The Evolution of Corporate Governance and Shareholder Value

COLCHESTER, CT, Oct. 2006 -- Historically, the role of boards of directors, as it relates to corporate compliance with legal constructs, has been limited to instances where certain warning bells of illegal conduct were present. Specifically, beyond the long standing duties of care and loyalty, boards had no affirmative duty to adopt a legal compliance program.

The corporate landscape and the hallowed board of director suites were permanently altered following the seminal decision of In Re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).  In Caremark, Chancellor Allen held that a board of directors, as a fundamental expression of their duty of care, is obligated to “exercise a good faith judgment that the corporation’s reporting and information reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations”. Id. This watershed ruling has forever altered the notion that a board is merely a policy-making body and represents an expansion of the duty of care to mandate through a formal process, an affirmative duty to minimize corporate risk and actively monitor all aspects of applicable law, with a concentration on processes designed to benefit shareholders.

These processes include guidelines conceived and constructed to address and sharply focus board responsibilities, stay abreast of evolving and novel legal predicates, as well as stock exchange requirements.

Additionally, these processes must be reviewed and amended as necessary, all the while striking the appropriate balance among the ebb and flow of responsibilities between and amongst management and non-management directors.

In an era rife with corporate fraud such as insider trading, backdating of options and "cooking the books,” coupled with the attendant wane of shareholder confidence, attention to these processes will be of major factor in the short-term sustainability, as well as the long-term viability and the capital markets. Significantly, attention to such good corporate governance processes will distinguish the companies that that are, in fact, well governed from those that are not. The end result is less volatility in share price and greater overall market stability.