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ABA Comments on Proposed Corporate Governance Listing Standards

The proposed corporate governance listing standards of the New York Stock Exchange and Nasdaq should expressly recognize the oversight role of the full board of directors, noted an American Bar Association committee, even when the board has delegated power to a board committee. This principle takes on added importance in light of proposed standards stating that a board committee's functions should include discharging the board\'sresponsibilities concerning a matter or giving committees sole authority to determine a matter.

In a letter to the SEC, the ABA committee on federal regulation of securities said that a board of directors should not be obligated to authorize a board committee to act unilaterally on matters broadly affecting corporate business. The members also urged that the charter of each committee be established by the full board of directors, and not by the committee itself. The corporate governance proposals are awaiting SEC approval.

Although the listing standards may mandate certain powers and authority for board committees, continued the members, they do not preempt state corporate law and thus do not alter the responsibilities of a board of directors. Board committees may exercise only the powers of the board of directors that are delegated to it by the board. The members urge that, when considering the role of board committees, the proposed listing standards expressly recognize the oversight role of the board of directors as a whole.

Even if it has established a board committee to deal with a subject, emphasized the members, the board of directors should not be precluded from requiring that action on a specified matter within such subject area nevertheless be taken by it as a whole, after appropriate inquiry and consideration by the committee and after receiving the committee's recommendation on the matter. Directors interested in the matter could be recused from the vote in accordance with customary practice. Moreover, the delegation of power to a board committee should be subject to the board's own ability to act to carry out its duties.

Specifically, committee activities should be subject to such oversight and control by the board as may be required to enable the board to carry out its duty to manage and supervise the company's affairs and to comply with state law and the charter and bylaws requirements of the particular company. Even in those instances where listing standards will require independent audit committees to possess specific powers in order to carry out the responsibilities specified by Section 301 of the Sarbanes-Oxley Act, concluded the ABA members, the role of the entire board of directors should be considered.