Page 592 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

578 The Complete Guide to Executive Compensation

5. External auditors are barred from providing nonaudit services without express approval
by the board.
6. Publicly traded companies must review their internal control systems, make appropriate
changes, and have the results verified by independent audit.
7. Penalties are increased for fraud and other white-collar crimes, including destroying
records and falsifying documents.
8. Insiders are prohibited from trading company stock during blackout periods for
company stock benefit plans.
9. Insiders are prohibited from receiving new loans.
10. Insider trading transactions are to be reported within two days.
11. CEOs and CFOs are to forfeit compensation realized from restatement of financial
statements because of misconduct.
12. Employees are protected from retaliation for whistle-blowing.
These requirements have been viewed by some as inadequate and by others as excessive.
Time will tell.

THE BOARD OF DIRECTORS
Major responsibilities of the board of directors include hiring the CEO, approving an annual
business plan, and adopting a long-range strategy. The board must also monitor the CEO’s
progress and performance within the framework of the approved actions. Traditionally, the
CEO’s performance assessment is converted to an approved compensation package (normally,
through an annual review). However, recent tax law changes, specifically, Section 162(m)
(the million-dollar limit on company tax deductions for nonperformance-based pay of the five
named executives in the proxy), have forced CEO pay issues to shift to a committee of the
board, typically named the compensation committee or executive compensation committee.
Before exploring the role of this committee, let’s take a look at the board itself.

Responsibilities

In addition to hiring and firing the CEO and approving annual and long-term plans, a
representative list of responsibilities might include the following:

1. Ensure compliance with the code of responsibility focused on company stakeholders.
2. Ensure the company vision and mission are reinforced with supporting objectives that
are the basis for executive pay.
3. Ensure the corporate objectives are consistent with the code of responsibility describing
stakeholder responsibilities.
4. Ensure compliance with the company code of ethics, including compliance with all
pertinent laws and regulations.
5. Assess its own effectiveness in meeting its fiduciary responsibilities.
6. Adopt or amend company bylaws.
7. Approve (subject to shareholder approval):
• Amendments to the certificate of incorporation.
• A merger with one or more companies.
• Sales, lease, or exchange of most if not all of the company’s assets.