Corporate Governance and The Role of the Governance Officer

Asking ten people to define corporate governance might well generate ten definitions ' or more. However, as a general proposition, corporate governance comprises the policies, systems and practices defining a company's ownership structure; the rights of its owners and other constituencies (employees, communities, etc.); the composition and operation of its board of directors and committees of the board; and transparency in conducting and reporting transactions.

While corporate governance is generally not the same thing as business ethics, corporate compliance, investor relations, corporate communications, securities disclosure, or public/community relations, it frequently involves ' and the governance officer needs to handle ' issues in one or more of these areas.

Corporate governance has many goals, but the primary ones are to promote the highest quality management through appropriate oversight by boards and owners; to facilitate ethical corporate behavior, including openness and fairness, and informed decision-making throughout the company; to create trust; and to encourage investment and enhance value. In other words, good corporate governance should result in a premium in the market price of a company's stock and a lower cost of capital. The Tone at the Top ' Board/Management Support of Good Governance

For the corporate governance officer to successfully perform his/her role, the Board of Directors and management must fully support good governance and the governance officer's role in implementing it. If the tone at the top is neutral to negative on the importance of good governance or on the governance officer's function, it may be difficult if not impossible for the governance officer to properly perform that function.

The Role of the Corporate Governance Officer

The functions of the corporate governance officer fall into three major areas:

• developing governance policies, systems and practices;
• engaging in internal and external communications regarding governance; and
• implementing continuous improvement in corporate governance, as in other areas of the business.

Developing Governance Policies, Systems and Practices. Any company espousing good governance needs to have in place comprehensive governance policies, systems and practices. Chief among these are written principles, adopted by the Board, that outline the policies and practices that will be followed in governing the company. The principles should cover the following major areas:

• the composition of the Board, including the appropriate mix of management and independent directors, the desired abilities and qualities of non-management directors, and the criteria to be used in determining whether they are independent (including criteria imposed by law or by a self-regulatory organization);
• the types and composition of Committees of the Board, including any independence criteria in addition to those applicable to non-management directors generally;
• the principal responsibilities of ' and expectations for ' the Board and its major Committees (Audit, Compensation, and Governance/ Nominating), including oversight responsibilities with respect to strategy, management development and succession, risk assessment, and corporate compliance; and
• the allocation of power and responsibility as between the owners, management and the Board, including how directors are elected (eg, annually or in staggered classes), whether they are subject to term and/or age limits, Board self-evaluation processes, CEO evaluations, and ' last but not least ' the functioning of the independent directors, including executive sessions and the selection of a 'lead director' or someone to perform similar functions.

The foregoing is an extremely abbreviated list of the subjects that should be covered by the governance principles. Further, companies have taken widely diverse approaches to crafting principles; in this area, as in so many other corporate governance areas, one size definitely does not fit all.

Similarly, a company must prepare and keep current extensive documentation controlling the actual operations of the Board and its Committees, including Committee charters and policies on topics ranging from delegations of authority to Audit Committee approval of audit and non-audit services, as required under the Sarbanes-Oxley Act.

The governance officer's responsibilities with respect to all of these materials vary all over the lot. At some companies, the governance officer may assume primary responsibility for drafting these materials and keeping them current; at others, one or more directors, the Board and/or the relevant Committee(s) may feel that these documents should emanate from the top. However, in all cases the governance officer has critical responsibilities. First, regardless of who has primary responsibility for creating them, the governance officer must commit these materials to memory ' and to spirit. He/she must have an organic understanding of how they work, must keep current on legal and other governance developments in order to be able to make suggestions for their continuous improvement, and must do his/her best to make them part of the corporate DNA. The latter point cannot be overemphasized ' the corporate governance officer should do his/her utmost to ensure that these documents are not just pieces of paper or web postings, but rather constitute an intrinsic part of how business decisions are made and implemented.

How the latter function is performed leads to a discussion of the second major component of a corporate governance officer's role.

Communications. Communicating may well be the most important component of the governance officer's role and the area to which he/she may devote the greatest amount of time.

First and foremost, the governance officer must communicate with the Board and management, including keeping them current on regulatory and other developments affecting governance, as well as best practices being implemented by others. Additionally, the governance officer needs to take an active role in facilitating communications between and among management, the Board and the company's institutional owners and the governance community.

Internal communications of a more general nature are key to making good governance part of the corporate DNA and assuring that business decisions are made and implemented in accordance with governance principles and policies. These communications include posting the governance principles and related information on the corporate website and intranet; engaging in programs in all major corporate departments and operating areas to explain the company's approach to and belief in good governance; and preparing articles and other written materials for inclusion in in-house magazines, newsletters and other communications. Here, as in so many areas, one size does not fit all; however, partnering with the corporate communications function should generate a lengthy list of strategies for 'spreading the word' on governance.

In addition to conveying the desired governance 'spirit,' internal communications are necessary to facilitate compliance with the principles. The governance officer can often act as a sounding board for employee concerns regarding governance, and he/she can seek to facilitate compliance by bringing these concerns, or even instances of noncompliance, to the attention of senior management and/or the Board.

As noted above, good governance should result in a premium in the market price of a company's stock and a lower cost of capital. External communications are critically important to achieving these goals; if the 'outside world' does not know about a company's governance accomplishments, these benefits may be difficult to achieve.

One way of communicating governance goals and achievements is through filings with the Securities and Exchange Commission; increasingly, companies are using their annual reports and proxy statements to get out the message that good governance is a core value and to communicate governance accomplishments. The governance officer is often involved (or should be) in preparing these filings.

SEC filings may provide good disclosure, but that is frequently not the same thing as good communication. As a result, the governance officer needs to engage in virtually constant communication with those responsible for corporate governance at the company's institutional owners; with the corporate governance community generally, including organizations such as Institutional Shareholder Services and the Council of Institutional Investors and, increasingly, organizations performing governance rating services; and with the general business media. At the same time, these communications cannot be one-way; the governance officer must listen to and consider the views and recommendations of the institutional owner/governance community, and convey those views back to the Board and others in the company.

Continuous Improvement. Finally, the governance officer must see to it that corporate governance has no finish line, but rather requires ' like any other area of the business ' continuous improvement. Just as with everyday operational matters such as distribution systems or quality control, a company can never stop examining, re-evaluating and improving its governance principles and practices and the extent to which they are followed. Again, the tone at the top ' the level of support from management and the Board ' will be critical to achieving this goal, but the governance officer can do much to facilitate this process, including constantly benchmarking and keeping management and the Board current on governance developments and practices.

The above is an extremely abbreviated overview of the corporate governance officer's responsibilities; as always, the devil is in the details, and achieving the 'gold standard' in corporate governance has many, many details. However, if the governance officer executes these responsibilities, and has the support of management and the Board, the company should find it much easier to achieve that standard and to accomplish the goals of doing so.

Robert B. Lamm, Esq. has been Corporate Secretary and Director of Corporate Governance of Computer Associates International, Inc. (http://www.ca.com/) since October 2002.

A French acquaintance recently commented that my job is very ” la mode.' She was not referring to ice cream; rather, she was suggesting that the role of the corporate governance officer is very trendy. There certainly has been a lot of media buzz about corporate governance in recent months, including reports that a growing number of public companies have designated governance officers. However, neither corporate governance nor the role of the corporate governance officer should be viewed as a fad that will soon pass from the scene. The effort to achieve and maintain good governance is here to stay; there is much evidence that the corporate and investment establishments are creating permanent infrastructures to develop, evaluate and continuously improve governance practices.

That said, the meaning of the term 'corporate governance' and the role of the governance officer are unclear ' and both are rapidly evolving, creating uncertainty as to what both are all about. The purpose of this article is to provide some insights into corporate governance and the functions of the corporate governance officer.

Defining Corporate Governance and Its Goals

Asking ten people to define corporate governance might well generate ten definitions ' or more. However, as a general proposition, corporate governance comprises the policies, systems and practices defining a company's ownership structure; the rights of its owners and other constituencies (employees, communities, etc.); the composition and operation of its board of directors and committees of the board; and transparency in conducting and reporting transactions.

While corporate governance is generally not the same thing as business ethics, corporate compliance, investor relations, corporate communications, securities disclosure, or public/community relations, it frequently involves ' and the governance officer needs to handle ' issues in one or more of these areas.

Corporate governance has many goals, but the primary ones are to promote the highest quality management through appropriate oversight by boards and owners; to facilitate ethical corporate behavior, including openness and fairness, and informed decision-making throughout the company; to create trust; and to encourage investment and enhance value. In other words, good corporate governance should result in a premium in the market price of a company's stock and a lower cost of capital. The Tone at the Top ' Board/Management Support of Good Governance

For the corporate governance officer to successfully perform his/her role, the Board of Directors and management must fully support good governance and the governance officer's role in implementing it. If the tone at the top is neutral to negative on the importance of good governance or on the governance officer's function, it may be difficult if not impossible for the governance officer to properly perform that function.

The Role of the Corporate Governance Officer

The functions of the corporate governance officer fall into three major areas:

• developing governance policies, systems and practices;
• engaging in internal and external communications regarding governance; and
• implementing continuous improvement in corporate governance, as in other areas of the business.

Developing Governance Policies, Systems and Practices. Any company espousing good governance needs to have in place comprehensive governance policies, systems and practices. Chief among these are written principles, adopted by the Board, that outline the policies and practices that will be followed in governing the company. The principles should cover the following major areas:

• the composition of the Board, including the appropriate mix of management and independent directors, the desired abilities and qualities of non-management directors, and the criteria to be used in determining whether they are independent (including criteria imposed by law or by a self-regulatory organization);
• the types and composition of Committees of the Board, including any independence criteria in addition to those applicable to non-management directors generally;
• the principal responsibilities of ' and expectations for ' the Board and its major Committees (Audit, Compensation, and Governance/ Nominating), including oversight responsibilities with respect to strategy, management development and succession, risk assessment, and corporate compliance; and
• the allocation of power and responsibility as between the owners, management and the Board, including how directors are elected (eg, annually or in staggered classes), whether they are subject to term and/or age limits, Board self-evaluation processes, CEO evaluations, and ' last but not least ' the functioning of the independent directors, including executive sessions and the selection of a 'lead director' or someone to perform similar functions.

The foregoing is an extremely abbreviated list of the subjects that should be covered by the governance principles. Further, companies have taken widely diverse approaches to crafting principles; in this area, as in so many other corporate governance areas, one size definitely does not fit all.

Similarly, a company must prepare and keep current extensive documentation controlling the actual operations of the Board and its Committees, including Committee charters and policies on topics ranging from delegations of authority to Audit Committee approval of audit and non-audit services, as required under the Sarbanes-Oxley Act.

The governance officer's responsibilities with respect to all of these materials vary all over the lot. At some companies, the governance officer may assume primary responsibility for drafting these materials and keeping them current; at others, one or more directors, the Board and/or the relevant Committee(s) may feel that these documents should emanate from the top. However, in all cases the governance officer has critical responsibilities. First, regardless of who has primary responsibility for creating them, the governance officer must commit these materials to memory ' and to spirit. He/she must have an organic understanding of how they work, must keep current on legal and other governance developments in order to be able to make suggestions for their continuous improvement, and must do his/her best to make them part of the corporate DNA. The latter point cannot be overemphasized ' the corporate governance officer should do his/her utmost to ensure that these documents are not just pieces of paper or web postings, but rather constitute an intrinsic part of how business decisions are made and implemented.

How the latter function is performed leads to a discussion of the second major component of a corporate governance officer's role.

Communications. Communicating may well be the most important component of the governance officer's role and the area to which he/she may devote the greatest amount of time.

First and foremost, the governance officer must communicate with the Board and management, including keeping them current on regulatory and other developments affecting governance, as well as best practices being implemented by others. Additionally, the governance officer needs to take an active role in facilitating communications between and among management, the Board and the company's institutional owners and the governance community.

Internal communications of a more general nature are key to making good governance part of the corporate DNA and assuring that business decisions are made and implemented in accordance with governance principles and policies. These communications include posting the governance principles and related information on the corporate website and intranet; engaging in programs in all major corporate departments and operating areas to explain the company's approach to and belief in good governance; and preparing articles and other written materials for inclusion in in-house magazines, newsletters and other communications. Here, as in so many areas, one size does not fit all; however, partnering with the corporate communications function should generate a lengthy list of strategies for 'spreading the word' on governance.

In addition to conveying the desired governance 'spirit,' internal communications are necessary to facilitate compliance with the principles. The governance officer can often act as a sounding board for employee concerns regarding governance, and he/she can seek to facilitate compliance by bringing these concerns, or even instances of noncompliance, to the attention of senior management and/or the Board.

As noted above, good governance should result in a premium in the market price of a company's stock and a lower cost of capital. External communications are critically important to achieving these goals; if the 'outside world' does not know about a company's governance accomplishments, these benefits may be difficult to achieve.

One way of communicating governance goals and achievements is through filings with the Securities and Exchange Commission; increasingly, companies are using their annual reports and proxy statements to get out the message that good governance is a core value and to communicate governance accomplishments. The governance officer is often involved (or should be) in preparing these filings.

SEC filings may provide good disclosure, but that is frequently not the same thing as good communication. As a result, the governance officer needs to engage in virtually constant communication with those responsible for corporate governance at the company's institutional owners; with the corporate governance community generally, including organizations such as Institutional Shareholder Services and the Council of Institutional Investors and, increasingly, organizations performing governance rating services; and with the general business media. At the same time, these communications cannot be one-way; the governance officer must listen to and consider the views and recommendations of the institutional owner/governance community, and convey those views back to the Board and others in the company.

Continuous Improvement. Finally, the governance officer must see to it that corporate governance has no finish line, but rather requires ' like any other area of the business ' continuous improvement. Just as with everyday operational matters such as distribution systems or quality control, a company can never stop examining, re-evaluating and improving its governance principles and practices and the extent to which they are followed. Again, the tone at the top ' the level of support from management and the Board ' will be critical to achieving this goal, but the governance officer can do much to facilitate this process, including constantly benchmarking and keeping management and the Board current on governance developments and practices.

The above is an extremely abbreviated overview of the corporate governance officer's responsibilities; as always, the devil is in the details, and achieving the 'gold standard' in corporate governance has many, many details. However, if the governance officer executes these responsibilities, and has the support of management and the Board, the company should find it much easier to achieve that standard and to accomplish the goals of doing so.

Robert B. Lamm, Esq. has been Corporate Secretary and Director of Corporate Governance of Computer Associates International, Inc. (http://www.ca.com/) since October 2002.