Corporate Governance

AuthorJoanie Sompayrac

Page 134

Corporate governance is the responsibility of a firm's board of directors. While management runs the company and oversees day-to-day operations, it is the board of directors that "governs" the corporations by overseeing management and representing the interests of the firm's shareholders.

By law, a corporation of any size must have a board of directors elected by its shareholders. The directors have a fiduciary duty to the shareholders, who are the corporation's owners, and directors as well as corporate officers can be held liable for failing to meet their fiduciary duties to stockholders. A passive board can get into trouble by relying on an influential CEO.

Investors and the public are particularly interested in the financial reports that publicly-traded companies release, and boards of directors of these companies have a legal obligation to ensure that these reports are fair and accurate. Recent business failures, auditor malfeasance, and material deficiencies in financial disclosures, however, have caused a serious erosion of public confidence in the financial reporting of these companies.

Consequently, Congress enacted the Sarbanes-Oxley Act of 2002. Common law has traditionally held that corporate directors have a primary fiduciary duty to the corporation and a secondary duty the shareholders. Sarbanes-Oxley has essentially made directors primarily responsible to the shareholders. The mandates of Sarbanes-Oxley are both complex and extensive. Stated simply, however, they basically require that members of corporate boards must avoid any financial, family, employee, or business relationships with the companies on whose boards they serve.

Further, Sarbanes-Oxley limits the ability of employees of the independent auditing firm from going to work for companies the auditor performs audit services for, and it requires five-year rotation period for audit partners on a given company's assignments. In other words, Sarbanes-Oxley clearly emphasizes independences and avoidance of conflict of interest.

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Historically, corporate boards of directors have had a myriad of duties, most of them set by common law and the corporation's own by-laws. These duties often include: hiring, supervising, and sometimes firing the Chief Executive Officer; approving major strategic decisions; meeting with shareholders; establishing executive compensation; making decisions about mergers and acquisitions; assessing the viability of potential takeover bids; taking action if the corporation fails; overseeing financial reporting and audits; nominating board candidates; and refining board rules and policies.

One of the most difficult governance duties of the board of directors is the removal of the firm's CEO. This can occur when the board, representing the interests of the shareholders, disagrees with the strategic direction being pursued by the CEO, or if they merely want to show they are "doing their duty" as board members. For example, when Carly Fiorino was ousted as CEO of Hewlett-Packard (HP) in 2005, she was viewed by many to be hard-driving and fearless. The HP board of directors, however, had...

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