Governance structures and practices should be designed to promote an appropriate corporate culture of integrity, ethics, and corporate social responsibility.
The tone of the corporate culture is a key determinant of corporate success. Integrity, ethics, and a sense of the corporation’s role and responsibility in society are foundations upon which long-term relationships are built with customers, suppliers, employees, regulators, and investors. The board plays a key role in assuring that an appropriate corporate culture is developed, by communicating to senior management the seriousness with which the board views the matter, defining the parameters of the desired culture, reviewing efforts of management to inculcate the agreed culture (including but not limited to review of compliance and ethics programs) and continually assessing the integrity and ethics of senior management.
Assessment of management performance and integrity are at the heart of effective governance, and should factor into all board decisions—not only in hiring and compensation matters. In particular, boards should assess management integrity and ethics when considering management proposals; assessing internal controls and procedures; reviewing financial reporting and accounting decisions; and more generally, when discussing management development and succession planning. The board should pay special attention to how members of senior management ap- proach their own conflicts of interest, for example, in addition to any proposed related-person transactions involving management, the conflicts inherent in compensation decisions and the use of corporate assets in the form of perquisites.
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VI.A. Conflicts of Interest, Ethics & Confidentiality35
ALI Principles/Recommendations BRT Principles NACD Report Conference Board Recommendations OECD Principles/Millstein Report A director, senior executive, or controlling share-
holder makes “disclosure concerning a conflict of in- terest” if the director, senior executive, or controlling shareholder discloses to the corporate decisionmaker who authorizes in advance or ratifies the transaction in question the material facts known to the director, senior executive, or controlling shareholder concern- ing the conflict of interest, or if the corporate deci- sionmaker knows of those facts at the time the trans- action is authorized or ratified. (§ 1.14(a))
[T]he corporation, in the conduct of its business . . . [i]s obliged, to the same extent as a natural person, to act within the boundaries set by law . . . ; (§ 2.01(b) (1))
See § 3.04, Comment c ([W]here directors of either a publicly or non-publicly held corporation are review- ing a conflict-of-interest transaction, it might be ap- propriate to recognize a right to expert assistance . . . in the subset of directors who are disinterested . . . .).
See generally Part V, Duty of Fair Dealing. See also Topic Heading VII.E, below.
Directors and management should never put personal interests ahead of or in conflict with the interests of the corporation. (p. 2)
Effective corporate governance requires . . . the CEO and senior management . . . [to] be committed to business success through the maintenance of the high- est standards of responsibility and ethics. (p. 5) The board should set a “tone at the top” that establish- es the corporation’s commitment to integrity and legal compliance. . . . The board should pay particular at- tention to conflicts of interest, including related- person transactions. (p. 10)
It is the responsibility of the CEO and management, under the CEO’s direction, to operate the corporation in an effective and ethical manner. (p. 10)
Business Roundtable believes that . . . corporations should have:
A CEO of integrity . . . who takes responsibility for the corporation adhering to the highest ethical standards.
A strong, ethical “tone at the top” [set by the CEO and senior management] that establishes a culture of legal compliance and integrity communicated to personnel at all levels of the corporation.
An effective compliance program. (p. 12)
See pp. 19-20 (The audit committee should report at
least annually to the full board on its oversight of the compliance program. … The audit committee should consider whether to hold private sessions ... with … those responsible for compliance (including at least one meeting annually with the person who has day-to- day responsibility for the compliance program).)
Boards should seek only candidates who have demon- strated high ethical standards and integrity in their personal and professional dealings, and who are will- ing to act on–and remain accountable for–their board- room decisions. (p. 7)
Boards should require that director candidates dis- close all existing business relationships between them or their employer and the board’s company. Boards should then evaluate the extent to which, if any, a candidate’s other activities may impinge on his or her independence as a board member, and determine when relationships are such that a candidate can no longer be considered independent. (p 10.)
If, through the evaluation process or otherwise, it be- comes apparent that a director is not meeting the standards established by the board (including ethical standards), where appropriate the governance commit- tee should provide the director with feedback, addi- tional education, or other reasonable means of guid- ance. If such attempts are either inappropriate or unsuccessful, the director’s resignation should be ac- cepted. (p. 18)
[T]he board should . . . seek disclosure of any rela- tionships that would appear to compromise director independence. (p. 20)
Board disclosure of procedures is distinct from shar- ing the substance of such deliberations, which should be confidential. (p. 16)
See also NACD, CORPORATE DIRECTOR’S ETHICS AND COMPLIANCE HANDBOOK (2003).
The Compensation Committee should . . . recognize the potential conflict of interest in management’s rec- ommending its own compensation levels. (Part 1, Principle I)
No compensation arrangement should be permitted that creates an incentive for top executives to act con- trary to the company’s best interests . . . . (Part 1, Principle I, Best Practice 4)
Boards must be composed of . . . a substantial major- ity . . . free from disqualifying conflicts of interest . . . (Part 2, Introduction at p. 9)
Each director should disclose to the board or to a des- ignated committee all relationships between and among that director, the company, and senior man- agement of the company, including any potential con- flict of interest, whether or not required for public disclosure, in order to allow for a comprehensive de- termination of a director’s independence. (Part 2, Principle II, Best Practice 4)
[E]thical standards and the skills required to foster ethical practice throughout the organization should be among the core qualifications for the CEO and other senior management positions. (Part 2, Principle VI) Among the practices which boards should consider for establishing an ethical corporate culture are: . . . continued and repeated emphasis, and commen-
surate behavior, by the board and CEO, on the importance of ethical conduct to the corporation and its business; and
using, as criteria for selection of the CEO and senior management, a candidate’s ability to and prior history of fostering ethical practices, in- cluding the candidate’s demonstrated business values and response to any misconduct in prior organizations in which the candidate was em- ployed. (Part 2, Principle VI, Best Practice 1)
Insider trading and abusive self-dealing should be prohib- ited. (Principle III.B)
Members of the board and key executives should be re- quired to disclose to the board whether they, directly, in- directly or on behalf of third parties, have a material in- terest in any transaction or matter directly affecting the corporation. (Principle III.C)
Stakeholders, including individual employees and their representatives, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for do- ing this. (Principle IV.E)
The board should fulfill certain key functions includ- ing . . . [m]onitoring and managing potential conflicts of interest of management, board members and sharehold- ers, including misuse of corporate assets and abuse in re- lated party transactions. (Principle VI.D)
Boards should consider assigning a sufficient number of nonexecutive board members capable of exercising inde- pendent judgment to tasks where there is a potential for conflict of interest. (Principle VI.E.1)
See Annotation to Principle III.B (Abusive self-dealing, e.g., by controlling shareholders, and insider trading, are prohibited in most, but not all, OECD jurisdictions; such practices violate the principle of equitable treatment of shareholders.).
See also Principle II.F.2 (Institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts of interest . . .).
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Under NYSE listing rules, domestic listed companies are required to adopt and disclose a code of business conduct and ethics for directors, officers and employees addressing: conflicts of interest; corporate opportunities; confidentiality; fair dealing with customers, suppliers, competitors and em- ployees; protection and proper use of company assets; compliance with laws, rules and regulations (including insider trading laws); and encouraging the reporting of any illegal or unethical behavior. Any waivers of the code given to directors or executive officers must be approved by the board or a board committee, and must be disclosed within 4 business days. Nasdaq-listed companies are required to adopt a code of business conduct and ethics for directors, officers and employees that, at a minimum would qualify as a code of ethics under the Sarbanes-Oxley Act. In addition, under the Sar- banes-Oxley Act and related SEC rules, companies must disclose whether or not they have adopted a code of ethics applicable to their CEO, CFO and certain other officers and, if not, why not. The Sarbanes-Oxley Act also provides “whistleblower” protections, which have been expanded by the Dodd-Frank Act. See Appendix. See 2011 ABA Guidebook at 24 (“Directors should be alert and sensitive to any interest they may have that might conflict with the best interests of the corporation, and they should disclose such interests to the designated board representative or committee and the general counsel. When directors have a direct or indirect financial or personal interest in a matter before the board for decision — including a contract or transaction to which the corporation is to be a party, or which involves the use of corporate assets, or which may involve competition with the cor- poration — they are considered “interested” in the matter. Interested directors should disclose the interest to the board members who are to act on the matter and disclose the relevant facts concerning it.”).
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