Corporate Governance Best Practices

“Good corporate governance equates to trust and accountability,” says Barry H. Genkin, head of Blank Rome’s Business Department, at 2010 China MEGA Forum

[Currently being revised]

“Corporate governance is a set of policies, customs, laws, and processes by which corporate are directed and how they conduct business,” began Barry H. Genkin. Genkin, head of Blank Rome’s Business Department, was presenting at the 2010 China MEGA Forum for Entrepreneurship & Innovation, hosted by China Entrepreneurs (CE) in October. “Why is corporate governance important? The main reason why [it] has developed is to create trust and confidence in the marketplace.” Stockholders and investors expect that companies they choose to support will employ a high level of corporate governance—and although private companies are not listed on U.S. exchanges, every company should be aware of corporate governance best practices.

Close-Up: Governance in a China context

Do differences exist between the applications of corporate governance practices to Chinese companies? In other words, “are they held to the same standard?” prompted Genkin. Culture was a major theme of his presentation.

“The answer to that is no, but that is changing,” said Genkin. “What I mean by that is that for the last several years, when Chinese companies trade in the U.S. from a regulatory perspective, Chinese companies have been held to a little bit of a lower standard than US companies in terms of compliance with many corporate governance regulations.” Eventually, however, there will be one standard that applies globally to all companies, including Chinese companies.

Changes will not occur overnight. “The level of sensitivity to corporate governance in the U.S. is here,” said Genkin. Initially, China and the U.S. should try to find a middle ground, and then continue to migrate to higher levels—these adjustments will be a process.  

Importance of an Independent Board of Directors

In order to function at the highest level, companies should structure the Board of Directors so that it operates independently within the company. This is sometimes difficult for Chinese companies, which tend to rely on family and friends: “that is terrible corporate governance,” explained Genkin. “When we counsel Chinese companies, it’s very important for us to communicate the concept that there really needs to be independent board members.”

Dealing with the media – should be one of the most important functions for the BOD. When you have more than one person, different people are saying different things. For all companies that are in the process of going public, is the concept of a corporate governance audit.* Doing things appropriate and following the best practices.

Difference in function is between running the company and managing the company. BOD, when they make mistakes, get involved in the day to day business operations of the company* That’s difficult to do when they meet on a monthly basis. What they really need to do is set the policy for the company

One of the most important functions of a board of directors is its succession plan.* My first question is what happens if the CEO gets runs over by a bus tomorrow? What happens when it does? Most companies are unprepared for an event like that when it occurs. It should know what the process is for dealing with that… that’s something that’s a critical function for the board of directors. Looking at the annual operating plan of the company. That is an important aspect. We also spoke about the long term strategic planning of the company.* Re-iterate that we only focus on companies as long-term value creators as opposed to short-term value creators*. We don’t want investors who will buy today and sell tomorrow… We mentioned before about executive decision making. And basically what needs to be happening is the board and the management have to understand each other so there is a delineation of responsibilities so each understands what the other’s turf is* -- what happens is that there are breaches both ways. Management of companies sometimes believe they can set policies for the company.* Boards of directors often think they can involve the day to operations… each company must decide where the line is for itself* Not of us can look at issues… with Chinese companies, it can be happening with greater frequency.

The BOD is responsible for monitoring the management… of the company. Managing and monitoring the company is done in several ways. By making sure the company is following through on its business and strategic plan. The company’s business plan is such that if investors could see everything that was going on.. reviewing the metrics of the company… most companies have one year plans, and beyond, up to five year plans, esp Chinese companies. What the boD should be doing, is on a quarterly basis seeing how the company has done relative to its internal projectsions.* If it misses on the high side… should be looked at…. It’s also an issue when companies do

More internal investigations – the committee should have separate practice.. the reality of the situation and the world we live in.

The obligation of the board of directors changes for only looking out for the best interest of shareholders to also looking out for the best interest of creditors.* It’s an important process to be thinking about… loans to insiders. All kinds of loans really need to be arms length.

Traits of a Good Director

What makes for a good director?

Genkin had some thoughts on this: “The director needs to be able to devote significant time and attention to participate in the leadership of the company. He needs to assist management in accomplishing the goals of the company, but he or she must be engaged in the process. And that takes a significant time commitment.”

Additionally, “directors are not supposed to be rubberstamps of the Chairman of the Board”—instead, they should be individuals who look at issues independently and provide honest feedback. “It’s one thing to disagree, it’s another to be disagreeable,” said Genkin. Feedback is good, but

Meetings between management and independent directors

I suggest that… management meet at least once a year… why is it important for independent directors to meet with management? All companies have insider.. it creates a flow of information that is very difficult to accomplish.. people who are responsible for the day to day.. when the company has a chairman… we recommend the company appoint a lead director.. for things that require the highest level of policy settings…

Committees

It is critical that companies have committees as part of their Board of Directors.

As you also know, it’s important that companies have important committees of the board of directors. primarily: audit, compensation, nominating- typically, the nominating committee and the governance committee are the same committee. The importance of having this committee is to delegate responsibility for groups of directors who are setting policy for this committee. Oversight of these various aspects. As you know, in many companies, boards of directors meet either quarterly or bimonthly. When you are functioning on a committee schedule, it’s important that they meet more…

Independent auditors

The audit committee is the most important committee in any commission. The obvious reason for that is that the financial statements and the oversight of the financial statements is one of the most critical functions that must be accomplished. When we look at companies have had problems, “9 times out of 10” the problem has been related to the financial reporting of the company.

Concept of the independent auditor. The one who has the direct channel of communication. Directly to the board of directors, and “assists in the monitoring of investment.” The compensation committee. It’s obvious to most people, when they see a compensation committee, what that committee does. It sets the salaries of the board of directors: sounds not complicated, but it is.

They need to benchmark that company’s compensation with others in its industry. It needs to make sure that the incentives of the management tie into the best interests of the company. When you look at—it should be long term oriented. It’s not atypical – to use outside experts… one of the important questions that I get asked,

Whenever their material transaction. An independent investment banker… with regard to that transaction. When I say independent investment banker, I mean who does not have a continuing relationship with the company.

Someone who has made a lot of money from doing that underwriting. May view the IB as being influenced by the fact that it has received previous compensation… so they should be independent. Shareholder compensations. This is important for a company, esp a public company. Really setting the policy in terms of how shareholder communications occur*.

Giving guidance. Future earnings. What is going to happen in the next quarter, in the next year? Some companies do that, other companies don’t. To make that determination. I can argue both sides of that particular issue.

It’s right for some companies who have a great deal of facility in predicting their future revenue and earnings, not a good deal for companies that have a hard time doing it. Long term shareholder value. Many times management lives by quarter to quarter. They are focused on earnings… the influence that boards of directors need to assert over the management is that management is really focused on the long term. Making decisions in the short term.. . but you’re building for the future. That is the policymaking that needs to occur at the board level. The primary function of the BOD…

Keeping records

It’s not a question of just accepting what management has done. When a company is a public company, it’s important to document what has happened.* It is very important that there is a documentation and a record of the important things that happened in a company.* So if anything happens down the road, there is something that shoes what happens.

Size of board of directors

is what is the appropriate size of a board of directors. “Typically, it’s been five and seven members.” You don’t want a BoD too large or too small.

You CAN have a BOD of one person- I strongly suggest 5-7 range, b/c it’s more manageable. It’s very difficult for the company to be run through the board of directors. One of the things that most companies do well… many times these transactions… have some benefit… appointing an independent director.

What happens if the board makes the wrong decision?

Question: What happens if the board of directors makes the wrong decision? Is the board liable? The short answer is no. They are not required to make the right decision… they must do it through a diligent, etc. process. It relies on various experts… they may be sued… but they are not liable. The “business judgment rule” – every company has risks associated with the operations of the company. Not only identify the risks associated with that, but also prioritize the risks so they are appropriate dealt with… where boards of directors… don’t deal well with surprises…

Whistleblowers

In terms of corporate governance, it will not happen from the bottom of the organization up. Whistle blower policy, basically the important takeaway here is that over 40% of all frauds that have occurred with companies are generated by tips from employees of the company.* Dealing with the unexpected. This is another important function of the board. Things happen that none of us anticipate*

Wrapping up

Stockholders, including investors and stockholders, expect that companies in which they invest will employ a high level of corporate governance. What is the acceptable level, and how can the Board of Directors facilitate this objective? Companies with an eye on “going public” need to practice corporate governance at the highest level, while also maintaining transparency. What is a corporate governance audit? Having good policies is critical, following these polices is even more important.

Collegial or friendly atmosphere – we all like this… “in running a public company, or being a director of a public company, many times you need to make very strong and sometimes unpopular decisions.”

Good corporate governance equates to trust and accountability. In