Editor: How has the focus on corporate governance shifted in recent years?
Schwartz: It's been a tectonic shift. Since Enron, WorldCom, Tyco, Rite-Aid, HealthSouth, et al., and following the passage of the Sarbanes-Oxley Act and the adoption of the SEC regulations implementing Sarbanes-Oxley, the whole issue of corporate governance has taken center stage in board rooms of public companies. Partly because they are scared (to some degree, unnecessarily so), directors are at full attention. Board meetings and board committee meetings tend to be longer, directors ask more hard questions, and they keep at it until they are satisfied with the answers. Boards and board committees are also quicker to engage their own outside counsel and other independent advisors. All of this affects board culture and the quality of the board process, which, in my experience, has never been better than it is today.
Editor: What trends are emerging related to limitations on director and officer liability?
Schwartz: A major development was the Delaware Supreme Court's May 2003 holding in the Disney case, which made it clear that, at a certain point, inattention on the part of directors can be so egregious that it amounts not only to a violation of the duty of care but also a violation of the duty of loyalty, so that they would not be protected by an exculpatory charter provision, under Section 102(b)(7) of the Delaware General Corporation Law, that would otherwise limit or eliminate the directors' liability to the corporation for breaches of their fiduciary duties.
Editor: What is on the horizon for corporate governance reform?
Schwartz: It is still not clear what will become of the proposed shareholder access rules, which have been pending before the SEC for more than a year now. The original proposal would allow shareholders to have direct access to the company's proxy machinery to nominate their own directors in certain circumstances. The SEC had originally proposed a rule with two circumstances that would trigger a right of direct nomination in the following year - where at least one of the company's director nominees has received "withhold" votes amounting to more than 35 percent of the votes cast, or a shareholder-access proposal meeting certain standards has received affirmative votes amounting to more than 50 percent of the votes cast.
The proposal is enormously controversial, with the U.S. Chamber of Commerce going so far as to threaten to sue the SEC if the rule is adopted, for example, The SEC commissioners are split in their views of it. Several alternatives have been suggested, including alternatives with different (and more stringent) triggering events. Nobody knows what the commission will do in the end, but we will surely hear more about the shareholder access proposal in 2005.
Another emerging trend to watch is the splitting of the CEO and board chair positions in U.S. companies. That arrangement has become the norm in other jurisdictions, such as the UK, but has been slower to take root here in the U.S. But more U.S. companies are beginning to adopt this arrangement, or at least establishing a lead independent director position, and I think the trend will continue.
Editor: What contributes to the complexity of corporate governance?
Goodman: The number of sources of laws, regulations and industry requirements impacting corporate governance is tremendous. The panoply of requirements includes those promulgated by not only myriad state and federal authorities but also self-regulatory bodies, such the stock exchanges. Moreover, there are a number of corporate governance best practice guides. They range from the American Law Institute, the American Bar Association, the Association of Corporate Counsel, the Business Roundtable and a number of post-scandal reports. Corporate Governance: Law and Practice brings the disparate pieces into one place for easy reference.
Editor: What is the role of in-house counsel in meeting today's corporate governance challenges?
Schwartz: The role of the in-house counsel. especially the general counsel or chief legal officer, has become both more important than ever and much more tricky. Section 307 of the Sarbanes-Oxley Act and the related SEC rules have put specific enforceable directives behind the often recited. but somewhat general, principle that corporate lawyers represent the corporation and not the individual executives, including the CEO. Now there are specifically defined circumstances under which a lawyer must go over the head of the CEO (or under which a subordinate lawyer must go over the head of the general counsel) to the board or board audit committee. The awareness in board rooms and in executive suites of the new rules has palpably changed the dynamic of the relationship among the board, the CEO and the general counsel.
Beyond the rule changes, the way government agencies and law enforcement officials deal with in-house lawyers has created new pressures and dilemmas. Government officials investigating public companies now routinely demand that the company waive the attorney-client privilege and, in extreme but increasingly common cases, exert the considerable power they wield to make in-house lawyers, in effect, agents of the government. This puts the general counsel in a real bind, to the point where he or she may have to decide whether to do what lawyers have always been expected to do - that is, to defend their clients - at the risk of angering public officials who expect in-house lawyers not to put up a defense but, rather, to help with their investigations. It is quite tricky.
Editor: How does Corporate Governance: Law and Practice help counsel function in this daunting environment?
Goodman: Unlike a law school text book, Corporate Governance: Law and Practice puts the relevant laws, regulations, judicial opinions and other authorities into context. Organized by subject area, it provides tools for addressing the "real life" challenges that arise in corporate practice. For example, its practical advice on board practices provides guidance for handling executive sessions, succession planning and other common concerns. Its chapters on audit, nominating and other committees give practical advice on their composition and how they go about their work.
As well as addressing such hot topics as how boards of directors and their committees can effectively delegate authority, Corporate Governance: Law and Practice includes thoughtful perspectives on the future direction of corporate governance reform. It also includes numerous useful appendices - including NYSE and NASD corporate governance standards, along with relevant securities statutes and regulations.
Editor: How do you use Corporate Governance: Law and Practice in your own day-to-day practice?
Goodman: I use Corporate Governance: Law and Practice all the time to help me address a wide range of issues. For example, the book contains a helpful discussion of indemnification agreements and D&O insurance policies. It includes practical tips for preparing indemnification agreements and understanding insurance policies with examples of provisions to consider and easy-to-understand explanations of why each is useful.
Editor: Who do you think would find Corporate Governance: Law and Practice helpful?
Goodman: A wide range of highly acclaimed experts contributed to Corporate Governance: Law and Practice, including Meredith M. Brown of Debevoise & Plimpton LLP; Yvonne Chen of Pearl Meyer & Partners; Jay M. Cohen of Dun & Bradstreet; Holly J. Gregory of Weil, Gotshal & Manges LLP; S. Mark Hurd of Morris, Nichols, Arsht & Tunnell; Andrew M. Johnston of Morris, Nichols, Arsht & Tunnell; Claude E. Johnston of Pearl Meyer & Partners; Robert B. Lamm of Computer Associates; J. Travis Laster of Richards, Layton & Finger, P.A.; Deborah Lifshey of Pearl Meyer & Partners; Nell Minow of The Corporate Library; and John F. Olson of Gibson, Dunn & Crutcher LLP.
Whether practicing in-house or with a law firm, each contributor shared their perspectives gained from many years of advising clients on corporate governance matters. Their insights and practical tips will be of great benefit to general and other corporate counsel, corporate secretaries, law firms and anyone else advising a company's board of directors and management.