Director Independence and Corporate Governance

by Bruce Dravis for American Bar Association – Business Law Today, November 22nd, 2010.

This article summarizes the role of independent directors in corporate governance, and describes recent material governance law changes enacted in 2010.

Since the turn of the millennium, independent directors have become the focus of corporate governance. In this still-developing corporate governance environment, the work, time commitment, and responsibilities of independent directors have increased significantly.

This increased focus started with the massive corporate scandals and failures of the early 2000s (e.g., Enron), which propelled the passage of the Sarbanes-Oxley Act of 2002 (SOX). The financial crisis of 2007-2008 resulted in the federal government adopting the nearly $1 trillion Troubled Asset Relief Program (TARP), and in a renewed focus on the role of independent directors in evaluating corporate strategy, risk, and compensation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) included many corporate governance provisions.

Both SOX and Dodd-Frank emphasize the importance of independent directors in the governance process.

What is Governance Good For?

The term “governance” refers to a combination of state and federal legal requirements (including statutes, regulations, and case law) and developing doctrines regarding the control of corporations.

For example, the law sets certain minimum requirements regarding how directors and officers are selected, what decision-making processes they must use, and how corporate financial reporting systems are structured and their accuracy verified. At the same time, institutional investors and their advisors are advancing an evolving set of “best practices” governance recommendations that represent standards beyond the legal minimum.

Compared to governance practices prior to 2000, there is now more active oversight of corporate management by the board and by committees of the board. On some matters, such as the authority to engage the company’s auditors or advisors to the compensation committee, decisions have been taken out of management’s hands entirely. (continue reading… )


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