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Ira Millstein Senior Partner Weil, Gotshal & Manges New York, New York Q: What went wrong with corporate governance? A: The economic bubble of the late 1990s bred a sea of avarice and greed the likes of which have never been seen before. The CEOs were unchecked by the boards of directors. The lawyers forgot that their duty was to shareholders. The system simply broke down, and thousands and thousands of people were misled. More active and vigilant boards could have caught the problems a lot earlier. . . . People are always going to be dumb and do stupid things and lose money. But hopefully we can make it a little less painful. In the 1980s and the 1990s, we had tons of “best practices,” [model procedures] and they were working charmingly, we thought. Now the NYSE, NASDAQ, and Congress have stepped in and taken those best practices and made them law. I also see an explosion of litigation over breach of fiduciary duty [by boards] coming. The Delaware Supreme Court has just issued a string of decisions on this, and every one held against the board and for the shareholders. There’s also a new standard of conduct. Sarbanes-Oxley and the NYSE listing requirements are warning you to behave a lot better, to self-correct. Q: How do we make boards better? A: We need to give some independent directors enough authority to develop the board’s agenda so there’s the kind of information flow that’s needed. And we need to separate the chairman and CEO jobs. A board run by the CEO is not going to be very enthusiastic about changing. . . compensation. The president of the United States can’t be the chief justice of the Supreme Court, too. Neal Wollin Executive Vice President and Secretary The Hartford Financial Services Group, Inc. Hartford, Connecticut Q: What changes has your company made, or does it plan to make, in response to Sarbanes-Oxley? A: For us, Sarbanes-Oxley is not going to be much of a change. We already had a strong, independent general counsel’s office that was in close and regular contact with our board of directors and members of senior management. Our clients have always assumedand indeed expectedthat any suspicion of fraud or wrongdoing would be investigated thoroughly, even before SOX. The Hartford is an old-line company, and we’re very concerned about our integrity. If anything smells or looks funny, it gets aired out, and that predates SOX. However, as a result of the new certification requirements [senior executives have to sign off on company financials], we have formalized a number of our processes relating to internal reporting. In addition, a group of about 12 senior members of our financial, audit, and legal staffs now meet twice a quarter to consider refinements to our existing procedures and implementation of new ones. In terms of the CEO and CFO certifications required by SOX, we’ve put processes in place for sub-certifications by business unit heads and senior financial and legal staff. We’re being prudent, doing the appropriate amount of due diligence to make sure the certifications are true, not just the bare minimum. Q: Previously, you served as general counsel of the Treasury Department. Do you have any advice for other GCs, based on that experience, for handling media attention? A: Working in the government, you get used to being under a lot of scrutiny. It’s always important to be transparent about what you’re doing. You do not want to do anything you wouldn’t want to read about tomorrow on the front page of the The Washington Post. Randall Sones General Counsel and Secretary Allegis Group, Inc. Hanover, Maryland Q: Allegis Group is not a publicly traded company. But what’s your view of the Sarbanes-Oxley legislation and the stock exchanges’ listing requirements? A: I’m most interested in seeing how the new SEC rules governing the standard of conduct for attorneys unfold. In the Allegis Group legal department, we always have had a form of “up the ladder” reporting requirement, from the assistant general counsel assigned to business units to the general counsel’s office, and from the general counsel’s office to the board of directors. The concern I have, and believe most in-house counsel share, is whether management will be hesitant to come forward with issues that could develop into “material violations” if they perceive the lawyers to be subject to some new, heightened disclosure requirement. If the effect of these new SEC rules is to cause management to delay or avoid involving counsel when a potential issue arises, then, while the lawyers may be absolved of responsibility, the intended benefits of such rules to the companies, their boards, and their shareholders will be lost. Margaret Foran Secretary and Vice President, Corporate Governance Pfizer, Inc. New York, New York Q: Pfizer has a long-standing reputation for strong corporate governance and an activist board. How has the company achieved thisand justified it in business terms? A: Pfizer has had a corporate governance department for ten years and a governance committee of its board even longer. The company has always felt it had a strategic advantage because we compete for investors, and our commitment to governance is one of the ways we distinguish ourselves. We’ve always been very candid with the board. We provide them with a directory of the top 50 people in the company, with home and office numbers. I have a department of 15 people, and we staff the board. Our CEO is also a leader in the corporate governance area; he’s the one who’s setting the tone. Board members attend ten meetings a year and are expected to devote close to 250 hours a year. They get extensive orientation too. It’s a lot of hard work. John Coffee Jr. Adolf A. Berle Professor of Law Columbia University School of Law New York, New York Q: Do you think that Sarbanes-Oxley solves all the corporate governance problems that were revealed in the many scandals of 2001 and 2002? A: No. Between 1997 and 2001, 10 percent of all publicly listed companies restated their earnings at least once. That represents a 700 percent increase from the early 1990s. You can explain this shift by looking at the basic incentives [involved]. During this period, the legal risks and liabilities of aggressive accounting policies were reduced by judicial decisions. The costs went down, and the benefits went up. And the ratio between consulting and auditing services shifted, so that consulting fees represented three or four times audit fees. SOX now bars this. [But other problems weren't addressed by SOX.] There has been a fundamental shift from cash compensation to equity-based compensation for senior management. This presented a very strong incentive or temptation for very aggressive earnings management. Also, although the bubble market occurred everywhere in the world, the scandals happened only in America. That’s in part due to the very different structure of shareholder ownership in Europe and the United States. European companies often have 80 percent ownership [by a single owner]. Here, everyone on a board owns under 10 percent. We have 100 years of dispersed ownership. Europe has very little use for options and equity compensation. Controlling shareholders almost always sell at controlled premiumsnot into the market. The day-to-day price is not key for them. In the 1990s, institutional investors in the U.S. insisted on equity compensation. Nothing in Sarbanes-Oxley addresses this. [There should be] minimum holding periods and retention ratios. We need to eliminate any incentives [for insiders] to bail out before investors do. Steven Woghin Senior Vice President and General Counsel Computer Associates International, Inc. Islandia, New York Q: How has Sarbanes-Oxley changed things at Computer Associates? Give us some specific examples. A: The biggest changes are in the amounts of reading and education we’re pursuing. Aside from reading the act and all the commentaries it has generated, we’re spending substantial time reading the stream of SEC releases proposing and adopting all of the rules being implemented under SOX. Because everything under SOX is new, we’re also spending a lot of time attending educational programs, networking, and doing all we can to understand the rules and the interpretations being put on them. We have created a new positiondirector of corporate governancethat is being filled by our new corporate secretary. The position wasn’t a result of SOXwe had planned to look for someone to head our corporate governance initiatives before SOX was enactedbut the passage of SOX and all it implies in the governance area certainly validated our decision. Of course, we have put some new procedures in place. We’ve formed a disclosure committee along the lines suggested by the SEC, and we’ve implemented procedures for “sub-certifications.” At least as far as the legal department is concerned, however, we haven’t had to do a whole lot more than enhance the documentation of processes we have been conducting all along. Q: If you could implement any kind of statute you wanted to improve corporate governance and reassure investors, what would it be? A: Given the events of the past year and the current environment, I’m not sure it’s possible for a single statute or even a series of statutes to reassure investors. It takes time to build, or rebuild, trust. However, any statute that we might draft would make it clear that the principal function of boards of directors remains oversight. If the board supplants management or has to do things like guarantee a company’s accounting systems, companies are going to lose a lot of directors. They won’t be protecting investors either. Gloria Santona Senior Vice President, General Counsel and Secretary McDonald’s Corporation Oak Brook, Illinois Q: Do you think that Sarbanes-Oxley has been a boon or a bane for general counselor a bit of both? A: The Chinese character for “crisis” combines the symbols for “danger” and “opportunity.” General counsel have clearly had to deal with both during the current crisis of confidence in corporate America. The adoption of Sarbanes-Oxley has given general counsel a unique opportunity to show leadershipnot just in establishing systems for legal compliance but, beyond that, in helping their companies think through what it will take to restore trust in corporate America. I don’t mean to give short shrift to the untold hours we’ve all spentand continue to spendeducating ourselves, our senior management, and our boards on the myriad aspects of SOX compliance and the resulting avalanche of SEC regulations. The compliance infrastructures we’re setting up are critical to ensuring that the investing public’s confidence in our companies’ financial statements and disclosures is not misplaced. But, over and above establishing compliance systems, we [general counsel] are particularly well situated to provide advice and counsel to our CEOs and board leadership on how to set the right tone at the topwhether through reinvigorated ethics policies, improved disclosure controls and procedures, or reengineered incentive systems. Mark Chandler Vice President and General Counsel Cisco Systems, Inc. San Jose, California Q: Sarbanes-Oxley encourages lawyers to “go up the ladder” if they suspect wrongdoing. Given this, how will you keep lines of communication open between lawyers and clients? A: The “up the ladder” requirement applies where the lawyer believes that something is amiss and not being addressed. In Cisco’s corporate culture, there is a commitment to compliance, and the legal team has a well-defined and appreciated role. I anticipate no issues whatsoever on the “up the ladder” requirement, and, from the standpoint of my experience in Cisco, have not understood the concern that’s been raised. All of our internal clients expectand indeed supportescalation where there is any divergence of opinion regarding the correct course of action. Q: If you could implement any kind of statute you wanted to reassure investors, what would it be? A: The key requirement for reassuring investors is to have companies live by a culture of openness and integrity. This is a requirement that goes beyond the words of any statute.

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