Strictly Confidential
Policy Dialogue on
Corporate Governance in China
Hosted by the Shanghai Stock Exchange and the OECD
Co-organizer: ERI /DRC
Shanghai, China
25 - 26 February 2004
in partnership with
The Government of Japan
The Global Corporate Governance Forum
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Strictly Confidential
The Role of Board Committees:
American Experience and Perspectives
COUDERT BROTHERS
LLP
Global Legal Advisers
1114 AVENUE OF THE AMERICAS
NEW YORK, NY 10036-7703
TEL : +1 212 626 4400
FAX : +1 212 626 4100
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February 25-26, 2004
Strictly Confidential
The Role of Board Committees:
American Experience and Perspectives
Presentation by
Barry Metzger
Senior Partner, Coudert Brothers LLP
New York and Tokyo
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Introduction
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Corporate Governance Scandal and Reform in the
United States
Despite its failure to prevent the recent crisis in
American corporate governance, there is increasing
reliance on, and strengthening of, the independent
director system and the role of Board committees
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Confidential
The Role of the Board of Directors in Corporate Strictly
Governance
Historic trend moving from the role of managing
the corporation to the role of supervising
management and serving as the focal point for
managing relations between shareholders,
management and other corporate constituencies
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Confidential
The Role of the Board of Directors in Corporate Strictly
Governance
The role of Board of Directors as set out in the January 2004 draft
(revised) text of the OECD Principles of the Corporate Governance
 Reviewing and guiding: corporate strategy, major plans of
action, risk policy, annual budgets and business plans, setting
performance objectives; monitoring implementation and
corporate performance; and overseeing major capital
expenditures, acquisitions and divestitures;
 Monitoring the effectiveness of the company’s governance
practices and changing them as required;
 Selecting, compensating, monitoring and replacing key
executives and overseeing succession planning;
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Confidential
The Role of the Board of Directors in Corporate Strictly
Governance
 Aligning key executive and Board remuneration with the longer
term interests of the company;
 Ensuring a formal and transparent Board nomination and
election process;
 Monitoring and managing potential conflicts of interest of
management, Board members and shareholders, including
misuse of corporate assets and abuse in related party
transactions;
 Ensuring the integrity of the corporation’s accounting and
financial reporting systems; and
 Overseeing the process of disclosure and communications.
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Confidential
The Role of Committees of the Board of Strictly
Directors
Ability to create committees long recognized and,
viewed as an inherent power of the Board of Directors,
it is not the subject of detailed statutory provisions
The traditional view that the Board’s activities
were not subject to delegation to committees
long ago gave way to the view that most decisions
are subject to delegation to Board committees
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Confidential
The Role of Committees of the Board of Strictly
Directors
The rationale for the creating of Board committees,
particularly in the context of the large modern corporation
 Efficiency of Board’s operations
 Need to develop subject specific expertise in the Board’s
operations and the desire to access particular expertise of Board
members
 Particularly enhancing the objectivity and independence of the
Board’s judgment, insulating it from the potential undue
influence of managers and controlling shareholders
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Confidential
The Role of Committees of the Board of Strictly
Directors
Establishment of committees, the appointment of members
and standards of independence.
The use of committees has developed largely as a matter of
market practice, with laws tending to make a general market
practice universal and mandatory.
Legal requirements regarding the establish of committees:
 State law
 Listing rules of the stock exchanges
 Federal securities laws
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Confidential
The Role of Committees of the Board of Strictly
Directors

No general legal requirement as to the number of
independent directors on the Board

Most formal requirements arise under the listing rules of the
stock exchanges

Sarbanes-Oxley Act of 2002, Section 301, requires the SEC
to adopt regulations to cause national securities exchanges
and associations to prohibit the listing of a company which
does not have an audit committee meeting certain
standards, and establishing standards of independence for
such committee members
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Confidential
The Role of Committees of the Board of Strictly
Directors
Role of Board committees in making recommendations
to the Board of Directors and in making decisions
on behalf of the Board of Directors
Liabilities of directors
 In respect of decisions made by Board committees
 In respect of directors’ participation on Board committees
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Board Committees
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Standing committees
 Executive Committee
 Audit Committee
 Compensation Committee
 Nominating Committee
 Public Policy Committee/Governance and Ethics
Committee
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Board Committees
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Ad hoc or special committees
 Special Litigation Committee
 Ad hoc committees formed to (i) to consider takeover
or buyout offer, (ii) to investigate and advise on the
appropriate response to allegations of serious
misconduct against the corporation or its senior
officers, and (iii) to evaluate and negotiate corporate
restructurings or refinancing or other matters where
conflicts of interest might otherwise arise
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Audit Committee
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Particular focus of attention and reform following corporate
governance scandals, viewed primarily as the product of
financial fraud involving senior management.
A particular focus of the reforms embodied in the SarbanesOxley Act of 2002
Listed companies first required to have audit committees
composed solely of independent directors by New York Stock
Exchange Rules in 1978
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Audit Committee
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Purpose:
To represent the board in overseeing the accounting
and financial reporting processes of the company
and audits of the financial statements of the company,
with the corporation’s registered public accounting
firm reporting directly to the audit committee,
and to establish procedures for:
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Audit Committee
Strictly Confidential
 the receipt, retention, and treatment of
complaints relieved by the company regarding
accounting, internal accounting controls, or
auditing matters; and
 the confidential, anonymous submission by
employees of the company of concerns
regarding questionable accounting or auditing
matters
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Audit Committee
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Composition: all members must be independent directors.
“… to be considered independent… a member of an audit
committee of an issuer [of registered securities] may not,
other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board
committee- (i) accept any consulting, advisory or other
compensatory fee from the issuer; or (ii) be an affiliated
person of the issuer or any subsidiary…”
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Audit Committee
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Duties:
The Audit Committee is responsible for:
 the appointment, compensation, and oversight of
the work of any registered public accounting
firm employed by the company;
 pre-approval of all auditing services and nonaudit services provided to the company by its
auditor;
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Audit Committee
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An accounting firm that performs any audit for the company
shall timely report to the Audit Committee regarding:
(1) critical accounting policies and practices to be used;
(2) alternative treatments of financial information
(3) other material written communications with management
Right to retain independent advisors
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Nominating Committee
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Purpose:
To identify persons qualified to sit on the board and
recommend such persons for election at the Annual
General Meeting of shareholders and to formulate and
review corporate governance principles for the company.
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Nominating Committee
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Duties:
The Nomination Committee is responsible for:
 Identifying and reviewing the qualifications of board candidates
from a wide range of backgrounds, to fill board vacancies;
 To consider succession planning keeping in mind the skills which
will be needed on the board to address challenges in the future;
 To regularly review the structure, size and composition of the
board;
 To regularly review the time required from a non-executive
director; and
 To make recommendations to the board on the above.
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Nominating Committee
Current debate over right of shareholders
independently to nominate candidates and
to obtain access to the corporation’s proxy
solicitation system
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Compensation Committee
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Particular concern that recent corporate governance
crisis in the United States and the accounting
frauds involved were the product of inappropriate
and excessive compensation incentives and rewards
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Compensation Committee
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Purpose:
To create and monitor the implementation of programs
designed to attract, retain and adequately compensate
the officers of the company and to comply with
applicable tax and securities law requirements.
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Compensation Committee
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Duties:
The scope of the duties of the Compensation
Committee is delineated by the board.
As a general matter, the Compensation Committee
will usually be assigned the following duties:
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Compensation Committee
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 determining/recommending compensation of the
officers of the company (salaries, bonuses and
amounts payable in connection with termination of
the officer)
 implementing annual bonus plans for senior officers
(determining the amount of bonuses and
performance objectives of bonus plans, and
monitoring achievement of objectives); and
 administering equity based plans/other long term
incentive plans
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Strictly Confidential
Conclusions: Implications for Directors
 Types of individuals to be recruited as directors
(need for special expertise or experience)
 Where is staff work done for committee
 Amount of director commitment/time required
 Potential liability
 Compensation
 The emerging professional independent director
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Strictly Confidential
Coudert Brothers
llp
Global Legal Advisers
North America: Los Angeles, New York, Palo Alto, San Francisco, Washington
Europe: Antwerp, Berlin, Brussels, Frankfurt, Ghent, London, Moscow, Paris, Rome, St. Petersburg, Stockholm
Asia/Pacific:Almaty, Bangkok, Beijing, Hong Kong, Jakarta, Shanghai, Singapore, Sydney, Tokyo
Associated Offices:Budapest, Mexico City, Milan, Prague
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