Preliminary Report of the American Bar Association Task Force on Corporate Responsibility

The July 16, 2002 preliminary report of the American Bar Association Task Force on Corporate Responsibility recommends a variety of reforms in corporate governance through changes in listing standards, rules of professional conduct for lawyers and other practices. Recommendations in the report relating to corporate governance are: - A substantial majority of the members of a board of directors should be independent. - Corporate governance committees should consist entirely of independent directors, and be responsible for identifying and contacting potential independent directors. They also should recommend a corporate code of ethics and conduct, including a means for corporate employees and agents to advise independent directors of information about material violations of law and breaches of duty to the corporation. - Corporate audit committees should consist entirely of independent directors. They should be authorized to recommend or take action to hire or remove outside auditors, engage independent accounting or legal advisers, and establish policies governing matters that could affect the independence of outside auditors. - Corporate compensation committees should consist entirely of independent directors, and should recommend or take action on compensation for senior executive officers or engaging independent executive compensation and legal advisers as necessary or appropriate. - All material transactions between the corporation and a director or executive officer should be reviewed and approved by a committee of independent directors, taking into account fairness, the rationale for the transaction, and appropriate public disclosure. - The board of directors should adopt procedures for routine executive session meetings between corporate officers responsible for implementing internal controls and the corporate governance committee or the audit committee, or both. The report also recommends that public companies consider designating a lead independent director or an independent board chair, establishing policies to set board meeting agendas, considering policies to set term limits or rotate service on board committees, maintaining director training programs, and adopting procedures to evaluate the effectiveness of meetings, information flow, diversity of experience among directors and contributions of individual directors. The report proposes that a number of changes in the ABA Model Rules of Professional Conduct be considered by the ABA Standing Committee on Ethics and Professional Responsibility. The changes the task force proposes to the ABA Model Rules would: - Require lawyers who know or reasonably should know of misconduct by corporate officers, employees or agents to disclose the misconduct to higher corporate authorities, in some cases directly to the board of directors. - Broaden permission for lawyers to disclose information about corporate conduct that has resulted in or is reasonably certain to result in substantial injury to the financial interests or property of another. The report acknowledges that the ABA House of Delegates rejected a similar proposal in February, before many of the corporate failures occurred and before the task force was created. - Require disclosure of confidential information to prevent client conduct known to the lawyer to involve a crime, including violations of federal securities laws, which is reasonably certain to result in substantial injury to the financial interests or property of another. The report also urges creation of direct lines of communication for outside counsel to inform the general counsel of any potential violations of law or breaches of fiduciary duties to the corporation. The ABA Task Force has invited written comments, and the report will be considered at one or more public hearings, and expects to present final recommendations to the ABA House of Delegates this year.