process Adequate process will protect the corporation and Directors even in light of inadequate results Document! Document! Document! 21

22 Recommendations Take steps to make Directors more aware of compliance issues arising in the corporation and better equipped to address situations when they arise Tailor Director selection process Increase Director training Craft Director informational materials in easily understandable language and format Regularly assess Director effectiveness 22

23 Recommendations Directors should exercise stricter oversight in the form of constructive skepticism Board should ask questions rather than simply relying on conclusions of management Board should request additional information when inadequate facts have been provided When management oversees response to compliance events, Board should require frequent updates 23

24 Recommendations Expand the role of independent Directors in dayto-day oversight and response to compliance events Independent Directors should constitute majority of Board membership Board may create position for principal or chair independent Director Independent Directors should meet regularly outside presence of management Independent Directors should populate Audit Committee, Qualified Legal Compliance Committee, and Compensation Committee 24

25 Recommendations Create additional effective reporting channels Corporate counsel and compliance officer should meet with Board, Audit Committee, Qualified Legal Compliance Committee, and/or independent Directors outside of presence of other officers Meeting should be regular (quarterly?) 25

26 Recommendations Remember that fiduciary duties are creatures of equity, rather than law This means that they are flexible and contextdependent This means that they rely on reasonableness and common sense rather than formal check the box requirements Compliance with Sarbanes-Oxley requirements will provide evidence of reasonableness 26

27 Recommendations Report all significant compliance problems to Board Significant = Material under GAAP Serious Violation of Law Strong government interest Publicity likely 27

28 Recommendations When does Board take Direct responsibility for significant compliance issue? Materiality is the issue and must be considered carefully Where does management s role end and the Board s begin? 28

29 Recommendations Does Audit Compliance Committee Retain Independent Counsel? Counsel Reports Directly to Audit Committee Can you keep management informed? Written or oral reports? 29

30 Recommendations: Disclosure to Outside Auditors Must Disclose For public companies expect press release and public filing Maintain attorney-client privilege Can public auditor also do forensic audit? 30

31 Agenda Basics of Corporate Governance Recent Considerations, including Sarbanes-Oxley Recommendations Client Relations Questions? 31

32 Client Relations: How a Board/Committee Becomes a Client Credibility Do you know our issues? Have you experienced this circumstance? Relationship Skills Can you hear us? Engagement Do you care about this? 32

33 Client Relations: How to Treat Boards/Committees as Clients Respect Build a relationship Understand client s skills and background Communication Ensure that Board members are confident in their understanding Education Take responsibility for bringing the content/knowledge to the Board Listening Know where you stand with the client Address the issues Opinions Express your opinions Give counsel 33

34 Client Relations: How to Bill for Crisis Management Manage bill expectations Gain agreement on approval process Management or Board approval? Communicate effective project management 34

35 Client Relations: Check In I am confident our team is addressing the assignment effectively and economically but I am really interested in whether or not we are meeting your needs as you see them. 35

36 Agenda Basics of Corporate Governance Recent Considerations, including Sarbanes-Oxley Recommendations Client Relations Questions? 36

37 Questions? Michael Kendall, Esq. (617) Lisa Murtha (215) (?) (215) (?) 37