INTRODUCTION

Best practices can be summarised as follows, with the understanding that certain organisations (such as public companies) may have greater obligations.¹

STRUCTURE OF THE BOARD OF DIRECTORS

Best Practice: Governing bodies of all organisations (whether designated as boards of directors, boards of trustees or otherwise, hereafter called 'boards of directors') should include completely independent directors and these directors should preferably constitute a majority of all directors, with the possible exception of privately held companies.

Independent directors should be included on the boards of directors of private companies and not-for-profit organisations. For private companies (especially family-owned businesses), independent directors can assist in resolving disputes involving management or family members, can assist the company in its business operations by providing dispassionate advice and through selection of the independent auditor can create credibility for the company's financial statements in the minds of banks, financial institutions and investors.

Not-for-profit organisations need independent directors to assist in their fund-raising activities and to create public credibility.

Although independent directors should constitute a majority of the directors of a not-for-profit organisation, it is not necessary to have a majority of independent directors for a private company. Public companies (other than controlled public companies) are generally required to have a majority of independent directors by stock market listing rules.

Small private companies (especially start-ups) may not be able to attract independent directors because of liability concerns. In such event, a small private company should establish a board of advisors, separate from its board of directors, that would include independent directors. The charter of the board of advisors should make it clear that it does not possess any of the powers or authority of the board of directors. The best practices described below with regard to using independent directors on board committees do not apply to small private companies who are unable to attract independent directors to their board.

WHO IS AN INDEPENDENT DIRECTOR?

There are different standards as to who is an independent director, depending on the context, and these standards significantly differ. For example, an individual can be an independent director for purposes of New York Stock Exchange corporate governance standards but not be considered an independent director because of economic or social ties if the individual is a member of a special management buyout committee of the board of directors. Likewise, a director can be considered an independent for purposes of the compensation committee of the board of directors of a Nasdaq Stock Market company, but not be considered independent for the audit committee because the individual is an executive of a venture capital fund that is an affiliate of the company.

Best Practice: Select independent directors who are willing and able to devote the necessary time to their director duties and preferably persons who have competencies which assist the organisation and which complement the competencies of other directors.

Independent directors who sit on too many boards may not have the necessary time to devote to the organisation. This should be frankly discussed with any potential director candidate. An assessment should also be made as to the potential candidate's background to determine if that background can assist the organisation and complement the competencies of other directors. A diversity of backgrounds is generally helpful to the organisation.

Best Practice: Directors must have their own information pipeline into the company, separate from the information provided to them by management and the independent auditors, in order to fulfill their state law fiduciary duties. An internal auditor reporting to the board of directors or its audit committee can fulfill this function.

Many of the corporate scandals occurred because the board of directors relied solely upon the management and the independent auditors for their information. In order to fulfill a director's fiduciary duty to monitor management, the director must have reliable and independent sources of information. A director cannot fulfill his or her duty to monitor management if all of their information comes from management. The corporate scandals indicate that independent auditors can be easily fooled by management and therefore cannot be the exclusive source of independent information to the board of directors. An internal auditor can assist the board of directors in obtaining the reliable and independent information they need in order to fulfill their fiduciary duties. If the organisation cannot afford a full-time internal auditor, internal auditing services may be outsourced.

Best Practice: Except in the case of a private company, unless there is a lead or presiding director, the Chairman of the Board should be an independent director and independent directors should meet separately from management directors at least once a year. If the Chairman of the Board is not an independent director, a lead or presiding director who is independent should be appointed.

The Chairman of the Board is an important position and can establish the agenda for board meetings and the nature of board discussion. Unless there is a lead or presiding director, permitting the CEO to also be the Chairman of the Board is a bad practice (except in private companies), since it permits the CEO to have too much power over the board of directors and undermines the board's fiduciary duty to monitor management. In situations in which the CEO or another management person is also the Chairman of the Board, a lead or presiding independent director should be appointed.

A lead or presiding director generally advises on board meeting schedules and agendas, chairs executive sessions of the board, oversees what information is provided to the board, leads the board in emergency situations and generally serves as an intermediary between the board and management. A lead director typically has greater power than a presiding director.

Separate meetings of independent directors, at least yearly, permits the independent directors to have a free and frank discussion concerning management and the organisation.

Best Practice: Directors of all organisations must establish audit committees, compensation committees and, in appropriate cases, nominating/corporate governance committees composed entirely of independent directors or, alternatively, must perform the duties of such committees acting through the whole board of directors, which should consist of a majority of completely independent directors. All important committees of the board of directors should annually evaluate their own activities.

There are many duties imposed upon the board of directors of any organisation and it may be preferable to divide these duties among committees of directors. These duties include selecting and monitoring the independent auditor, establishing compensation for at least the top management of the organisation, having a committee which can nominate new directors and monitoring the corporate governance of the organisation in order to establish an ethical law-abiding culture which is necessary to avoid criminal prosecution as well as civil law suits. Private companies may choose not to have a nominating committee, but such a committee should be required for not-for-profit and public companies.

If the board chooses to perform these functions as a whole, it may also do so. In a complex organisation, however, this can be very time consuming and it is generally preferable to use a committee structure.

Annual self-evaluation of the functions of committees of the board is a best practice and is required by New York Stock Exchange rules for audit and compensation committees.

Best Practice: The audit committee must include persons who have the ability and willingness to fully understand the organisation's accounting, and they must, at a minimum, hire and determine the compensation of the independent auditor, pre-approve all auditing and nonauditing services performed by the independent auditor, and assure themselves of the independence of the auditing firm. The audit committee is responsible for overseeing the organisation's financial reporting process and should understand and be familiar with the organisation's system of internal controls.

The audit committee of the board of directors is probably the most important board committee since it is responsible for supervising the organisation's relationships with its outside auditors and overseeing the organisation's financial reporting process, including reviewing the financial statements of the organisation. The audit committee should be familiar with the organisation's internal controls over financial reporting. The audit committee must consist of persons who have both the ability and the willingness to understand complex accounting concepts. To maintain the integrity of the audit process, the audit committee must hire and determine the compensation of the independent auditor and pre-approve all audit and nonaudit services provided by the auditor.

Some small private companies and certain not-for-profit organisations may not wish to expend the funds necessary to obtain an independent audit of their financial statements and may only obtain so-called compilation or review reports from an auditor. This is not a good corporate governance practice. It is difficult for directors to fulfill their fiduciary duties to monitor management without audited financial statements.

Audited financial statements are essential for not-for-profit organisations that solicit contributions from the public and want to assure their potential donors that their money will be well spent.

If audited financial statements are obtained, the audit committee must determine the independence of the auditing firm. If a private company with audited financial statements is sold, it is typical for the buyer to require a representation of the independence of the auditing firm.

Best Practice: All organisations (with the possible exception of small private companies) should have an internal auditor, hired and compensated by the audit committee of the board of directors, and reporting directly to the board of directors. The primary responsibility of the internal auditor should be to assist the board of directors to perform its fiduciary duty to monitor management. Other operational duties may be assigned to the internal auditor by management, but these other duties should not interfere with the primary responsibility of the internal auditor.

The internal auditor should primarily function as the eyes and ears of the board of directors and particularly its audit and compensation committees. To make it clear to the internal auditor that he or she owes their primary responsibility to the board of directors and its committees, the internal auditor should be hired by the audit committee and his or her compensation determined by the audit committee. Although internal auditors are also typically assigned operational functions by management, the audit committee must make certain that these management assigned functions do not interfere with the primary duties of the internal auditor. The audit committee should also be responsible to be certain that there is adequate funding for the internal audit function. This was one of the failures of the WorldCom audit committee.

Best Practice: The compensation committee must, at a minimum, establish the compensation of the top officers of the organisation, use the internal auditor to verify that the compensation given to the top officers is consistent with what the committee authorised and, either alone or together with a separate nominating/corporate governance committee, must determine that the compensation policies of the organisation are consistent with an ethical law-abiding culture.

The compensation committee of an organisation must obtain accurate information in order to set the compensation of its top officers. According to news reports, the Tyco compensation committee never received such information and, as a result, massive compensation payments were made to its top officers without proper authorisation.

Best Practice: Boards of directors should be kept to a reasonable size, since large boards of directors tend to be ineffective.

As a rule of thumb, it is preferable to have not less than four and not more than ten persons on the board of directors. Too many directors can make the board unwieldy and make it difficult to operate. In general, smaller is better.

Some not-for-profit organisations opt for very large boards of directors in order to increase the number of potential donors to the organisation. If a not-for-profit maintains a large board of directors for this reason, all important decisions should be made by a small executive committee of the board and ultimately ratified by the full board. The executive committee would, in effect, operate as the real board of directors.

Best Practice: An organisation should obtain a fairness opinion from a qualified and independent third party in the event of any material transaction involving a potential conflict of interest, such as an insider loan, purchase or sale, or a material merger or acquisition. Investment bankers and other qualified third parties rendering fairness opinions should not receive a percentage of the transaction consideration for rendering the fairness opinion.

Before approving a material transaction involving a potential conflict of interest, the board should obtain a fairness opinion from a qualified and independent third party such as an investment banker. The fairness opinion will serve to protect the board from criticism and potential legal liability from other constituents or stakeholders of the organisation, such as shareholders in the case of a public or private company or contributors in the case of a not-for-profit organisation which solicits public contributions.

Many public companies use investment bankers to render fairness opinions who are entitled, as their sole compensation, to a percentage of the transaction consideration if the transaction is consummated. This practice has been properly criticised as creating a conflict of interest. Contracts for contingent compensation provide an unreasonable incentive to the investment banker to give the fairness opinion or be entitled to no compensation. At least one court in Delaware has indicated that such an arrangement may destroy the independence of the investment banker.²

Best Practice for Public Companies: Public companies should establish an effective procedure for shareholders to communicate with the board or one of its committees, such as the nominating/corporate governance committee.

The Business Roundtable has recommended that the board of a public company should provide a vehicle for shareholder communication directly with the board so that it can be apprised of shareholder concerns.³ The chair of the nominating/corporate governance committee is an appropriate person to fulfill this role.

Best Practice for Public Companies: Board compensation should include incentives to the directors to focus on long-term shareholder value as part of director compensation and, therefore, a meaningful portion of director compensation should be in the form of long-term equity. Directors should be required to hold a meaningful amount of the public company's stock as long as they are on the board.

To better align director interest with the interest of long-term shareholders, a significant portion of the compensation of directors should be in the form of long-term equity, such as restricted stock or stock options which vest over time. Requiring directors of public companies to be shareholders helps create confidence in shareholders that the directors have similar incentives to shareholders.

OPERATION OF THE BOARD OF DIRECTORS

Best Practice: Boards of directors should confine their activities to overseeing the management of the organisation and should not engage in day-to-day management activities or in micromanagement.

The function of the board of directors is to monitor management, not to engage in normal management activities. Independent directors typically do not have the time to devote to daily management activities, nor is it their responsibility to do so. Directors can for a short period of time, or in an emergency situation, perform management duties, but these situations should be extremely limited. Some members of boards of directors misunderstand their role within the organisation and undertake day-to-day management activities, typically because they are not comfortable with the competency of management. If the board does not have confidence in management, management should be replaced.

Best Practice: Although directors can engage in constructive criticism, ask tough questions of management at board meetings and disagree with each other, the discussions should be kept collegial with a view to developing a consensus.

At board meetings, directors should avoid trying to put management or other directors down. This does not mean that directors should not ask tough questions and be prepared to disagree with both management and each other. Directors should engage in constructive criticism and should maintain a sceptical but constructive attitude. Although disagreement is acceptable, being disagreeable is not acceptable. The discussion should be kept collegial, with a goal of reaching a consensus.

Best Practice: Directors must determine what information they need from management to properly monitor management's performance.

One of the most difficult tasks of a director is to determine what information they need about the organisation that will assist them in overseeing the management of the organisation. Directors must proactively decide what information they need and review and revise their decision from time to time, as necessary. Directors cannot passively allow management to select what information will be supplied to the directors.

Best Practice: Directors should develop metrics to monitor the performance of management and review such metrics from time to time to determine their efficacy.

Directors must determine the best methods of measuring management performance as part of their oversight function. There is no universal metric which is applicable to all organisations and, therefore, directors will have to select the appropriate measurement tools and review and revise them from time to time.

Best Practice: Directors must take the time to fully consider important matters to the organisation and establish a record of due diligence. In transactions in which there are potential conflicts of interest, a special committee composed of completely independent directors should be formed. These special committees must establish a complete record of due diligence in order for their decision is to be respected by the courts.

Directors must take the time to fully consider important matters to the organisation. For example, if the organisation is considering an acquisition or sale, directors must establish a record of due diligence. The courts will tend to review directors' actions with 20/20 hindsight. In Smith v Van Gorkom⁴ directors who gave inadequate consideration to a sale of the organisation were forced to settle the claim by shareholders for $23.5m.

The courts (particularly in Delaware) have held directors personally liable for huge amounts of damages for failing to take the time and effort to fully consider important matters and to seek appropriate independent advice.

If there is any potential for a conflict of interest with management or other directors, a special committee of completely independent directors must be established to consider the matter, which committee is advised by independent advisors, for the courts to respect the decisions of such committee.

Best Practice: Directors must either directly or through committees identify the major risks of an organisation, prioritise those risks, and establish internal controls and a compliance programme to help ameliorate such risks. The major risk analysis should be used to develop a committee structure within the board of directors, with each committee having an oversight role with respect to each major risk.

It is important to identify and prioritise the major risks of an organisation and establish internal controls to help ameliorate these risks. The Board or one of its committees should, with the assistance of management, legal counsel and independent accountants, perform such an analysis and establish appropriate internal controls. Board committee structure should be established with a view to having a committee with oversight over each major risk.

Performing this risk analysis will assist the Board in demonstrating that it has complied with its fiduciary duties. The Delaware Chancery Court has held in the Caremark case⁵ that one of the board's fiduciary duties is to implement a compliance programme to prevent violations of the law. The court also stated that a director's duties include 'an attempt in good faith to assure that a corporate information reporting system, which the Board concludes is adequate, exist'.

No system for identifying risks is perfect. Likewise, there is no 'one size fits all' analysis which is possible. Each organisation has peculiar risks which must be identified and prioritised. A multiplicity of civil and criminal statutes, rules and regulations (federal, state and local) require that experienced legal counsel be used to assist in this risk analysis. At a minimum, every director should be generally aware of the more significant foreign, federal, state and local statutes applicable to the business of the organisation.

A good source for organisational risk identification is to review the problems which have previously occurred in the organisation or in other similar organisations. Directors should require an industry report at each board meeting which will not only review the status of competitors, but will discuss any government investigation or any regulatory or other legal issues which are affecting organisations in the same industry. If another company in the industry has disclosed a government investigation, directors should enquire as to whether the practices being investigated are also being practiced by the organisation. If the organisation is engaged in the same practice or the organisation does something similar, it is likely that the organisation will be dragged into the government investigation of the other company in the industry.

Some risks are insurable; therefore, any risk analysis must include an analysis of existing insurance coverage.

One method of analysing risk is by using balance sheet accounts and rating the various risks which can affect these accounts. There are many other methods of analysing risks which should also be considered.

Once the major risks have been identified, methods should be developed by the Board and management to attempt to control these risks. Although no risk control system is perfect, the attempt to analyse and control risks will help the organisation to comply with the US Department of Justice Sentencing Guidelines. Compliance with these Guidelines helps to protect the organisation from criminal indictment and fines.

Best Practice: The board must establish a succession plan for the chief executive officer.

One of the primary functions of the board of directors is to develop a succession plan for management, particularly the chief executive officer. A well thought out succession plan can protect the organisation against the consequences of the sudden death or disability of the chief executive officer or his or her ultimate retirement.

Best Practice: The board is responsible for obtaining an annual operating plan from management, including annual budgets, and monitoring the performance of the annual operating plan.

The board should obtain an annual operating plan from management which should include specific budgets. The board must oversee the performance of this annual operating plan and management's adherence to its proposed budgets.

Best Practice: The board has a responsibility for making certain that the organisation has a long-term strategic plan and overseeing the implementation of such strategic plan by management.

It is management's responsibility to develop a long-term strategic plan and it is the board's responsibility to make certain that they do so. The board must also regularly monitor the execution of the strategic plan by management.

Best Practice: The board of directors and the chief executive officer should have a clear understanding of the types of decisions which can be made by management without board approval and those which require board approval.

There are many decisions that have to be made by the organisation which clearly require board approval (such as mergers, major acquisitions, declaration of dividends, election of senior officers, etc). There are however, many other important decisions that, in the absence of clear guidelines, can be made by the chief executive officer pursuant to the CEO's power to manage the organisation on a day-to-day basis. The CEO must have clear guidelines, whether monetary or otherwise, which delineate when board approval must be obtained for a particular decision.

Best Practice: When conducting internal investigations which may involve top management or may be potentially embarrassing to the organisation or top management, such investigations must be conducted by an independent board committee (typically the audit committee) and completely independent counsel should be used.

If suspicious events occur which may involve top management or may be potentially embarrassing to the organisation or top management, it is important for the organisation to investigate them before a government agency does so. The fiduciary duties of the directors may require them to do so. In addition, there are significant advantages to conducting an internal investigation, including an ability to discover and correct problems for the organisation which may be discovered later by a government agency. In order for the courts and government agencies to respect the organisation's internal investigation, a special committee of the board must be formed consisting solely of completely independent directors.

Best Practice: When the organisation is in the 'vicinity of insolvency', directors should seek the advice of counsel to assist them in performing their potential fiduciary duties to creditors.

When private or public companies or not-for-profit organisations are in the 'vicinity of insolvency', there is a line of court cases which supports the position that they owe their fiduciary duties to creditors and not to equity holders or members (in the case of not-for-profit organisations). The concept of the 'vicinity of insolvency' is not well defined and derives primarily from bankruptcy court cases. If there is any suspicion as to the financial viability of the organisation, directors should seek the advice of counsel to assist them in performing their potential fiduciary duties to creditors.

Best Practice: Directors should not authorise personal loans or other personal extensions of credit to management or directors of private or not-for-profit organisations, or to management or directors of public companies not subject to Sarbanes–Oxley, except in the most compelling circumstances and only with arms-length terms and documentation.

Sarbanes–Oxley prohibits personal loans or other personal extensions of credit to the directors or executive officers of public companies subject to that law (subject to certain exceptions). It is a bad practice for any organisation (except a bank or other financial institution engaged in that business) to make personal loans or grant extensions of credit to management or directors of the organisation. Such loans create conflicts of interest which can be harmful to the organisation.

Not-for-profit organisations which solicit public contributions are particularly vulnerable to criticism for making any such personal loans or extensions of credit.

Obviously, this prohibition would not apply to single owner private companies or to private companies which make proportional loans to all its shareholders who also happen to be directors or officers. Likewise, this prohibition on personal loans or other extensions of credit would not apply to compensation plans which have a loan feature or to employment contracts with new executives in which the loan is part of their compensation package (except to the extent the prohibitions of Sarbanes–Oxley apply).

OTHER CORPORATE GOVERNANCE PRACTICES

Best Practice: Corporate culture is the key to corporate governance. The key to corporate culture is leadership from the top and a compensation system which rewards not only financial performance but provides positive and negative incentives to employees to report legal risks and wrongdoing up-the-ladder. All organisations should adopt a law compliance and ethics policy, which states the policies and values of the organisation, and effectively enforce such policy.

The demise of Enron and WorldCom resulted in large part from the 'numbers driven' culture of these two organisations. The culture of the organisation must be monitored by the board of directors or one of its committees (such as the nominating/corporate governance committee). Moreover, the US Sentencing Commission Guidelines require the board of directors to establish an ethical law-abiding culture as a condition for avoiding criminal indictment of the organisation.

Best Practice: A whistleblower policy should be established for all organisations (except to the extent prohibited by certain foreign laws) since, according to a 2004 survey by the Association of Certified Fraud Examiners, fraud is detected 40 per cent of the time by tips.

Whether the organisation is public, private or not-for-profit, it is important for the board of directors or one of its committees to make themselves accessible to employees by establishing a whistleblower policy. Properly handling employee complaints helps to avoid law suits (including class actions) and government investigations.

Retaliation against whistleblower may violate various federal and state laws, including Sarbanes–Oxley. The anti-retaliation provisions of Sarbanes–Oxley apply to retaliation against any person providing a law enforcement officer any truthful information relating to the commission or possible commission of a federal offense, whether the retaliation is by a public, private or not-for-profit organisation, and create criminal penalties for such a violation. Sarbanes–Oxley also prohibits retaliation in fraud cases involving reporting public companies against whistleblowers by 'any officer, employee, contractor, subcontractor, or agent' of such reporting public company. Thus, even private subcontractors to a reporting public company are prohibited from such retaliation.

Best Practice: All organisation should have an emergency operations plan, in case of fire, flood, explosion, etc.

Good corporate governance requires advance planning for all emergencies.

Best Practice: All organisations should adopt a press and media policy which sets forth the titles of the one or possibly two individuals who have the authority to speak for the organisation. Any spokesperson for the organisation must be properly trained for that role.

Every organisation should have a press and media policy which describes who will be the spokesperson for the organisation. Failure to have such a policy can result in mixed messages and be embarrassing to the organisation. Advanced training of any spokesperson for this role is essential.

Best Practice for Public Companies: Public companies should adopt a by-law which provides that if a majority of the shareholders actually voting withhold their votes for a particular director, such director will not be elected.

If a majority of the shareholders of a public company actually voting withhold their votes for a particular director, such director obviously does not have the support of the shareholders and should not be seated. In November 2005, Institutional Shareholders Services ('ISS') stated that they would generally support shareholder proposals to public companies asking the company to implement a majority voting standard in uncontested director elections unless the public company satisfied certain tests, which tests could in part be satisfied by adopting the by-law recommended above.⁶

Best Practice: Internal investigations in response to employee complaints should generally be conducted by independent directors through the use of the audit committee, the corporate governance committee or a special committee of the board, using independent counsel and other independent advisors.

One of the basic duties of the board of directors is to conduct internal investigations as a result of whistleblower or other complaints that are received from employees of the organisation. Typically these internal investigations should be assigned to the audit committee or the corporate governance committee and should be conducted by independent directors who are on those committees. In the case of transactions which involve a conflict of interest with management or other directors, a special committee of independent directors can be created to conduct an investigation or monitor a transaction, as discussed below.

Many boards of directors are content to delegate these investigations to other management personnel. Unless the board is certain that there is no involvement of top management and that the complaint, if true, would not be embarrassing to the organisation, the board should not delegate these investigations to other management personnel.

Best Practice: Special committees of independent directors of the board should typically be formed for these reasons, among others:

• to conduct an investigation that may involve top management or other directors;
• to consider a demand on a corporation by a shareholder to bring action against other directors and officers;
• to consider whether to terminate an action brought by shareholders in the name of the corporation (a so-called derivative action);
• to consider a transaction in which a majority of the board has financial or other interests adverse to the corporation;
• to consider a transaction in which an individual director or a minority of the board have financial or other interests adverse to the corporation, if the interested director or directors control or dominate the board as a whole;
• to consider a transaction in which a majority of the directors receive a special or personal benefit, if material, that may be incidental to an arm's-length transaction and
• to consider a transaction with a controlling stockholder (eg, a going private transaction).

If the organisation is involved in any of these transactions or similar conflict of interest transactions, it is extremely important for the proposed committee to obtain independent counsel experienced in representing special committees. Independent counsel should preferably be counsel who has not previously performed services for the organisation and who is selected by the independent director committee. In sensitive situations (eg, a management buyout), the independent counsel should have no prior relationship to the organisation and should be selected without the recommendation of management.

The first task of the independent counsel should be to determine the 'independence' of the members of the committee. Directors who would normally be considered independent under the corporate governance rules of the stock exchanges may not be considered independent for the purpose of the special committee. For example, a director who has a relative working for the company may pass muster as an independent director under the New York Stock Exchange Rules, but would not necessarily be considered independent in the context of a management buy-out.

The strictest test to date for independence has arisen from the Oracle Derivative Litigation⁷ decided in 2003 by Vice Chancellor Strine of the Delaware Chancery Court. Vice Chancellor Strine declined the recommendation of Oracle's special litigation committee that litigation alleging insider trading by certain directors should be dismissed because the court held that nonmonetary social connections between the special committee and the directors whose conduct was at issue raised a reasonable doubt as to the special committee's ability to impartially consider whether the action should be dismissed.

Some of the mistakes that have been made by special committees of Delaware public companies, all of which would be considered negative factors by the Delaware courts in determining whether to respect the decisions and recommendations of the committee, are listed next.

• The committee employed an investment banker recommended by management.
• The chief executive officer leading a management buyout hand-picked the chairman of the special committee and other members.
• The special committee did not have the authority to engage independent advisors at the company's expense.
• The special committee did not have sufficient authority to engage in real arm's-length bargaining but could only pass on the fairness of the transaction.
• The special committee did not in fact engage in arm's-length bargaining with a controlling shareholder.
• The special committee's investment banker was paid only if a transaction occurred with a controlling shareholder.
• The special committee failed to spend a reasonable amount of time meeting and deliberating on the issue in light of its importance to the organisation.
• The special committee failed to ever meet in person (versus telephone conference calls).
• All of the directors on the committee were not viewed as completely independent.

The failure to properly form and operate an independent board committee can result in major personal liability to directors. For example, in 2004, certain directors and the controlling shareholder of Emerging Communications, Inc. were held liable for over $75m in connection with a going private transaction with a controlling shareholder.
© John Wiley Sons, Inc.⁸

References

Notes

1. For the Business Roundtable's best practices for 2005 go to: www.businessroundtable.org/publications/index.aspx and click on the document entitled 'Principles of Corporate Governance' (3rd November, 2005).
2. In re Tele-Communications Inc. Shareholders Litigation, Del. Ch., C.A. No. Civ. A. 16470 (21st December, 2005).
3. Id. at 1.
4. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).
5. Caremark International, Inc. Derivative Litigation, Docket No., 1996 WL 549894, [Del. Ch.].
6. ISS Releases 2006 Corporate Governance Policy Updates: Section 404, Director Performance and Tally Sheet Policies are Added, while Majority Vote, Burn Rate and Other Policies are Tuned— Press Release 21st October, 2005 ( http://www.issproxy.com/pressroom/2005archive.jsp) .
7. In re Oracle Derivative Litigation, 824 A.2d 917 (Del. Ch. 2003).
8. In re Emerging Communications, Inc., Shareholders Litigation, 2004 WL 1305745 (Del. Ch., 3rd May, 2004, Revised 4th June, 2004).