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Key25 The best and worst in corporate boards

A board asleep at the wheel is the worst corporate board. For example, the minutes of a Johns-Manville board meeting as long ago as 1932 reflected an awareness on the part of the board that there were serious health problems among asbestos workers. Such information did not bode well for a company whose one product was asbestos.

Key24 Good questions for good board members

Regardless of the company or industry, there are some questions in common that good board members should ask both to fulfill their fiduciary duties and ensure that the shareholders’ investment in the company is protected:

Key23 Board form: rebels at the gate

Some of the large institutional investors in corporations are not at all satisfied that boards are doing their jobs effectively. These institutional investors have been led by CalPERS, the California state employees’ pension fund and one of the largest stockholders in the country. Large investors are beginning to use their clout to awaken boards and directors to action, responsiveness and just generally paying attention to the business of the company.

Key22 The irate sharehoder: annual ruckus

In the Vietnam War era, protestors often bought a share or two of Dow Chemical to use the 13as a forum to address Napalm, the war and general corporate decadence. While the causes have changed, shareholders still have their insurgent rights.

Key21 Shareholders versus stakeholders

The shareholder-stakeholder debate is one centered around ownership and authority. Who owns the corporation? Who has the authority to run the corporation? What rights do those who own the corporation have? What responsibilities do those who own the corporation have?

Key20 Board meetings: art, science and requirements

Boards most commonly meet monthly, bimonthly or quarterly. Most boards have an established date for meetings to allow directors to plan their schedules. Corporation law requires that notices be posted of board meetings, but board members may choose to waive notice in the interest of holding an emergency meeting between regular meetings. Generally the corporate secretary’s office or office of legal counsel is responsible for the notice and scheduling of board meetings.

Key19 On the board's responsibility for preventing the books from being cooked

In 1993, when Leslie Fay, Inc. announced a reversal of its earnings for the previous three years, the chair of the company’s audit committee explained that the financial accounting problems were news to him. He may indeed not have known of the accounting improprieties, but why not? Perhaps he should have known.

Key18 Board committees: extra fees or real purpose?

Given the diverse structure of boards and the demands of the many CEO’s sitting on the boards of other companies, may not be held every month. Some boards meet every other month while other boards meet quarterly. And board meetings are not always good arenas for discussion. Enter committees. Between board meetings, committees of the board may handle issues and work. The board can assign committees authority to make board decisions while the board is away. But committees also serve as smaller, more manageable groups that can meet together more often in order to work through issues to be presented to the board. While the board’s away, the committees will actually get things done.

Key17 Who's in charge here?

The shareholders elect the board and the board elects the officers. The number of officers required in a corporation varies from state-to-state but there must generally be an officer in charge, usually the president and/or the CEO, and another officer designated as the keeper of corporate records.

Key16 Inside information: the law on juicy tidbits

Federal securities laws consider all directors to be insiders, meaning that they have access to information about their companies that is not generally available to the market. Under Section 10(b) of the 1934 Securities Exchange Act, directors cannot trade on inside information. For example, a director will know long before the information becomes public that a merger of his company with another company is in the works. Generally the announcement that a company is about to be acquired sends the stock price higher. But insiders are not permitted to profit from that information by buying stock in advance of the announcement. Trading on insider makes trading on such information will be turned over to the SEC and/or the persons from whom those profits were made.

Key15 Federal laws and criminal sanctions: the SEC and other things that can go bump in the boardroom

Apart from IRS, the most important initials that every director should keep in mind are SEC. The SEC is the Securities and Exchange Commission; it is the federal agency responsible for the oversight of the sales of securities and the stock markets. SEC regulation affects every director and every boardroom.

Key14 On being sued personally: directors without insurance

Key13 On being sued: directors' liability and insurance

The business judgment rule described earlier provides some protection for directors. But the complexities of corporate life and law mean that directors still may easily end up as defendants in litigation. Even if they emerge victorious, the cost of mounting a legal defense can be prohibitive.

Key12 Conflicts,contracts and independent directors

A board member represents the shareholders in a corporation. Directors’ decisions must be made in the best interests of the company, not their own or that of management.

Key11 Carpe diem, but not the opportunity

Because directors are fiduciaries, they are not permitted to capitalize on business opportunities that come their way that might interest the corporation. For example, a director on the board of Scott Paper would need to share with the board of Scott an opportunity for acquisition of land for logging. As explained in Key 9, Loft’s had the right to look at Pepsi as a business opportunity before one of its directors, Charles Guth, took it for his own.

Key10 Mistakes or errors of judgment?

Directors make mistakes. They are permitted certain types and levels of mistakes under the legal principle called the business judgment rule. The business judgment rule means simply that courts will not substitute their business judgment ex post facto for the judgment of the board at the time it made its business decision. No judicial second-guessing of directors is permitted.

Key9 Directors' fiduciary duty: it's not their money

Key8 Pink slips for directors

Sacking a director is never easy. But some moves are worse than others. For example, H. Ross Perot became a director at General Motors after G.M. acquired his company and he became one of the largest shareholders. But Mr. Perot’s down-home criticism, usually issued along the lines of “Now, looky here. You aren’t running this bidness right,” didn’t go down well with the buttoned-down bureaucrats at G.M. G.M. was forced to borrow heavily to buy Mr. Perot’s shares to make him go away.

Key7 Compensation in theory and practice: do directors deserve what they earn?