Where to turn for legal advice? Both inside and outside corporate counsel play an important role in advising the board of directors.

• Author: Raymond, III, F. Douglas
• Position: Legal Counsel For The Board

OVER THE LAST TWO YEARS, corporate governance has become front-page news. Following some spectacular failures by corporate boards to oversee properly the senior officers of public companies, the oversight role of corporate directors has been widely debated. Many commentators argue that directors have broken faith with the stockholders by not being sufficiently skeptical of the managers, and that many boards are, in effect, the lapdogs of unscrupulous officers. These challenges to boards come at the same time as the heightened regulations imposed by Sarbanes-Oxley, the Securities and Exchange Commission, and the NYSE and Nasdaq listing requirements.

The confluence of these events has led many boards to reconsider the role they should play in managing the corporation and its officers. As boards grapple with these issues, some have questioned to whom they should turn for objective legal counsel and whether inside counsel is able to give the directors the objective advice they must have.

The role of the board

The stockholders are the owners of the public corporation but cannot themselves directly oversee the actions of management or, for that matter, the board of directors. Instead, stockholders must rely on others to manage their assets on their behalf. It is a bedrock principle of corporate law that the business of the corporation is managed by or under the direction of the board of directors. (Others, including the independent auditors, the SEC, and institutional investors, obviously also play important roles in this effort.) However, direct operational control must, as a practical matter, rest with the full-time managers, the senior officers. This is especially true for a public corporation with hundreds or thousands of stockholders.

The separation between ownership of the business and its day-to-day management inevitably gives rise to potential conflicts of interest, ranging from outright self-dealing by officers at the corporation's expense to sugarcoating bad news or to rushing into poorly considered business ventures. The board of a public company should take an active role in managing the corporation so as to minimize the potential for these conflicts.

However, in many well-publicized cases this did not happen. For example, the special investigative committee of the board of directors of WorldCom Inc. reported that:

"[WorldCom's] Board and its Committees did not function in a way that made it likely that they would notice red flags. The outside Directors had little or no involvement in the Company's business other than through attendance at Board meetings. ... [The Chief Executive Officer] controlled the Board's agenda, its discussions, and its decisions. He created, and the Board permitted, a corporate environment in which the pressure to meet the numbers was high, the departments that served as controls were weak, and the word of senior management was final and not to be challenged."

A well-functioning board should look to the company's lawyers to help it meet its oversight responsibilities and manage these potential conflicts. The lawyers should play an especially important role in helping the board to oversee the corporation's compliance with laws, including Sarbanes-Oxley and the related rules and regulations, and in establishing effective whistleblower and other preventative programs. In addition, counsel's active involvement in the board's processes and discussions can improve its deliberative process and help the board establish that...