Improve Corporate Governance: Protecting Investors by Strengthening Gatekeeper Roles

February 28, 2007

Corporate scandals from Enron to WorldCom have highlighted the importance of effective corporate governance – the policies and practices that determine how a corporation is operated and governed. In the wake of these scandals, Congress hastily passed the Sarbanes-Oxley Act of 2002 (SOX) in an effort to protect U.S. capital markets and millions of American shareholders.

SOX promotes accountability and transparency in corporations. It also has a few provisions that enhance the effectiveness of “gatekeepers”—corporate directors, in-house and outside counsel, and internal and external auditors. But while SOX may have increased investor confidence in the short term, ongoing compliance with its requirements, as well as the heavy fines imposed by the Securities and Exchange Commission (SEC), have proven extremely expensive for some companies.

The strength of U.S. capital markets is in large part based on effective corporate governance. Without it, the valuable securities – including those in 401(k) plans and other retirement vehicles – of millions of Americans would be at risk.

The next President should protect the investments and retirement plans of millions of Americans by leading the effort to strengthen the roles of gatekeepers. Key recommendations include:

  • The New York Stock Exchange’s listing requirement that a company’s compensation committee be comprised of independent directors should be codified.
  • The SEC should develop an inspection program to review corporations’ financial statements and accounting practices.
  • The SEC should consider requiring attorneys to pass a competency examination before being permitted to appear before it.
  • Board members should be required to participate in an initial orientation as well as in periodic continuing education.
  • Shareholders should be given a greater role in voting, through nominations, election of individual candidates instead of slates, and majority instead of plurality decisions.
  • The board of directors should be involved in the decision to hire, retain and compensate the general counsel.
  • The board’s compensation committee should be required to approve the compensation of all top-tier executives.
  • The board’s audit committee should obtain control over the internal audit function as well as over the outside auditors, including the power to terminate personnel and to approve compensation.

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