The new paradigm.

Directors and the companies on whose boards they serve are in a new era of corporate governance. The response by regulators to the abuses of Enron and other scandal-stricken companies was sweeping and swift. Today's directors are now faced with new responsibilities and increased levels of accountability and oversight. As is evident in the discussion below, the mantra of this new paradigm is simple and clear: Restore public trust in Corporate America by ensuring ethical behavior at the top.

Greater Federal Regulation of Corporate Governance

The internal controls requirements in Sarbanes-Oxley Section 404 and the financial statement certification requirements of Sarbanes-Oxley Section 302 are a substantial step by the federal government to regulate corporate governance.

Traditionally, corporate governance was almost exclusively the province of state law. Management responsibilities, director duties, and corporate behavior guidelines were all defined by state statutes and court opinions, with much of the country looking to the State of Delaware for key corporate law principles. The Sarbanes-Oxley Act has dramatically altered the balance between the federal government and the states in the regulation of corporate governance. With the management certification requirements of Sections 302 and 404, the federal government has taken an affirmative step toward specifying management's role in the design, maintenance, and efficacy of the internal financial reporting and control systems of a company. As a result of these and other provisions in Sarbanes-Oxley, the federal government has become a significant source of corporate governance regulation on top of any regulation that states may impose on companies.

The federal government has committed substantial resources to ferret out and prosecute corporations, management, and directors involved in fraud and other acts that harm the investing public.

The scandals of the past few years shook the public trust, severely hurt the financial markets, and generally made it impossible for the federal government to allow "business as usual" to continue. In response to the scandals, the federal government took unprecedented steps aimed at curtailing corporate misbehavior. It established the Corporate Fraud Task Force to address the criminal issues, stating that tough enforcement would address the massive greed and fraud by the few, while creating fewer regulations for those properly run businesses that should not be...