Strictly Confidential
Hosted by the Shanghai Stock Exchange and the OECD
Co-organizer: ERI /DRC
Shanghai, China
25 - 26 February 2004 in partnership with
The Government of Japan
The Global Corporate Governance Forum
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COUDERT BROTHERS
LLP
Global Legal Advisers
1114 AVENUE OF THE AMERICAS
NEW YORK, NY 10036-7703
TEL : +1 212 626 4400
FAX : +1 212 626 4100
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Strictly Confidential
Presentation by
Barry Metzger
Senior Partner, Coudert Brothers LLP
New York and Tokyo
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Strictly Confidential
Corporate Governance Scandal and Reform in the
United States
Despite its failure to prevent the recent crisis in
American corporate governance, there is increasing reliance on, and strengthening of, the independent director system and the role of Board committees
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Historic trend moving from the role of managing the corporation to the role of supervising management and serving as the focal point for managing relations between shareholders, management and other corporate constituencies
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The role of Board of Directors as set out in the January 2004 draft
(revised) text of the OECD Principles of the Corporate Governance

Reviewing and guiding: corporate strategy, major plans of action, risk policy, annual budgets and business plans, setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures;
 Monitoring the effectiveness of the company’s governance practices and changing them as required;
 Selecting, compensating, monitoring and replacing key executives and overseeing succession planning;
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 Aligning key executive and Board remuneration with the longer term interests of the company;

Ensuring a formal and transparent Board nomination and election process;

Monitoring and managing potential conflicts of interest of management, Board members and shareholders, including misuse of corporate assets and abuse in related party transactions;
 Ensuring the integrity of the corporation’s accounting and financial reporting systems; and

Overseeing the process of disclosure and communications.
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Ability to create committees long recognized and, viewed as an inherent power of the Board of Directors, it is not the subject of detailed statutory provisions
The traditional view that the Board’s activities were not subject to delegation to committees long ago gave way to the view that most decisions are subject to delegation to Board committees
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The rationale for the creating of Board committees, particularly in the context of the large modern corporation
 Efficiency of Board’s operations
 Need to develop subject specific expertise in the Board’s operations and the desire to access particular expertise of Board members

Particularly enhancing the objectivity and independence of the
Board’s judgment, insulating it from the potential undue influence of managers and controlling shareholders
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Establishment of committees, the appointment of members and standards of independence.
The use of committees has developed largely as a matter of market practice, with laws tending to make a general market practice universal and mandatory.
Legal requirements regarding the establish of committees:
 State law

Listing rules of the stock exchanges
 Federal securities laws
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
No general legal requirement as to the number of independent directors on the Board

Most formal requirements arise under the listing rules of the stock exchanges

Sarbanes-Oxley Act of 2002, Section 301, requires the SEC to adopt regulations to cause national securities exchanges and associations to prohibit the listing of a company which does not have an audit committee meeting certain standards, and establishing standards of independence for such committee members
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Role of Board committees in making recommendations to the Board of Directors and in making decisions on behalf of the Board of Directors
Liabilities of directors
 In respect of decisions made by Board committees
 In respect of directors’ participation on Board committees
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Board Committees
Strictly Confidential
Standing committees

Executive Committee

Audit Committee

Compensation Committee

Nominating Committee

Public Policy Committee/Governance and Ethics
Committee
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Board Committees
Strictly Confidential
Ad hoc or special committees

Special Litigation Committee

Ad hoc committees formed to (i) to consider takeover or buyout offer, (ii) to investigate and advise on the appropriate response to allegations of serious misconduct against the corporation or its senior officers, and (iii) to evaluate and negotiate corporate restructurings or refinancing or other matters where conflicts of interest might otherwise arise
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Audit Committee
Strictly Confidential
Particular focus of attention and reform following corporate governance scandals, viewed primarily as the product of financial fraud involving senior management.
A particular focus of the reforms embodied in the Sarbanes-
Oxley Act of 2002
Listed companies first required to have audit committees composed solely of independent directors by New York Stock
Exchange Rules in 1978
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Audit Committee
Strictly Confidential
Purpose:
To represent the board in overseeing the accounting and financial reporting processes of the company and audits of the financial statements of the company, with the corporation’s registered public accounting firm reporting directly to the audit committee, and to establish procedures for:
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Audit Committee
Strictly Confidential
 the receipt, retention, and treatment of complaints relieved by the company regarding accounting, internal accounting controls, or auditing matters; and
 the confidential, anonymous submission by employees of the company of concerns regarding questionable accounting or auditing matters
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Audit Committee
Strictly Confidential
Composition: all members must be independent directors.
“… to be considered independent… a member of an audit committee of an issuer [of registered securities] may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee- (i) accept any consulting, advisory or other compensatory fee from the issuer; or (ii) be an affiliated person of the issuer or any subsidiary…”
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Audit Committee
Strictly Confidential
Duties:
The Audit Committee is responsible for:
 the appointment, compensation, and oversight of the work of any registered public accounting firm employed by the company;
 pre-approval of all auditing services and nonaudit services provided to the company by its auditor;
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Audit Committee
Strictly Confidential
An accounting firm that performs any audit for the company shall timely report to the Audit Committee regarding:
(1) critical accounting policies and practices to be used;
(2) alternative treatments of financial information
(3) other material written communications with management
Right to retain independent advisors
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Nominating Committee
Strictly Confidential
Purpose:
To identify persons qualified to sit on the board and recommend such persons for election at the Annual
General Meeting of shareholders and to formulate and review corporate governance principles for the company.
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Nominating Committee
Strictly Confidential
Duties:
The Nomination Committee is responsible for:
 Identifying and reviewing the qualifications of board candidates from a wide range of backgrounds, to fill board vacancies;

To consider succession planning keeping in mind the skills which will be needed on the board to address challenges in the future;

To regularly review the structure, size and composition of the board;
 To regularly review the time required from a non-executive director; and
 To make recommendations to the board on the above.
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Nominating Committee
Strictly Confidential
Current debate over right of shareholders independently to nominate candidates and to obtain access to the corporation’s proxy solicitation system
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Compensation Committee
Strictly Confidential
Particular concern that recent corporate governance crisis in the United States and the accounting frauds involved were the product of inappropriate and excessive compensation incentives and rewards
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Compensation Committee
Strictly Confidential
Purpose:
To create and monitor the implementation of programs designed to attract, retain and adequately compensate the officers of the company and to comply with applicable tax and securities law requirements.
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Compensation Committee
Strictly Confidential
Duties:
The scope of the duties of the Compensation
Committee is delineated by the board.
As a general matter, the Compensation Committee will usually be assigned the following duties:
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Compensation Committee
Strictly Confidential
 determining/recommending compensation of the officers of the company (salaries, bonuses and amounts payable in connection with termination of the officer)
 implementing annual bonus plans for senior officers
(determining the amount of bonuses and performance objectives of bonus plans, and monitoring achievement of objectives); and
 administering equity based plans/other long term incentive plans
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
Types of individuals to be recruited as directors
(need for special expertise or experience)

Where is staff work done for committee

Amount of director commitment/time required

Potential liability

Compensation

The emerging professional independent director
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Global Legal Advisers
North America: Los Angeles, New York, Palo Alto, San Francisco, Washington
Europe: Antwerp, Berlin, Brussels, Frankfurt, Ghent, London, Moscow, Paris, Rome, St. Petersburg, Stockholm
Asia/Pacific: Almaty, Bangkok, Beijing, Hong Kong, Jakarta, Shanghai, Singapore, Sydney, Tokyo
Associated Offices: Budapest, Mexico City, Milan, Prague
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