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Reader
Profile
Is board service becoming more risky on a personal level? Charles Elson: On its surface, because of increased responsibilities and increased scrutiny of directors, board service certainly is becoming more time consuming, and it would appear to be more risky. I don’t think it’s more risky in terms of ultimate liability if a director comes to board service as independent and as someone who invests equity in the business itself. The threat of time commitment involved in defending your actions is certainly real and has to be taken into account. But I believe that if you are independent, do your job diligently, and devote the appropriate amount of time and effort to what you are asked to do, there should not be any increased liability and it shouldn’t be more risky than it was in the past. The difference, of course, is that with the increased responsibilities that directors are now faced with, there is a greater focus on what they’re doing, and there is obviously the potential for increased liability. But the fear really is having to respond to questions that bear on your conduct as a director, as opposed to actual liability. More on a personal level than on a financial level? Elson: Right. Assuming that you are independent, have a real commitment to the company, and are diligent, if you meet those three requirements you should be perfectly fine. However, that is not going to stop someone – a shareholder – from asking questions. Again, with greater responsibilities come potentially greater liabilities. The more you are responsible for, the more you can miss something, and there’s a potential for questions being raised. So, a person considering board service in the current environment needs to evaluate his or her appetite for personal scrutiny and the prospect that he or she may be asked specific questions about what motivated various votes or positions? Elson: That’s correct! There is a lot more focus placed on individual directors than in the past. Directors are no longer a nameless, faceless group – there is much more personality attached to directors, and much more attention is placed on individual actions. In the past, shareholders seldom even knew who the directors were. Today, they know exactly who they are, and because they have this knowledge, they are much more likely to pose questions related to individual accountability. Do you think some of that accountability is focused more on the person or more on the role? Are members of the audit committee, for instance, more likely to be the subject of shareholder scrutiny than, say, the nominating committee? Elson: In an era of increased responsibility you have increased focus. The audit committee, given Sarbanes-Oxley, has many more responsibilities than it did in the past, and with greater attention focused on it there is more opportunity for exposure than there was just a few years ago. If you approach your job with diligence and independence and have a real stake in the business, then in the long term you will not have anything to worry about from a liability standpoint. Has corporate America adjusted to the costs associated with Sarbanes-Oxley compliance? Elson: I think executives are just beginning to appreciate the substantial costs of it. The reality is beginning to sink in as corporations begin to work through the various requirements that the act stipulates. There is some question as to the cost-effectiveness of the actions that have to be taken. On the other hand, it’s the law, and frankly there isn’t much business leaders can do about it. They are mandated to comply, so compliance has now simply become a cost of doing business. Will this greater cost translate into better financials? That’s something we’ll have to wait to see. What are your thoughts on that outcome? Elson: It’s too early to tell. I’m a great believer in the independent, equity-owning director. To me, that, combined with truly independent outside auditors, is the best protection against misconduct. A procedure is terrific, but unless procedure is entered into by those who believe wholeheartedly in the goal of the procedure, then it runs the danger of being simply a sequence of empty exercises. So I’d pay much more attention to the members of the audit committee and on the independence of the auditors than I would on procedure. In the long run, it’s not the procedure that gets you there, it’s the spirit behind the procedure. How has the board-CEO relationship changed over the past five years? Elson: Oh, it’s become much more balanced than it was. Traditionally, the CEO controlled and dominated the board. Following the stock exchange listings standards changes, and with the advent of independent board majorities, the emergence of independently-comprised nominating committees, and the era of mandated executive sessions of the board, there’s clearly a tremendous shift in the balance of power to a much more centered and balanced relationship between the CEO and the board. It’s much more of a partnership. Charles M. Elson is the Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He is also "Of Counsel" to the law firm of Holland & Knight. He formerly served as a Professor of Law at Stetson University College of Law in St. Petersburg, Florida from 1990 until 2001. His fields of expertise include corporations, securities regulation and corporate governance. He is a graduate of Harvard College and the University of Virginia Law School, and has served as a law clerk to Judges J. Harvie Wilkinson III and Elbert P. Tuttle of the United States Court of Appeals for the Fourth and Eleventh Circuits. He has been a Visiting Professor at the University of Illinois College of Law, the Cornell Law School, and the University of Maryland School of Law, and is a Salvatori Fellow at the Heritage Foundation in Washington, D.C. and a member of the American Law Institute. Professor Elson has written extensively on the subject of boards of directors. He is a frequent contributor on corporate governance issues to various scholarly and popular publications. He served on the National Association of Corporate Directors' Commissions on Director Compensation, Director Professionalism, CEO Succession, Audit Committees, Strategic Planning and Director Evaluation, was a member of its Best Practices Council on Coping With Fraud and Other Illegal Activity, and presently serves on that organization’s Advisory Council. He is Vice Chairman of the ABA Business Law Section’s Committee on Corporate Governance and a member of its Committee on Corporate Laws. Additionally, Professor Elson served as an adviser and consultant to Towers Perrin, the international human resource management consultants, a director of Circon Corporation, a medical products maker; Sunbeam Corporation, the consumer products manufacturer; Nuevo Energy Company, an independent oil and natural gas producer and is presently, a member of the Board of Directors of AutoZone, Inc., the national automobile parts retailer, Alderwoods Group, an international death care services provider, and the Investor Responsibility Research Center, a non-profit corporate governance research organization. |
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