Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Monday, August 21, 2006

Outside Directors Beware: Backdating and Other Sins

SEC Commissioner Roel Campos spoke last week to the Hispanic Association on Corporate Responsibility on the topic "How to be an Effective Director." He quoted with approbation Justice Black's statements that "the law has no place for dummy directors," and that "directors should direct."

Campos noted that in fulfilling their fiduciary obligations directors "cannot ignore red flags, or even pink ones." He also stated that an audit committee which meets on just a quarterly basis for an hour or so has not devoted sufficient time and oversight to the business. He also made several comments about majority voting for directors which will, he predicts, become the norm.

The types of actions brought against outside directors by the SEC in recent years were reviewed by Campos and he spent quite a bit of time discussing outside director culpability with respect to option backdating. He provided two bits of advice to outside directors: (1) use "as of" dates only where legal consequences have been carefully reviewed, and (2) one-member board committees are generally not appropriate for critical board functions.

The "as of" comments are, he noted, applicable to options backdating and also to instances where contracts may be signed in a later quarter with an "as of" date in an earlier quarter in an attempt to engage in premature revenue recognition.

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