Portfolio : Corporate Governance of the Financial Reporting Process

I. Focus, Scope and Objectives of Portfolio
A. Traditional Sources of Law
B. Emergent Sources of Law
C. Portfolio Focus and Purpose
1. In General
2. Performance Standards for Directors
D. Portfolio Scope and Organization

II. State Law Principles of Corporate Governance
A. Structure and Process of Governance
B. Substantive Principles of Corporate Governance
1. The Board's Responsibility for Information and Reporting Systems
a. Scope of the Board's Duty of Inquiry
b. The Need for Directors to Use Their Expertise
c. The Need For Directors to Be Independent
d. The Need to Consider Relevant Constituencies
e. The Need for Directors to Act When They Learn of Problems
2. Director Protection Under the Business Judgment Rule
3. Beyond the Business Judgment Rule: Insulating Directors from Personal Liability
a. Exculpation of Directors
b. Indemnification of Directors
c. Advances for Legal Expenses
d. Directors and Officers Liability Insurance
e. Summary of Protection for Directors

III. Federal Securities Laws Principles of Corporate Governance
A. The Disclosure Requirements
1. Backgrounds of Management and Directors
2. Executive and Director Compensation
3. Ownership of Company Securities
4. Relationships and Related Transactions of Corporate Insiders
5. Proxy Solicitations
B. Structure and Process
1. The Board of Directors
2. The Audit Committee
3. Other Committees of Directors
4. Internal Structure and Processes Below the Board Level
a. Internal Audit
b. Code of Ethics
c. Equity Compensation Plans
d. Loans to Directors and Executive Officers
e. Whistleblowing
(1). Whistleblowing by External Auditors
(2). Whistleblowing by Attorneys
(a). The Carter and Johnson Case
(b). The Gutfreund Case
(c). Sarbanes-Oxley Rule
(d). The Isselmann Case
(e). Summary of Attorney's Duty to Blow the Whistle
C. Management Certifications of Financial Reports
1. Purposes of the Certification Requirements
2. SOX: Section 302 Certification
a. Section 302 Requirements
b. The Company's Internal Controls
(1). Creation of Disclosure Controls and Procedures
(2). Evaluation of Controls
c. Determination of Accuracy and Completeness
d. The Disclosures Required by the Certification Process
3. SOX: Section 906 Certification
D. Substantive Federal Requirements for Corporate Governance of the Financial Reporting Process
1. Foundational Pronouncements
a. Stirling Homex Corporation
b. Gould, Inc.
c. National Telephone Co., Inc.
d. Summation of Foundational Developments
2. Growing Concerns of the 1990s
a. The Cooper Companies
b. Orange County, California
c. The W.R. Grace Investigative Report
3. Enforcement Actions Against Corporate Directors
a. Cases Against Directors Involved in Wrongdoing
(1). SEC v. Arthur Toll, Bruce B. Edmondson, Gerald Levinson and Elliott S. Fisher
(2). Incomnet
(a). False Press Release
(b). Trading in Company Stock
(c). Liability of Incomnet Directors
(d). Incomnet's Contribution to the Evolution of the Law
(3). First Florida Communications, Inc. and Paul Richard Bell
(4). Asthma Disease Management, Inc. and Richard A. Manini
(5). Del Global Technologies Corp., Inc. and David Michael
(6). Safescript Pharmacies, Inc. and Curtis Borman
(7). Former Directors of Spiegel Inc.
(8). Summary Concerning Direct Involvement by Directors
b. A Director's Duty to Use His or Her Awareness
(1). Reid Rutherford
(2). Tyco International Ltd. and Frank E. Walsh, Jr.
(3). The Massachusetts Turnpike Authority and James Kerasiotes
(4). Heartland Advisors, Inc. and Hugh Denison
(5). Royal Ahold and Ture Roland Fahlin
(6). Tyson Foods, Inc. and Donald Tyson
(7). Fischer Imaging Corporation and Teresa Ayers
(8). First American Health Concepts, Inc. and John R. Behrmann
(9). Summary as to Director's Awareness
c. The Director's Duty of Vigilance
(1). John H. Hankins, Howard L. Peterson and John G. Guffey
(2). Michael Marchese
(3). Rudolph Peselman
(4). Charles M. Powell and Clifford C. Thygesen
(5). Louise A. Cummings
(6). Steven Angel
4. Summary of Federal Substantive Requirements for Corporate Governance of the Financial Reporting Process
E. Leniency: The Seaboard 21(a) Report
1. Background
a. Seaboard's Financial Reporting Problem
b. Company Response to the Problem
c. Seaboard's Reward for Cooperating
2. Policy for Leniency
a. Cooperative Measures
b. SEC Caveats
c. Importance of Timing
d. Nature of the Seaboard Prescriptions
e. Steps Toward Leniency Under the Seaboard Report
(1). Steps to Take Before the Investigation
(2). Steps to Take in Response to the Investigation
f. Impact of Seaboard 21(a) Report
F. Considerations from the Criminal Process
G. Summary of Federal Law Concerning Director's Duty of Vigilance
H. A Footnote About Shareholders and Influential Persons
1. Shareholders: Jason Galanis
2. Influential Person: Alan Casden

IV. Theories of Legal Liability
A. Fraud Charges
1. Intentional or Reckless Fraud
2. Negligent Fraud
B. Nonfraud Charges
C. Aiding and Abetting Charges
D. Causing Violations
E. Relevance of One's State of Mind

V. Planning Points: Measures for Fulfilling Federal Responsibilities
A. Which Directors Are Responsible?
B. What Is Reasonable Care?
C. What Should Be Done in the Ordinary Course?
1. Adequacy of Systems and Processes
2. Oversight of Executive Management
3. Compare Company Disclosures Against the Facts You Know
4. Be Mindful of the Interests of All Securities Holders
5. Be Alert to Management and Directorial Self-Interest
6. Be a Responsible Signatory
7. Do Not Rely Exclusively on Management
8. Pursue Red (and Yellow) Flags
9. Implementing the Seaboard Prescriptions in the Ordinary Course
D. Seaboard Measures to Take After the SEC Investigation Begins
E. Avoid Uncooperative Conduct

VI. Summary of Directorial Responsibilities and Planning Points