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Aguilar Offers Corporate Governance Pointers

SEC Commissioner Luis Aguilar highlighted the important work of boards and principles of good corporate governance in a recent speech. Speaking to a gathering of corporate directors, Aguilar noted that “[c]ritical to strong corporate governance are its implementers—the boards of directors.” He said that directors serve a “critical role in setting the appropriate tone at the top, are expected to be guardians of the company’s assets, and are relied upon by both shareholders and the capital market.” Aguilar lauded directors performing these heavy responsibilities on a part-time basis “with the threat of lawsuits hanging over your head.”

Aguilar acknowledged directors’ concern about being second-guessed and the focus of SEC enforcement actions against. However, he noted the infrequency of such cases, particularly against outside directors, so much so that the agency does not maintain statistics on that category of cases. He argued that those cases that have been brought involved affirmative wrongdoing by the directors or the enabling of wrongdoing by “unreasonably turning a blind eye to obvious ‘red flags’ of misconduct.” Those directors who are “embracing their responsibilities and are fulfilling them conscientiously . . . should have nothing to fear from the SEC.

Aguilar suggested that boards engage shareholders and pay special attention to the resiliency of their organizations through oversight of crisis and risk management. He also stressed the need for boards to change over time in order to accommodate a changing world and marketplace. He encouraged boards to undertake a periodic review of performance that includes “the board’s composition, leadership, interpersonal dynamics, governance policies, and strategic vision, among other topics.” He called reviews of individual board members “a valuable tool for identifying incipient gaps between board members’ skills, knowledge, and abilities, on the one hand, and the company’s evolving needs, on the other.” According to Aguilar, boards can use this information to address gaps in knowledge through recruitment, education, or a rotation of board committee responsibilities. Aguilar acknowledged that “assessments are rarely easy, and are sometimes painful, but they are essential if boards are to meet the implacable demands of today’s constantly evolving business environment.”