Financial disclosure, governance benchmarks know no bounds
The Sarbanes-Oxley Act’s corporate governance language does not technically apply to small mutual insurers, but a recent court decision indicates they might be expected to live by it, an attorney warned here at an industry conference.
That advice came from Nicki Locker, a partner with the 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 Insurance Companies.
Locker based her warning 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 its 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 1990s, according to Locker.
In 2005, board practices have “evolved to a much higher standard,” she noted, adding that 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.”
Indeed, board members of non-public mutuals “will be judged against general board practices,” she said.
Also speaking at the session was Steve Wagner, a partner at Deloitte & Touche consultants in Boston and a member of its U.S. Center for Corporate Governance. He and Locker presented a blueprint for good governance by boards with a number of suggestions.
Wagner advised that what it takes for a company to avoid an Enron-type accounting scandal is a “vibrant corporate culture committed to truth and doing the right thing.”
Locker counseled that the tone at the top of any organization would have a “profound effect throughout the company.”
Among the other points they made concerning board governance:
o Boards should send messages to those in their organizations 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 ensure they have some level of financial literacy.
The speakers also suggested that boards 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.
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.
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.”
Daniel Hays is a senior editor of NU’s Property & Casualty edition.
SOX standards are becoming the norm in how board actions are judged in all types of companies