Phoenix, Ariz.–The Sarbanes-Oxley Act's corporate governance language does not apply to small mutual insurers, but a recent court decision could make them live by it, an attorney warned yesterday at an industry conference here.
That advice came from Nicki Locker, a partner with Wilson Sonsini Goodrich Rosati law firm in Palo Alto, Calif., during a session on corporate governance at the annual convention of the National Association of Mutual Insurers.
Ms. Locker based her advice on a ruling, in August, by the Delaware Court of Chancery concerning the Walt Disney Company board's approval of a no fault separation agreement for former President Michael Ovitz, who was fired after one year with a $140 million payout.
The court, while finding the board did not breach its fiduciary duty, was scathing in its criticism of the board's operations, but upheld them based on the general board practices of the '90′s, according to Ms. Locker.
In 2005, board practices, she said, have "evolved to a much higher standard" and, while Sarbanes-Oxley does not cover mutuals, some of the act's basic requirements "have become the norm and what is expected of boards of directors."
"You [board members of non-public mutuals] will be judged against general board practices," she advised.
Also speaking at the session was Steve Wagner, a partner at Deloitte & Touche consultants in Boston and a member of their U.S. Center for Corporate Governance. He and Ms. Locker presented a blueprint for good governance by boards with a myriad number of suggestions.
Mr. Wagner advised that what it takes for a company to avoid an Enron type of accounting scandal is a "vibrant corporate culture committed to truth and doing the right thing."
Ms. Locker counseled that the tone at the top of the company would have a "profound effect throughout the company."
Among the other points they made concerning board governance:
o Boards should send messages to their organization about acting ethically.
o They should select and hire the right person as chief executive officer.
o Board members should oversee financial objectives and monitor performance without managing performance.
o Boards should establish practices to educate their membership and insure they have some level of financial literacy.
The speakers also said that boards should arrange to have the opportunity to sometimes meet and hold discussions away from executive management.
Directors should make sure they have fairly detailed minutes that include a general description of the dialogue that takes place during meetings.
Ms. Locker suggested that boards might bring in an outside consultant to perform an audit of their firm's ethical culture.
Interviews with employees at companies involved in major scandals have revealed that they went along with improper activities because they felt there was no one to complain to.
Mr. Wagner warned that for boards today "there is a bright light being shined" on their activities and "everybody is watching. You want to make sure your decisions are well thought out."
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