(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC Chair Says Boards Responsible for Good Corporate Governance

The primary responsibility for guardianship of corporate governance practices "must reside with the board of directors and must not be diluted by the power of the chief executive," remarked SEC Chairman William Donaldson. He made his remarks before the 2003 Washington Economic Policy Conference in Washington, D.C.

Mr. Donaldson characterized directors as the "true stewards" of corporate governance who must demonstrate their dedication to this stewardship without interference from the CEO. The chairman cautioned participants to disregard a "check the box" approach to good corporate governance. Such an approach, continued Mr. Donaldson, would not encourage corporations to strive to meet higher ethical standards. Instead, the result would be a variety of "politically correct" mandates.

Mr. Donaldon recommended that board members define the culture of ethics that they expect the company to embrace. This philosophy must apply to their selection of a CEO as well as the "very DNA" of the corporation. Provided that the board has met this fundamental obligation to define the culture of the corporation and its board, then it can go on and make decisions about the implementation of this culture.

"Tone at the Top"

The "tone at the top" of a company is "perhaps more vital than anything else," insisted Mr. Donaldson. He emphasized that the board must demand that any candidate for chief executive must have the highest standards of integrity and dedication to investors' interests. It is also crucial, observed the chairman, that the audit committee must be composed entirely of independent directors and its responsibility defined.

Beyond these mandates, Mr. Donaldson believed that we should proceed slowly in mandating specific structures and committees for all public corporations. Mr. Donaldson counseled that we should be seeking assurances of independence without excessive rigidity. Once a company determines the ethical culture that will prevail, each board should have the flexibility to create their own approach to its structure.

Compensation

"Compensation is a key area where strong corporate governance is now essential," stressed the SEC chairman. Directors need to examine their dependence on compensation consultants when making decisions about senior management compensation. The board must set appropriate compensation related to the goals and performance of top management, he asserted. Board members should not be pressured by outside compensation consultants who are not responsible to shareholders to meet some artificial standard.

Director Selection and Duties

Both directors and boards need to assess how many boards or committees on which they can reasonably serve while maintaining a high level of dedication and responsibility to each. If all current directors made this assessment, Mr. Donaldson observed, there would be vacant seats to fill. Moreover, he called for an expansion of the "talent pool" in order to create a new generation of directors. Boards have often relied on friends and informal relationships to recruit members.

The growth of director training programs around the country is a positive step in the right direction, according to Mr. Donaldson. The Commission has been involved with many programs and plans to accelerate these efforts. To those teaching such programs, the chairman recommended that the conventional program be expanded to include issues such as interpersonal human dynamics that influence the board and its decision-making.

A board's most important first step, concluded Mr. Donaldson, should be "to define the parameters of an inviolate corporate culture." In doing so, he urged that the board should ask "what kind of moral compass do we want guiding this corporation" and "what ethical standards do we want embedded in this corporation's DNA?"