New England Biz Law Update
Just when companies thought the rash of government-imposed reforms could not get more onerous, now the state legislatures are stepping up their activism. A recent report by the Boston Bar Association’s Corporate Governance Task Force takes a hard look at ways that Massachusetts should – and should not – be contemplating entering the fray of corporate governance reforms.
One of the most striking aspects of Sarbanes-Oxley was the degree to which the federal government now appears willing to delve into the thickets of corporate governance, an area previously considered within the province of the states. Since then, a host of factors – including a series of high-profile corporate bankruptcies and government investigations, the Tyco, Adelphia, and Martha Stewart trials, recent well-publicized shareholder proxy battles, and a marked increase in the public’s distrust of large corporations – have combined to create a genuine social movement around the issue.
Not surprisingly, state government is not immune from the pressures created by this phenomenon. Across the country, states have considered or adopted a whole array of “mini-SOX” requirements, such as requiring additional financial statement certification requirements (California), additional disclosures regarding non-auditing work performed by the company’s accounting firm (Illinois), and proposals for new statewide corporate accountability boards (New Jersey).
Closer to home, Massachusetts recently enacted the new Chapter 156D Business Corporation Law after over a decade of attempts to update the prior law. Members of the Massachusetts Legislature have also sponsored a number of other bills affecting corporate governance issues ranging from increased funding for government corporate investigators to longer limitations periods under the state “blue sky” securities act.
In the wake of these events, then-BBA President Joseph Kociubes created a Corporate Governance Task Force to provide constructive recommendations in the for profit, not-for-profit and public sectors in Massachusetts.
The Task Force was co-chaired by the authors of this article, and included in-house counsel from several area corporations, representatives from relevant state and federal regulatory branches, the investment community, and from corporate counsel and director organizations.
It recently issued a report, which is summarized below. (The report is available at http://www.bostonbar.org/pub/bw/0304/080904_081604/corpgov.pdf.)
Ongoing Review Of Chapter 156D
While sorely needed and impressive in its scope, the newly enacted Chapter 156D did not reflect many of the more recent developments such as SOX or the new SRO listing standards.
Given these developments, and the likelihood of continued corporate law ferment, the Report recommends re-examination of Chapter 156D in several specific areas, such as (1) the provision establishing staggered boards of directors as the default rule for public companies; (2) the level of share ownership required to call special meetings of shareholders of public companies; (3) provisions regarding the duties and responsibilities of directors; (4) provisions permitting elimination of class voting otherwise granted by the statute; and (5) guidance to the judiciary on the definition of director “independence.”
The BBA has now formally assigned to its Business Law Section the task of conducting an ongoing review of Chapter 156D in these areas.
Director Education
In many ways, director education provides the real backbone to effective corporate governance. The latest internal investigation of Lord Black and others at Hollinger International only confirms that having a gold-medal board does not mean that the corporate executives are not running off with the silver.
Directors were, until recently, neither required nor expected to receive in-depth education, a situation that was at odds with the complex, often technical, issues that come before corporate boards.
The Report now recommends that incentives, such as liability-minimizing provisions, for director participation in continuing education programs be provided, either by statute or through official commentary to Chapter 156D.
Proxy Voting And Preferential Purchasing
Massachusetts has the purchasing power of a Fortune 500 company. Its investment in publicly traded companies is nothing to sneeze at, either: The Commonwealth holds shares of public companies worth billions of dollars.
The Report recommends that the Commonwealth consider using its power as an investor to encourage good governance practices in those companies through its investment criteria and through its proxy voting criteria. In addition, the Commonwealth should consider wielding its purchasing power – as do many other governmental entities – to encourage good governance practices in its vendors.
Nonprofits
Non-profit corporations face governance issues similar to those facing for-profit corporations. Like many corporations, nonprofits have diverse, and often dispersed, stakeholders, and have not been immune from scandal and excess by those holding the reigns.
The Attorney General of Massachusetts has recently published a proposal that seeks to strengthen corporate governance for public charities. The Report recommends that the BBA should give serious consideration to supporting key aspects of the Attorney General’s efforts.
Business Litigation Session
The establishment of the Massachusetts Superior Court Business Litigation Session has played a critical role in the jurisprudential evolution of the state’s corporate governance law. The Report recommends that the session be expanded and provided sufficient resources to enhance the Commonwealth’s ability and reputation for resolving commercial disputes.
State Whistleblower Provisions
An effective whistleblower regime must balance many competing considerations. While SOX requires public companies to adopt certain whistleblower protections, neither the SEC nor the federal courts has issued substantial guidance on what SOX requires.
As such, it may be too soon to identify those “best practices” conforming to SOX. The Report recommends that consideration by the Legislature of additional state law standards in this area – while perhaps ultimately prudent – should be conducted after the federal standards have been better clarified and defined.
Legal Ethics
The topic of lawyers’ responsibility for clients’ misdeeds has figured prominently in corporate governance reforms. Given the passage of SOX, the SEC’s recent rulemaking thereunder, and the amendments to the Model Rules of Professional Conduct recently approved by the American Bar Association, the Report recommends that the Massachusetts Rules of Professional Conduct be reviewed and that appropriate bar officials provide interpretive guidance regarding the relationship of the state rules to these new developments.
Beth I.Z. Boland and R. Scott Henderson are co-chairs of the Boston Bar Association Task Force on Corporate Governance. Ms. Boland is a partner in Bingham McCutchen LLP’s securities litigation/corporate governance group. Mr. Henderson is associate general counsel of Bank of America, wealth & investment management. He was a member of Bingham McCutchen’s investment management group at the time the Task Force Report was written. They wish to thank Matt Applebaum, an attorney with Bingham McCutchen, for his important contributions to the Task Force and this article.
