KNOW THE LANDSCAPE®
Corporate Governance is Good Business
By GORDON E. CRIM
December 23, 2011
“Corporate governance” is a catch-all phrase denoting a collection of policies and practices that help ensure proper
oversight and control of various business functions and situations, including information gathering and disclosure,
ethics and conflicts of interests, internal controls, transparency and accountability. Publicly traded companies,
which are subject to regulation by the Securities and Exchange Commission (“SEC”), must implement a corporate
governance regime. Many readers of this publication, however, are managing non-public or closely held companies.
Such businesses often encounter internal conflicts of interest, divergent strategic views and, in some cases, questionable
decisions or actions on the part of company management. A corporate governance regime can ensure certainty,
transparency and accountability of business policies and functions, provide a framework for addressing conflicts of
interest and corporate democracy, and guide directors and officers in exercising their fiduciary duties. Corporate
governance is simply “shorthand” for good business practices and is appropriate for businesses of all sizes.
Legislative focus on corporate governance seems to intensify in the aftermath of crises. The savings and loan debacle
of the late 1980s precipitated new federal banking laws, including the Financial Institution Reform Recovery and
Enforcement Act of 1989 (“FIRREA”) and the Federal Deposit Insurance Improvement Act in 1991 (“FDICIA”),
which mandated independent audit functions, limitations on and disclosure of transactions with insiders, and specific
procedures to ensure accountability. The demise of Enron and the scandals that ensued prompted passage of the
Sarbanes-Oxley Act in 2004, under which publicly traded companies are required to implement procedures to foster
transparency, oversight and accountability. In the aftermath of the 2008 financial collapse, Congress enacted the
Dodd-Frank Wall Street Reform and Consumer Protection Act, certain provisions of which enhance the corporate
governance regulatory scheme. Many of the regulations adopted under Sarbanes-Oxley were modeled on provisions of
FIRREA and FDICIA. Such regulations require: audit and compensation committees comprising solely independent
directors; certification by senior management of internal controls and disclosure procedures; ethics policies; “whistleblower” protocols; disclosure of insider transactions and management remuneration; and more recently under DoddFrank, expanded shareholder rights through advisory votes on executive compensation.
While not subject to SEC or federal banking regulations, non-public companies should nonetheless consider adopting
corporate governance principles that are manifested in such regulations. To do so is simply good business inasmuch
compliance with good governance practices can demonstrate proper exercise of fiduciary duties by directors and
officers. Indeed, a corporate governance regime articulates specific actions and policies that serve to underpin the
proper exercise of fiduciary duties to which directors and officers are subject under applicable state laws. While
state statutes do not prescribe specific practices, such as independent audit committees, ethics policies or say-on-pay,
established corporate law generally imposes on directors and officers duties of care and loyalty in the conduct of their
business.
The duty of loyalty requires that directors and officers act solely in the best interests of the company and its stakeholders.
In smaller companies, conflicts of interest involving insiders are common. An officer or director, for example, might
be the landlord of the company premises, and therefore have a personal interest adverse to the company as tenant.
Similarly, compensation of management inherently involves conflicts of interest. Corporate policies and procedures to
ensure the proper handling of such conflicts, such as appointing an independent committee to evaluate such conflicts,
provide a means of ensuring exercise of the duty of loyalty.
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The duty of care requires directors and officers to act as prudent and diligent business persons in conducting the affairs
of the company. Policies that, for example, require independent review or audit of financial information, establish
ethical standards of conduct and accountability for management actions, would help ensure that the board of directors
is acting with due care.
Proper exercise of fiduciary duties is one of the most important protections available to directors and officers from
personal liability for adverse consequences of their official actions. Under the “business judgment rule,” absent a
conflict of interest, a court will defer to the judgment of the board of directors and not find liability if the board
exercises due care in taking action, even where such action subsequently proves to be disastrous. Conversely, failure
to observe such duties exposes directors and officers to individual liability for which there may be no protection,
notwithstanding any indemnification provisions in the company’s charter documents.
When viewed through the prism of fiduciary duties of care and loyalty, the federal regulations prescribing corporate
governance practices for publicly traded companies articulate what could simply be called “doing the right thing.”
This principle is not exclusive to public companies, but rather is necessary for the proper conduct of any business.
The size and complexity of the business dictates the scope of the necessary policies and procedures. For example, a
closely held corporation may not need to offer say-on-pay privileges to its shareholders, but would be well advised
to implement independent determination of executive compensation. Similarly, the board should establish ethics
and conflicts of interest policies, as well as appropriate internal controls to monitor business activities and to ensure
accuracy of financial statements.
A well-managed business of any size can benefit from the adoption of good corporate governance practices, which need
not be crafted from scratch. Examples of appropriate policies can be found in the annual reports and proxy statements
of public companies, available on the SEC website. No matter what size of company, good corporate governance is
simply good business.
Gordon E. Crim is a shareholder at Lane Powell, where his practice focuses on counseling boards of
directors of business corporations and financial institutions. He can be reached at 503.778.2143 or
crimg@lanepowell.com
Note: The statements expressed in this article are personal statements by the author, not intended to
be legally binding or incur legal reliance, or constitute a lawyer-client relationship with any reader.
© 2011 Lane Powell
Corporate Governance is Good Business
By Gordon E. Crim, December 23, 2011