Best practices are higher standards than those set by state law fiduciary duties, federal sentencing guidelines and a maze of other laws including:

Federal securities law requiring directors to have certain knowledge regarding registration statements filed with the Securities and Exchange Commission (SEC), creating liabilities for wrongdoing as a control person, requiring reports of purchases and sales of the company's securities, requiring disgorgement of profits from any short-swing transaction in the company’s securities and requiring oversight of the audit process and other requirements created by the Sarbanes-Oxley Act of 2002 (SOX). Federal securities laws also include the Securities Exchange Act of 1934 (Exchange Act) and the rules of the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (NASDAQ) for their listed corporations.

Federal tax law creating liability for certain corrupt practices regarding foreign officials and for allowing unreasonable compensation.

State securities law, which despite  traditionally regulating the substance of transactions not historically regulated by federal securities laws, are under revision to expand some of the executive accountability provisions of SOX to corporations not covered by SOX.

State law regarding nonprofit organization fiduciaries, such as UMIFA and other laws creating fiduciary or other standards for nonprofit organization managers.

Rules regarding regulated industries, such as insurance and banking regulations for management and the safety and soundness of insurers, banks and their holding companies, and SEC rules regarding securities dealers, investment advisers and investment companies.

Rules of professional conduct such as those for attorneys, accountants and internal auditors that apply not only to directors who are attorneys, accountants or internal auditors, but more importantly to the company’s attorneys, accountants and internal auditors and their relationship with the board.

Boards should strive to exceed just being compliant with laws. They should focus on best governance practices and should evaluate their practices periodically. This should start with an evaluation of the board’s governance operations and practices, beginning with those evidenced by the organization’s and the board’s governing documents. Governing documents should be reviewed against pre-selected sources of best practices that serve as benchmarks, identifying for the board (or an appropriate committee) those operations and practices that meet or exceed the benchmarks, and those that are deficient in comparison with the benchmarks. With respect to those that are deficient in comparison with the benchmarks, considerations for improving those operations and practices should be recommended to the board or committee. Finally, work with the board or committee and its general counsel and other appropriate officers on integrating any desired improvements into the board’s governing documents and practices.

Practices to be Evaluated

Generally, boards should use an outside facilitator familiar with board practices and sources of benchmarks to guide the evaluation. Practices that may be evaluated include:

  1. Governing Board
  1. Role of the board
  2.  Composition
  1.  Number of directors
  2. Outside and independent directors
  3. Expertise
  4. Age and tenure
  5. Former CEO
  1. Nomination and election
  1. Classification
  2. Nominations
  1. Leadership
  1. Independence
  1. Proceedings
  1. Frequency of meetings
  2. Access to agenda
  3. Call for meetings by outside directors
  4. Attendance
  5. Outside or independent director meetings
  6. Location
  7. Notices and information
  8. Minutes
  9. Actions by written consent
  1. Conflicts of interest
  1. Conflicts of interest
  2. Change in status
  1. Board compensation
  1. Annual retainer
  2. Meeting fee
  1. Training
  1. New directors
  2. Continuing education
  1. Committee Independence and Responsibilities
  1. Audit committee
  2. Compensation committee
  3. Nominating committee
  4. Governance/Corporate Compliance Committee
  5. Other committees
  1. Executive Compensation
  1. Independent oversight
  2. Peer data
  3. Documentation
  4. Cash composition
  5. Performance pay
  6. Change in control and severance pay
  7. Review to avoid encouraging unreasonable risks
  8. Limitation on evergreen employment contracts
  9. Transparency of compensation in the income statement
  1. Role of Management
  1. CEO’s authority and responsibilities
  2. Access of non-CEO management to the board
  1. Other Practices or Policies
  1. Strategy and Risk assessment
  1. Board responsibilities 
  2. Management responsibilities
  1. Conflict of interest policy
  2. Business conduct policy
  3. Diversity practices
  4. Ethics program
  5. D&O protection
  1. Governing document provision
  2. Indemnification agreement
  3. D&O insurance
  1. Succession planning
  1. The board
  2. Management
  1. Whistleblower policy
  2. Document retention policy

Identifying Benchmarks to Evaluate the Board’s Current Practices Against

The next step is to identify and select the sources of best practices to be used as benchmarks. We recommend including: ongoing IRS and Treasury initiative for improving governance of tax-exempt entities; recent principals promulgated by the National Association of Corporate Directors; governance issues identified as important by institutional investors; and governance changes required by bankruptcy courts for approval of recent reorganizations.

There are many sources for best practices, including:

NYSE and NASDAQ Rules for Publicly-Traded Companies

Policies of Institution Investors

  • Council of Institutional Investors “Corporate Governance Policies” (updated December 21, 2011); and “Statement in Support of Defined Benefit Plans,” “Statement on Best Disclosure Practices for Institutional Investors,” “Statement on Financial Gatekeepers,” “Statement on Guiding Principles for Trading Practices,” “Commission Levels, Soft Dollars and Trading Recapture,” “Statement on Independence of Accounting and Auditing Standard Setters,” “Statement on Principles for an Effective and Efficient Proxy Voting System, “Statement on the Value of Corporate Governance.” 
  • Teachers Insurance and Annuity Association–College Retirement Equities Fund (TIAA-CREF) Policy Statement on Corporate Governance, 6th edition (2011)
  • California Public Employees’ Retirement System (CalPERS) “Global Principles Of Accountable Corporate Governance,” (2011)
  • Ohio Public Employees’ Retirement System (OPERS) “Corproate Governance 2011 Annual Report" (February 2012)  

Policies of Applicable Trade Associations  

Service Providers

Universities

Non-Profit Sites

  • Sample Conflict of Interest Policy and Glossary of Terms for exempt organizations under Internal Revenue Code section 501(c)(3) available in “Instructions for Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code” on the IRS website
  • USA.gov for Nonprofits

Identifying Practices for Improvement  

The comparison of the board’s current operations and practices with the benchmark will identify those that are deficient in comparison. The next step is recommending to the board or committee considerations for improving those operations and practices. Finally, the board or committee will need to coordinate with its general counsel and other appropriate officers on integrating any desired improvements into the board’s governing documents and practices.