Question on public company governance

Governance in the Spotlight: What the Sarbanes-Oxley Act Means for You
F ollowing a wave of high-profile corporate business and governance scandals, Congress passed the Public Company Accounting Reform & Investor Protection Act
of 2002 (Public 107-240), better known as the Sarbanes- Oxley Act. This legislation contains the most sweeping and
comprehensive set of public-company governance, financial and accounting reforms enacted in more than 30 years. The Sarbanes-Oxley Act, intended to protect investors and renew public trust in corporations and their boards, set the stage for even broader reforms promulgated by the stock exchanges and other business and investor protection groups.
These emerging requirements and standards are widely perceived as governance “best practices” for both for- profit and not-for-profit organizations alike. Attorneys, consultants and governance experts agree that it is only a matter of time before the Sarbanes legislation and the rules and regulations designed to implement it. will be broadly applied to not-for-profit governance and used as the yardstick against which board performance and accountability are measured.
S a r b a n e s a t a G l a n c e While the Sarbanes-Oxley Act leaves many questions unanswered and allows federal agencies broad discretion in enforcing its requirements with publicly- held companies, the following provisions
are applicable to nonprofit organizations: The role of independent directors and
their representation on audit and other key board committees
Executive compensation and loan arrangements
New disclosure requirements for changes affecting the company’s financial status and the adequacy of company financial statements and controls
Detailed codes of ethics, business conduct and comprehensive conflict-of- interest policies.
Each of these areas is discussed in more detail below.
Independent directors. Independent directors arc the linchpin of many of the public-company reforms. To be considered “independent.” directors must be tree of relationships with the company/organization or its management that might influence their decisions. Relationships affecting director independence include employment, vendor, or consulting arrangements, as well as indirect links through family, business or charitable organizations in which the board member may hold an officer or director position.
Sarbanes-Oxley and the related rules
of stock-listing organizations (such as the New York Stock Exchange) sharpen the focus on the role of independent directors by specifying governance oversight activities in which only independent direetors should be involved. For example. independent directors must meet together at regular intervals without either inside directors or management present. Several important governance-related committees, such as the audit committee, the nominating committee, the corporate governance committee, and the compensation committee must be staffed solely by independent directors.
Audit committee. The new reforms make it clear that the audit committee bears direct responsibility for hiring and firing the CEO, delermining CEO compensation, and overseeing the company’s external auditors. Because of the importance of maintaining the audit’s integrity, committee members are prohibited from receiving any compensation from the company other than directors’ fees and expense reimbursement.
The Act also requires that: ‘ The external auditor reports direetiy
to the audit committee, not to company management.
Audit committees must be given the authority and resources to hire outside attorneys, consultants and other advisors as they think necessary.
The audit committee must oversee the external auditor directly and resolve any
Septembei 2004 Trustee
 

 
disagreements between management and auditors about financial reporting.
Audit committees must establish procedures to receive anonymous employee concerns about accounting or auditing practices.
External auditors are prohibited from providing certain nonaudit services to the companies they audit, such as consulting, bookkeeping, appraisal or valuation services, design and implementation of financial information systems, actuarial services, legal services unrelated to the audit, and management or human resources functions.
The audit committee must rotate the lead external audit partner at least every five years.
All audit committee members must be financially literate.

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