Prudent Governance Practices in Troubled Times

The directors, as well as the senior officers, of every corporation have specific duties with respect to identifying and managing the risks associated with the business activities of the corporation.  Under state corporation laws, for example, directors and officers must satisfy their fiduciary duties of care and loyalty and this generally means that they are required and expected to exercise reasonable judgment in overseeing the activities of the corporation by, among other things, developing internal reporting and monitoring systems that will allow them to keep abreast of material risks.  Once a material risk has been identified the directors and officers must exercise their good faith business judgment to manage those risks in an informed and disinterested manner.  In addition, Section 404 of the Sarbanes-Oxley Act places explicit burdens on the leaders of public companies to regularly assess the effectiveness of their internal controls and stock exchange requirements, such as those mandated by the New York Stock Exchange, require that members of the audit committee of any listed company must discuss the company’s policies with respect to risk assessment and management as well as the company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.  Finally, any actual or perceived failure with respect to risk management will likely expose the company and its directors and officers to intense scrutiny by the media and the financial community that may substantially damage the reputation of the company, impair its ability to obtain additional capital and trigger inquiries from regulators.  The current state of the economy raises the level of risk for everyone and directors and officers of every company, as well as their advisors, should review this week’s report on prudent governance practices in troubled times.

 

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