GOVERNANCE COLUMN: The Efficacy Of Corporate Governance Best Pratice Audits


Andrew Sherman, Jones Day

By Andrew J. Sherman

A natural place to begin the review and analysis of corporate governance practices is a legal audit that focuses on compliance with current laws to ensure that governance and decision-making systems and internal processes are in place to comply with applicable laws, regulations and best practices.  The legal audit should include recommendations for improvement as well as provide a series of compliance training programs for officers, directors, and managers with significant financial or reporting responsibilities.

Among the topics and questions to be examined and discussed during the Corporate Governance Best Practices Audit are:

  • The size and composition of the Board and the relationship of its composition and the relationship of its composition to the performance of the company.  There is a definite trend toward smaller boards with higher ratios of outside directors.
  • The independence and objectivity of the Audit Committee—which must meet Sarbanes-Oxley requirements.
  • The knowledge, skills and discipline of the Compensation Committee.
  • The overall structure of executive compensation and stock options plans.  Pay for performance, fairness, issues, linking reward with the meeting of strategic objectives, the reduction of excessive perquisites, the board’s ability/willingness to stand up to the CEO, and so on, are all current issues that will require examination.
  • Internal control processes to ensure that the Board is fully and promptly informed, adequately performing its oversight role, has systems in place to manage and mitigate enterprise level risks, and that “red flags” are addressed timely and properly.  It is critical to have a written statement of corporate governance policy in place.
  • How closely and effectively the Board monitors the integrity and accuracy of the company’s financial statements and reports (without micromanaging the process).
  • The compensation system for the Board members; the extent to which Board compensation influences their objectivity.  For example, are directors required to own (or not) a specific amount of company stock?
  • The transparency of communications with shareholders and the financial markets.  Are the requirements of regulation FD being met?
  • The effectiveness of the Board’s strategic and business planning skills.  Have clear goals been set for the executive management team?  How well is the team implementing these goals and how closely is performance being monitored?
  • The risk management procedures that are in place.  The audit should include a comprehensive review of the officer and director liability insurance policies as well as other types of risk management, such as information/data security, physical security, and so on.
  • The succession plans that are in place for both the Board and executive management levels.
  • How well are the skills of the various board members match up with company’s current medium (and long-term) strategy.  Have changes to the company’s business model caused shifts in its focus, triggering a need for new directors with a different set of skills?  What procedures are in place for replacing directors that now may be obsolete?
  • Any proactive steps the Board is taking to maximize shareholder value, such as the leveraging of existing intellectual assets.
  • Whether the Board has a Nominating Committee? Are its policies and criteria clearly articulated?  If so, how closely are these policies followed:  What due diligence is done on prospective candidates (and vice versa)?
  • Whether there is a performance review process for Board members.  Why or why not?  If so, how effective have these reviews been in improving individual members or overall Board performance?
  • Whether Board meetings are held both with and without the CEO present to encourage candor and objectivity.  Who selects and appoints committee members?  The Board?  The CEO?  By the by-laws allow for a nonexecutive chairman?  If yes, have the differences in the responsibilities between the Chairman and CEO been clearly articulated? Is there good chemistry between the Chairman and CEO?  Why or why not?  Are periodic meetings of only independent directors held?
  • The frequency of Board meetings.  Who sets the agenda?  How effective are the meetings?  Are there minimal attendance standards?  How often do the committees meet?  How many committees are in place and how well do they function?  Are they adequately reporting to the entire Board?  Are lines of authority between the Committees and the entire Board clearly established?
  • Any contingency plan the Board has in place should the company become financially distressed.  Does the Board understand that its fiduciary responsibilities may extend to other types of stakeholders, such as creditors and vendors, as workout plans and strategies are developed?
  • Whether the Board has a formal orientation program for new members.  If so, when was it last updated?
  • Whether Board composition reflects gender, ethnic and racial diversity.  How many international members are there on the Board?  What is the average age of Board members?

A corporate governance process must be put in place for both privately held companies and publicly held companies that upholds the integrity of the company’s leadership in the eyes of shareholders and employees, that creates truly informed Board members who have the power to act based on timely and accurate information, and that protects the authority and fosters the courage of the Board to take whatever acts necessary to fulfill its fiduciary obligations.  In reexamining the roles, functions, and responsibilities of Board members, it is no longer sufficient to merely make a periodic meaningful contribution to the strategic direction of the company; rather, directors must now be proactive as defenders of the best interests of the shareholders and to the employees, participants, and beneficiaries of pensions, 401(k), and stock option plans.  Board members and corporate leaders should assume that their meetings will be in “rooms with glass walls” and their actions will be examined under a microscope.

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Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,500 attorneys worldwide.  Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies.  Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over twenty-three (23) years.  Mr. Sherman is the author of twenty-three (23) books on the legal and strategic aspects of business growth and capital formation.  His twenty-third (23rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company’s Intellectual Property, (AMACOM) was published in early October 2011 and is now available on  Mr. Sherman can be reached at 202-879-3686 or e-mail

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