Advisories & Insights

One of the most important issues facing directors, officers, managing partners or LLC managing members (referred to for brevity as "directors")is proper governance procedures and controls. The "hot issue" for 2003 is the proper disclosure of corporate governance records. The United States Congress, state governments, banks, venture capital funds, stockholders, and employees are all demanding such disclosure. Failure to comply with new disclosure requirements could result in possible fines or even prison time.

From our broad experience in California, Nevada, Oregon, and Washington, as well as nationally and globally, we have developed Ten Commandments for Private Company Governance and Ten Commandments for Public Company Governance. Although many companies are already complying with most of these "commandments," they may need to refine and document their actions.

I. Thou Shalt Attend Board Meetings. Directors must provide oversight, acumen, criticism, feedback, wisdom, and perspective to top management.

II. Thou Shalt Keep Proper Records. Directors must keep a record of the resources used and the processes employed when determining company action.

III. Thou Shalt Properly Consult with Professional Advisors. Directors must be qualified, informed, and proactive in selecting qualified lawyers, accountants, engineers, and scientists; individuals who will provide unbiased objective views regarding company strategies and properly raise any conflicts of interest.

IV. Thou Shalt Develop Written Policies and Procedures. Directors must set policies and procedures and act in accordance with those policies and procedures in order to meet the company's objectives. Such policies and procedures should include the proper methods of action for the Board, when meetings should occur, and the areas of the Board's responsibility and delegation.

V. Thou Shalt Not Allow Personal Feelings or Emotion to Affect Decisions. Directors must have skills and experience other than being a friend of management and hence able to resist pressures from management or decision making based upon emotion or for personal reasons.

VI. Thou Shalt Be Proactive in Obtaining and Scrutinizing Information. Directors must recognize red flags, such as results not meeting forecasts, unusual cash flow statements in relation to balance sheets or income statements, inappropriate compensation or end-of-year draws, discussions of how to meet loan covenants, and repeated transactions between related parties.

VII. Thou Shalt Have the Necessary Knowledge. Directors must be knowledgeable about the industry; the economies in which the company participates; the company's marketing plan; strategic plans; budget; compensation policies; strategic partners; competitors; and employee base.

VIII. Thou Shalt Not Rely Upon Top Management. Directors must require management to provide full information in a timely manner, well before any Board meeting; engage in constant feedback with the Board; allow the nonemployee members of the Board to meet apart from top management; and proactively provide alternative paths and strategies to the Board for its final decision.

IX. Thou Shalt Set Policies and Procedures for Board and Management Performance. Directors must demand objective standards to measure management's performance throughout the year. Directors must establish procedures to allow for any suggestions from top management. Focus areas should be: profitability; return on investment ratio; employee retention and recruitment; revenue growth; strategic alliances; compensation objectives; and growth in the market value of the company.

X. Thou Shalt Hold Management Accountable to the Board. Directors must hold top management accountable for the policies set and make changes in top management when necessary.

I. Thou Shalt Refine Disclosure and Reporting Procedures and Controls. The chief executive officer and chief financial officer must certify that their quarterly and annual reports (10-K/10-Q) are accurate and complete. There are heavy penalties for noncompliance. Every company should immediately assess procedures and controls, prepare to be able to certify all public reports, and formalize procedures for certification through a "disclosure committee" made up of key officers and directors, which will review all financial reports and prepare the documents for certification. Additionally, every company must adopt a Code of Ethics and review their audit committee for compliance with the Sarbanes-Oxley Act.

II. Thou Shalt Suspend All Loans to Executives and Directors. Effective immediately, a SEC-registered company may not offer personal loans to a defined group of executives and officers. The uncertainty of the Sarbanes-Oxley Act forces companies to suspend any loan to an executive or director until further guidance is received.

III. Thou Shalt Disclose Section 16 Reporting Requirements. Effective immediately, corporate insiders (Section 16 insiders) of SEC registrants must file on Form 4 reports of transactions in company securities by the second day after the execution of the transaction. A company should inform potential Section 16 insiders of the requirements as well as the company's procedures for properly reporting such transactions.

IV. Thou Shalt Establish Mandatory Pre-Clearance Procedures. A company should establish mandatory pre-clearance procedures before a Form 4 or Form 5 reportable transaction is effectuated. A committee or a company officer, such as the company's general counsel, should review and approve any transaction for timing and reporting requirements.

V. Thou Shalt Provide Periodic Education to Directors, Officer, and Employees. Companies need to constantly inform and remind directors, officers, and employees of the rules and requirements through periodic e-mails, bulletins, and occasional in-person training to ensure compliance and to help avoid the stiff penalties and fines of the Sarbanes-Oxley Act .

VI. Thou Shalt Require Officer/Director Certification and Power of Attorney. Companies should require officers and directors to sign a certification agreeing to comply with all of the rules and requirements and should obtain powers of attorney allowing certain officers to sign the required Section 16(a) reports on their behalf, if necessary, to meet the strict deadlines.

VII. Thou Shalt Review Employment Procedures With Respect to Whistle blowing. Employees who provide information regarding conduct that the employee reasonably believes violates U.S. securities laws or anti-fraud laws are protected from retaliatory actions, including termination. Companies should review employment policies and procedures to make certain that employees are informed about the applicable regulations and that human resources officers provide adequate opportunity for a whistleblower to make a complaint.

VIII. Thou Shalt Re-examine Officers for Possible Section 16 Insiders. Section 16- defined insiders must comply with many requirements and rules. Companies should re-examine employees to determine if they meet the applicable Section 16 definitions, such as who has the policymaking duties to be a Section 16 insider, and, for all Section 16 insiders, companies should confirm the existence of adequate reporting codes (e.g., CIK, CCC and Form ID codes) necessary for reporting certain stock transactions.

IX. Thou Shalt Begin Electronic Filing on "EDGAR." Electronic filing of documents is required to be phased in by June 2003. However, the two-day filing requirements for Form 4 can practically be met only through electronic filing. Companies should begin moving toward electronic reporting immediately in order to meet the required deadlines.

X. Thou Shalt Develop Notification Procedures for Broker-Dealers. Companies should re-examine broker-dealer relationships and consider establishing preferred brokers for insider stock sale transactions. These service providers should adequately understand the requisite reporting requirements and agree to notify companies of any potentially reportable transaction. Companies should also review benefit plans to determine when insiders can control the date of execution for reporting requirements.