November 3, 2003

Designating Audit Committee Financial Expert:

One question that I keep getting is what processes should a board use to make its “audit committee financial expert” determination. Faegre & Benson recommends the following process (with the caveat that each company’s circumstances may require a different process):

1. Send Audit Committee Questionnaire to audit committee members and have them returned prior to board meeting. Circulate the completed questionnaires to all directors prior to the board meeting.

2. Have the General Counsel do some analysis of the completed questionnaires against the criteria prior to the board meeting to help the board figure out if there are additional questions left unanswered by the completed questionnaire that would require further inquiry, etc. and present analysis to all directors at the board meeting.

3. At the board meeting, directors could then discuss the completed questionnaires and ask additional questions to get information they need to complete their assessment and use the analysis table to walk through the definition of an “audit committee financial expert.”

Overall, the audit committee should agree which of its members shall be suggested to the board as the “financial expert” – and from a practical perspective, a director should not be identified as a financial expert without their consent. Management nor nominating committees should play much of a role in this process (other than assistance from the General Counsel or outside counsel in asking the right questions and conducting a review of the questionnaires – or recruiting a new director that qualifies as a financial expert).

For members, in our “Audit Committee Portal” – courtesy of Faegre & Benson – we have posted a sample audit committee questionnaire, a board resolution regarding a financial expert determination and a spreadsheet with the financial expert criteria that audit committee members can use to help analyze prospective financial experts. In addition, we have other sample D&O questionnaires available.

Y2K All Over Again?

One readers shares: While surfing to Oracle Corporation’s website for technical information, I was startled to see Sarbanes Oxley prominently featured on Oracle’s homepage. You might call it a new high water mark for the hype that has built around SOX that the same vendor that promised us Network Appliances in the 90’s, and reassured us at the millennium that its technology would ward off the perils of Y2K is now offering us white papers on governance and invites us to “Learn how Oracle’s powerful differentiated capabilities can help you meet the demands of the Sarbanes-Oxley Act.”

Crisis in Mutual Fund Industry

As Pat McGurn of ISS noted in our recent “Wildest Proxy Season” webcast, mutual funds often are the “swing” vote in a close vote. In addition, the SEC’s recent proposal on shareholder access will undoubtably make the votes cast by mutual funds even more important.

That’s one reason why the governance failures at funds are so scary. The reforms that companies have undergone over the past two years pale next to the ones necessary to fix governance in the mutual fund industry. Yesterday, the NY Times ran two good articles on the topic – one about the excessive compensation earned by Putnam’s CEO and one was an interview with John Bogle, the founder and CEO of Vanguard (who offered his own reform ideas – and noted that the all of the fund scandals have yet not been revealed).

Yesterday, Nell Minow emailed me this disturbing quote from the Investment Company Institute’s Report on Mutual Fund Directors (published in 1999 to help investors understand the roles of mutual fund directors):

“[S]hareholders gain an extra layer of protection because each mutual fund has a board of directors looking out for shareholders’ interests. Unlike the directors of other corporations, mutual fund directors are responsible for protecting consumers, in this case, the fund’s investors. This unique “watchdog” role, which does not exist in any other type of company in America, provides investors with the confidence of knowing that directors oversee the advisers who manage and service their investments.”