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Developments Relating to Enron Corp
Full Committee on Energy and Commerce
Mr. Roger W. Raber
Good
afternoon, Mr. Chairman. I thank you and this committee for the opportunity to
testify on the subject of "Lessons Learned from Enron's Collapse." I am
honored to be here today as President and CEO of the National Association of
Corporate Directors (NACD), a not-for-profit professional association founded in
1977 to enhance the education and development of corporate boards. Summary
Statement In my
remarks this afternoon I will cover three main subjects.
My main
point in all of this is that corporate directors are an important key to success
of our free enterprise system. True, some aspects of our corporate system-such
as disclosure-do require continuous improvements that directors alone cannot
accomplish. Directors must work with others, such as institutional investors and
regulators, to ensure this improvement. But improvements to the system are not
enough. Good corporate governance requires above all the presence of
independent, informed directors who have the courage and integrity to ask
difficult questions. With such directors, any reasonable system can work.
Without such directors, any system, no matter how excellent, can fail. The Mission and Work of the NACD NACD was
founded in 1977 as a membership organization for corporate directors committed
to improving board effectiveness. Today,
NACD is still the only membership organization of its kind in the United States.
At this time, the NACD has more than 10,000 active members and
participants. These are individuals or entire boards who purchase our publications,
attend our seminars, and receive training in their boardrooms. Most of our
members and participants are directors, but some are board advisors such as
attorneys and accountants. Many distinguished corporate directors add to our
knowledge and practice as members of our governing board, advisory board, and
faculty. Through
our publications, seminars, and services, which cover both basic and
emerging issues, NACD promotes high board standards
and creates forums for peer interaction.
We have 12 chapters where directors meet to learn about, discuss, and
respond to current issues. Since 1977, our Director's
Monthly publication has featured "best practice" articles by and
for corporate directors -over 2,000 articles to date. Also, for the past decade, NACD has issued annual "Blue
Ribbon Commission" reports on issues such as director professionalism and
evaluation, executive and director compensation, and the board's role in
strategy, among other topics. Furthermore,
NACD also conducts research
on governance trends, tracking over 100 issues steadily over time and
across company sizes and industries. Finally, our members, directors, and
officers also communicate with the media, regulators, institutional
investors, and others where needed to improve understanding of board issues.
The Role of the Corporate Board of Directors The board of directors has an important place in the corporate system. Corporations are owned by shareholders. Boards are accountable to shareholders, and managers are accountable to the board. Corporations are chartered through state corporation laws. These laws vary by state, but they share common features. One common feature in state corporation laws is the notion of director duty-namely the twin duties of care and loyalty. The duty of care says that corporate directors must exercise care in their decisions, just as they would in their own decisions. The duty of loyalty says that directors must be loyal to the company, remaining free of any conflicts of interest as they vote on particular matters. A judicial doctrine called the business judgment rules shields directors' decisions from liability as long as the directors exercised care and were free of conflicts of interest. Another common feature in state corporation laws is the notion that corporations are "managed under the direction of a board of directors." The nature of this direction varies. A small new corporation may just have a few key officers, who are all directors and owners as well. If a corporation sells stock to the general public, however, ownership shifts to non-managers. These non-manager-owners need protection. This is the role of state and federal securities laws. For example, securities laws require full, timely, and clear disclosure of important ("material") information. Also, securities laws ensure that owners have representation on boards, through voting on nominations of particular directors. As
companies grow, boards often grow, and form committees, such as an audit
committee, a compensation committee, and a nominating committee. They also may
form special committees to look at sensitive issues. The NACD recommends that
these committees be composed of qualified, independent directors.
Our recommendations have made a difference. For example, today, partly as
the result of concepts advocated by a member of our boards of directors, in a
Blue Ribbon Committee report to the Securities and Exchange and stock exchanges,
the boards of publicly listed companies must have an audit committee composed
entirely of independent directors who are (or who will spend time to become)
financially literate. This is only one of the many reforms NACD has advocated in
the past 25 years. Lessons
Learned: Directors as a Solution In
closing, I would like to explain how directors can be a solution to the kinds of
problems that allegedly occurred at Enron. (For a detailed response to the
specific issues raised in the Enron case, I refer the committee to the January
31, 2002, issue of our newsletter, DM
Extra, which can be viewed on our web site, nacdonline.org. I include
a copy for the record.) In
general, I believe that there are three keys to board effectiveness:
independence, information, and integrity-especially the courage to ask the
tough questions. Independence.
NACD commends the SEC and stock exchanges for requiring "independent" audit
committees. Meanwhile, independent nominating and compensation committees are
now on the rise. Unless this beneficial trend continues, we anticipate stock
exchange requirements mandating the independence of these committees.
Information.
Directors need to be well informed about governance, and about the companies and
industries they serve. A vital source of information is financial statements.
Overall, the financial statements of U.S. companies do a good job of disclosure,
keeping up with new challenges of financial reporting, but we want to make sure
that oversight groups for accounting standards remain free from undue influence
by any particular constituency. Ongoing education for directors is also important. A
number of major institutional investors actively encourage director education in
their portfolio companies. The late Jean Head Sisco, in her speech as NACD
Director of the Year in 2000, went so far as to suggest that the stock exchanges
require newly listed companies to provide evidence of ongoing director
education. Integrity.
Last but not least, there is integrity. Directors should have the "duty of
curiosity" to ask difficult questions, such as, "Do these numbers reflect
our true profitability?" "What will this policy do for the employees in our
401-k plan?" "Isn't it risky to have our auditors do some of our internal
auditing work?" After Enron, more directors will be asking such questions. We
will do our part to make sure that they do. In
summary, directors play an important role in the governance of corporations.
Whatever actions you recommend as a committee, I ask you to remember that in the
long run, corporate directors can be an important part in helping your actions
succeed. I thank
you for your time.
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