MARCH 23-29, 2007
So you want to be a director?
Private and public company board-rooms
are abuzz with financial news headline
sound bites: “corporate governance,” “regulatory compliance,” “transparency” and
“SOX.”
These words are often spoken in the same
breath with shareholder litigation, personal
liability exposures, and echoes of Enron,
Worldcom and Tyco.
These are challenging times for participation on corporate boards. Yet, never before have we needed more clear-thinking,
proactive and courageous business leaders
serving as directors.
Being a director of a quality company is
a privilege and an opportunity. It can also
be a mine field for the unwary.
Contemporary business realities mandate
careful thought before accepting a position
or continuing as a member of a corporate
board.
Let’s review the basics.
Directors are elected by shareholders,
typically cultivated by current management. Directors serve as fiduciaries of the
corporation and its shareholders, and represent the entity itself, not a particular group
of shareholders or management. Perhaps
the key responsibility of a director is to
ensure the integrity and the competence of
management. Specific duties include:
• Providing continuity for the organization with the competencies required to
maximize the entities’ strategic goals and
mission
• Selecting and appointing key executives including evaluating, setting compensation and, when necessary, replacing
members of senior management
• Providing advice to senior management
• Overseeing the management of the organization to ensure the business is being
run properly, ethically and legally through
board policies and objectives
• Reviewing and approving major corporate plans, actions and financial objectives
• Reviewing and approving major deci-
sions with respect to
auditing and accounting
• Managing resources
effectively
and acquiring sufficient resources for the
organization’s operations
• Being accountable to shareholders
James
regarding the compaStoetzer
ny’s activities and expenditures.
The board is empowered to manage the
company’s business and affairs in accordance with the company’s articles, bylaws
and regulatory environment.
Board service today requires common
sense and specific knowledge of current legal and regulatory expectations. Long ago,
Supreme Court Justice Hugo Black declared, “The law has no place for dummy
directors, ...” and “directors should direct.”
Some things don’t change. Backdating options is just another form of corporate selfdealing; and widespread earnings restatements are a contemporary consequence of
improper or fraudulent accounting.
Today’s effective board member must
be a “conscientious director.” The stakes
are higher, the expectations greater, and
yes, your own wallet may be at risk. So, if
you want to be a director today, you simply must be fully prepared. Take the time
to really know your company, the industry
in which it operates, the competition, and
the current legal environment. This is not
a passive exercise. You must speak up, ask
questions, read the fine print and demand
full disclosure. You must not be a potted
plant or a rubber stamp.
In the wake of explosive shareholder litigation, Securities and Exchange Commission and other regulatory oversight investigation and indictments — typically arising
in extreme situations — directors face increased scrutiny. Shareholders and regulaGIVING
DIRECTION
tors are demanding greater director involvement. Today’s “conscientious directors”
must be accountable. Innocent outside directors have found themselves on the wrong
side of large company settlements requiring
additional individual contributions from
personal funds upward of 20 percent of
net personal assets. Does fear of liability strengthen director independence? The
expansive regulatory constructs built into
Sarbanes-Oxley and SEC “guidance” assume as much. Great business leaders rise
to many challenges. You can be an effective director by being smart. There are now
many educational opportunities for directors; your company should embrace director training and pay for it. For the faint of
heart or less experienced directors, there is
some protection in working with well established, cautiously managed, stable companies with good reputations and corporate
citizenship. Insist upon honest and ethical
conduct, written codes of ethics and procedures promoting accountability, full disclosure, compliance with applicable laws and
regulations, and the prompt internal reporting of misconduct.
Whether sitting on a board presently, or
contemplating an opportunity, carefully
review company indemnification language
protecting directors who act in good faith
and within the scope of their duties. You
should require further protection through
director liability insurance, and must understand the coverages that are afforded
through such policies, as they vary widely.
Additionally, you should take advantage of
third party professionals to analyze your
company’s governance practices, both
qualitatively and quantitatively.
JAMES STOETZER, a shareholder at Lane
Powell PC, focuses his practice on complex commercial disputes, including director and officer
liability matters. Reach him at 206-223-7019 or
stoetzerj@lanepowell.com.
Reprinted for web use with permission from the Puget Sound Business Journal. ©2007, all rights reserved. Reprinted by Scoop ReprintSource 1-800-767-3263