The collapse of Enron has corporate-governance types questioning if outside directors should be held accountable for, or simply be more aware of, a company's complex finances. Roger W. Raber has some opinions on the subject. As president and chief executive officer of the National Association of Corporate Directors (NACD) in Washington, he heads a 25-year-old organization of more than 10,000 members that is committed to improving the efficacy of corporate board members. "The board of directors has an important place in the corporate system," he says. Raber recently addressed the House Energy & Commerce Committee. Although state corporation laws vary, they have several common features, according to Raber. One is the director's "twin duties of care and loyalty." Corporate directors must show care in their decisions, just as they would in making decisions affecting their own businesses or personal affairs. They also must be loyal to the company and remain free of any conflicts of interest as they vote on particular matters. A judicial doctrine-the business judgment rules-shields directors' decisions from liability as long as the directors exercised care and were free of conflicts of interest, Raber notes. Another common feature of states' corporation law is the notion that companies are managed under the board's direction. A small, new corporation may just have a few key officers who also are directors and owners, but if it sells stock to the general public, ownership shifts to nonmanagers who need to be protected. This is the role of federal and state securities laws that require full, timely and clear disclosure of material information, and give shareholders the right to vote on directors' nominations, Raber says. "As companies grow, boards often grow and form committees, such as an audit committee, a compensation committee and a nominating committee. They also form special committees to look at sensitive issues. The NACD recommends that these committees be composed of qualified, independent directors." Independence, information and integrity-"especially the courage to ask the tough questions" -are the keys to effective corporate boards, Raber maintains. Both the Securities and Exchange Commission and the nation's major stock exchanges require independent audit committees already, while corporations themselves increasingly are making their nominating and compensation committees independent as well. U.S. corporate financial statements generally do a good job of providing information to directors, he adds. "But we want to make sure that oversight groups for accounting standards remain free from undue influence by any particular constituency. Ongoing education for directors also is important." Last, but not least, there is integrity, he adds. "Directors should have the 'duty of curiosity' to ask the difficult questions, such as 'Do these numbers reflect our true profitability?' Or, "What will this policy do for the employees in our 401-K plan?' and 'Isn't it risky to have our auditors do some of our internal auditing work?' After Enron, more directors will be asking such questions. We will do our part to make sure that they do." -Nick Snow
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