And Where Were the Outside Directors?

Ponder, if you will, the impact of the economic, financial and credit market crisis on proper governance trends and the related board of director oversight role. Will independent members of corporate boards face aggressive and possibly well‑funded "where were the outside board members" attacks? The answer will surely be yes.

So, what should board members and senior management be considering now in light of these severe economic headwinds and market declines (and possibly related substantial financial losses)? While many of these governance topics or questions that follow are not necessarily new or novel, we should assume that the proverbial "heat in the kitchen" may set all time records in the months ahead. At a minimum, we will likely face new and extensive regulations and possibly entirely new regulators.

Ÿ How many of your board members are truly (and completely) independent?

Ÿ Particularly today, should you review your policy, limitation or expectation regarding the number of outside boards of directors on which your board members should sit?

Ÿ Do the incumbents on your board have the right skills and backgrounds for the challenges and opportunities you face (and for the probable new regulatory environment)?

Ÿ If applicable, can your board continue to defend not separating the offices of CEO and chairperson of the board?

Ÿ Do any of your executive compensation plans (and related performance targets or financial incentives) need to be reviewed again in light of the current financial environment? Are the plans fairly balanced or do they include financial incentives for inappropriate risk-taking?

Ÿ Are you prepared for stockholder "say on pay" initiatives or other related stockholder activism on executive compensation issues (particularly given likely changes and regulatory emphasis under President-elect Obama's administration)?

Ÿ When did you last review severance or change of control agreements (including provisions backed into retirement or long‑term compensation plans) for key members of senior management?

Ÿ Would the minutes of your board of directors and/or compensation committee meetings reflect thoughtful discussion of compensation issues (particularly those that might, with the benefit of hindsight, incent management to take questionable risk)?

Ÿ On a related point, is your industry or business such that you should consider forming a risk or risk management committee? Should issues of risk be monitored by your audit committee or board?

Ÿ Should you consider changes to your board and key committee meeting schedules, agendas, time considerations, and expectations in light of current economic and financial pressures? What about the content and timing of your board information packages?

Ÿ Is it time to revisit your charter and by-laws regarding the procedures for director election, staggered board terms and similar governance provisions?

Ÿ Do your audit, compensation and nominating/governance committee charters need to be reviewed and possibly modified to reflect these new governance trends and related expectations?

Ÿ Is your insider trading policy up‑to‑date so that the board and senior management has full transparency regarding any trading – including any possible hedging activity?

Ÿ Do you have 10b5-1 trading plans for your senior executives and, if so, how are such plans approved and monitored by the board?

Ÿ Is it time to review your annual officer and director questionnaires, ethics and code of conduct policies, whistleblower policy and procedures, risk factor disclosures, composition of your disclosure committee, disclosure and controls procedures, and financial statement certification road map?

Ÿ How well do you know your stockholders (and possibly bondholders), and should you be taking steps to allow key stockholders (and bondholders) to communicate directly with members of your board?

Ÿ Are you facing circumstances where you should consider separate counsel for your board and key committees (with all due respect to general counsel and outside company counsel)?

Ÿ For your periodic reports, are you simply updating past reports or taking a fresh look at your disclosures, particularly disclosures about executive compensation and liquidity and capital resources?

Ÿ If you are considering a financing and/or M&A transaction, what additional questions should you be asking and what new information should you expect to receive in advance of any director vote?

Many of these questions apply to both public and private boards of directors. These challenging times certainly require, or at least suggest, consideration of new approaches, questions, and areas of emphasis by boards of directors. Indeed, no member of a board should consider "business as usual" as the acceptable course – true even if your organization may happily be posting positive financial results or increasing stockholder returns.

Throw out your checklist, step back and exercise your best judgment (and pay particular attention to the paper trail as you know those dastardly plaintiffs' attorneys will hope you are not).

Joseph DeGroff is a founding partner of the Firm’s Private Equity and Venture Services Group. His primary areas of practice include venture finance transactions, general business laws matters, federal and state securities law and mergers and acquisitions.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.