The Spotlight on Boards

Marty Lipton, co-founder of the corporate law firm Wachtell, Lipton, Rosen & Katz, published a memo on September 9, 2010 outlining public company board of directors’ roles and responsibilities. Below is a summarized version of this memo:

The Spotlight on Boards

• Current focus on the performance of corporate boards prompts revisiting what is expected from the board of directors of a major public company – not just the legal rules, but also the aspirational “best practices” that have come to have almost as much influence on board and company behavior.
• Choose the CEO, monitor his or her performance and have a detailed succession plan in case the CEO becomes unavailable or fails to meet performance expectations.
• Plan for and deal with crises, specially crises like HP where the tenure of the CEO is in question, BP where there has been a major disaster or J&J and Toyota where hard-earned reputation is threatened by product failure. 
• Determine executive compensation, achieving the delicate balance of enabling the company to recruit, retain and incentivize the most talented executives, while avoiding media and populist criticism for “excessive” compensation
• Interview and nominate director candidates, monitor and evaluate the board’s own performance and seek continuous improvement in board performance.
• Provide business and strategic advice to management and approve the company’s budgets and long-term strategy
• Determine the company’s risk appetite (financial, safety, reputation, etc.), set state-of-the-art standards for managing risk and monitor the management of those risks. 
• Monitor the performance of the corporation and evaluate it against the economy as a whole and the performance of peer companies.
• Set state-of-the-art standards for compliance with legal and regulatory requirements, monitor compliance and respond appropriately to “red flags.”
• Take center stage whenever there is a proposed transaction that creates a seeming conflict between the best interests of stockholders and those of management, including takeovers.
• Set the standards of social responsibility of the company, including human rights, and monitor performance and compliance with those standards.
• Oversee government and community relations.
• Pay close attention to investor relations and interface with shareholders in appropriate situations.
• Adopt corporate governance guidelines and committee charters.

To meet these expectations, it will be necessary for major companies to have a sufficient number of directors to staff the requisite standing and special committees; to have directors who have knowledge of, and experience with, the company’s businesses, even though meeting this requirement may result in boards with a greater percentage of directors who are not “independent”; to have directors who are able to devote sufficient time to board and committee meetings, and the preparation for them; to provide regular tutorials by internal and external experts as part of expanded director education; and to maintain a true collegial relationship among and between the company’s senior executives and the members of the board.

- Martin Lipton


Posted by David Schatz