Our Massachusetts Employment Lawyer Blog recently touched on the issue of a board’s responsibilities under the Sarbanes-Oxley Act of 2002. The issue of corporate responsibility is at the forefront of public discourse.
Through our General Counsel on Call services, our Massachusetts business attorneys provide legal counsel to boards and corporate leadership. Ignorance is not bliss — nor is it an excuse for noncompliance. What often happens is a board or corporation does not even realize they are not in compliance with the law until a legal issue arises and they find themselves liable. Under Sarbanes-Oxley board members may be held personally liable. Seeking legal advice in a proactive manner by conduct a thorough review of your board or company procedures is an excellent way to help ensure you are in compliance.
Make no mistake about it, mega-corporate collapses like Enron and WorldCom brought the issues to the forefront. And the anti-Wall Street sentiment that has brewed since the economic collapse has only served to further position corporate management in the crosshairs.
Corporate governance litigation is at an all-time high. And regulator enforcement emphasis is on preventing problems before they arise. A board’s responsibilities under Sarbanes-Oxley must be taken seriously. The 2002 law provides for personal liability of a public company’s directors.
Among the obligations of a board member of a publicly held company:
-Fiduciary Duties: A director can face civil liability for breaches of fiduciary duty, care and loyalty owed to a corporation and its stockholders.
-Duty of Loyalty: Directors are required to act in good faith in the best interests of a company. Potential conflicts of interest should be avoided or else fully disclosed and waived by the corporation.
-Business Judgment Rule: This rule presumes a director was duly informed and acted in good faith in the belief that actions were in the best interests of the corporation.
-Oversight and Monitoring: A director has an obligation to see that a corporation is operating within the law and striving to achieve its purposes.
Responsibilities and Restrictions of Sarbanes-Oxley:
Regulations give significant power to the audit committee and also go into detail regarding the committee’s responsibilities. The committee must be directly responsible for the appointment, compensation, retention and oversight of the accounting firm. At least one director must qualify as a “financial expert.”
-Obtain and review an annual report.
-Review and discuss annual and quarterly financial statements with management and independent auditor.
-Discuss earnings and financial information provided to ratings agencies, analysts and the press.
-Discuss risk assessment and risk management policies.
New director and board committee nominations must be made by independent directors — except for situations where a third party has a right to nominate. The committee must have a written charter addressing its purpose and responsibilities, including:
-Identify potential board members.
-Select or recommend that the board select a director.
-Develop and recommend corporate governance guidelines.
-Oversee the evaluation of management and the board.
Sarbanes-Oxley has numerous other requirements and prohibitions, including a prohibition against director loans, the establishment of a compensation committee, pension fund blackout periods and trading restrictions and accelerated filing requirements of beneficial ownership reports.