Advising the Independent Director in the Post-Enron Era

November 01, 2005

In the aftermath of the 2001-2002 corporate scandals (most notably Enron) and the resulting loss of public confidence in the capital markets, the U.S.  Congress conducted lengthy investigative hearings to determine the root causes of these problems.  Based on these investigations, Congress concluded that these corporate debacles stemmed from major weaknesses in:  (i) the American system of corporate governance; (ii) the accounting and audit functions of public companies; (iii) the federal public disclosure system; (iv) the business ethics of public companies; and (v) the standards of conduct of lawyers, auditors and investment professionals.  The Congressional lawmakers took special note of the blatant failure of the boards of directors of these problemed companies to detect and deter the alleged corporate wrong-doings underlying these scandals.  The federal regulators became convinced that the corporate scandals could largely have been prevented if  the outside directors had properly monitored the affairs of their companies on an informed basis and with an independent eye.  They perceived that the breakdown in corporate governance was largely attributable to an unhealthy “coziness” between outside directors and management.  Indeed, some critics even held the view that many CEOs were guilty of stacking their boards of directors with their old cronies who in turn did little more than rubberstamp management’s agenda. To remedy these perceived deficiencies and to restore investor confidence in corporate America, the federal regulators moved quickly to fashion appropriate regulatory reforms.

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