CORPORATE GOVERNANCE AND COMPLIANCE: DESCRIPTION

The investing public no longer trusts corporate management. Directors' reputations are tarnished. These are the new realities for corporate America. As a consequence, the way corporations govern themselves has changed dramatically and permanently, as has the required amount and extent of validation of compliance with governance mandates.

Governance has always, of course, been considered a part of corporate counseling and still is. Compliance - the work of lawyers to help clients confirm that they are meeting requisite governance and other regulatory standards - has historically been the concern of public companies and therefore treated as a matter of corporate finance and securities law. Because of the impact of the Sarbanes-Oxley Act of 2002 and the changes to the listing requirements on the major stock exchanges, however, at least for the present, both governance and compliance issues have become much more numerous and more complex. Furthermore, while these changes ostensibly relate only to public companies, the wash effect on private companies both in general and in the market place has been extensive. Consequently, all corporate lawyers confront this more complex universe of governance and compliance regularly.

Governance

Present Practice
The changes in Corporate Governance can be summarized as those in composition of boards and committees, the allocation of board work to committees and the installation of processes to encourage good corporate governance.

We assist our clients in reviewing the composition of their boards to assure that a majority of the directors are independent, that the board has the appropriate number of committees, that the committees are themselves comprised of sufficient numbers of directors who are independent and qualified, that the allocation of responsibilities to committees is appropriate. We counsel our clients with respect to all aspects of governance practices including such fundamentals as content of board books and timeliness of their delivery to the more complex question of assisting boards to achieve protection of the business judgment rule in a related party transaction in a board comprised of constituents representing various stockholder groups all of whom are related parties.

In connection with our governance work we have prepared a library of standard documents which we customize with clients, including among others:

• Charters for audit, compensation, governance and nominating committees
• Guidelines for these committees' operations
• Disclosure committee documents including charters, guidelines, reporting procedures and training materials
• Other special purpose guidelines
• Policies for approval of non-audit services by audit committees
• Codes of conduct
• Corporate governance guidelines
• Whistleblower policies
• Procedures for reporting and evaluating irregularities
• Guidelines for determining when investigations must be undertaken
• Procedures to be followed for such investigations

Also included in the library are products we review with clients with greater or lesser frequency, such as:

• Anticorruption-antibribery policies
• Computer and communications resources policies
• Confidential information policies
• Document management policies
• Financial disclosure policies
• Insider trading policies
• Merger and acquisition policies
• Officer and director indemnification policies
• Policies governing executive and director compensation approvals
• Policies and procedures governing the General Counsel's role and responsibilities
• Related-party transactions policies
• Risk management policies
• Securities trading plans

Another aspect of this role involves continuing review of directors' and officers' liability insurance. Policies for this coverage have become more expensive, more refined and require review and interpretation as well as, in some cases, renegotiation on behalf of our clients.

We conduct education seminars for boards of directors of our clients. The subject matter varies. Recent sessions range from explaining the impact and demands of the Sarbanes-Oxley changes to a review of controls procedures to a review of the changes in the law to a seminar on the present status of the Business Judgment Rule. We anticipate that the complexity of governance issues will not diminish. We do expect, however, that clients will become more familiar with the reforms and better able to incorporate them in their day-to-day operations. Some of the governance reforms have yet to become effective and we do not anticipate that the training needs will subside until several years after the last delivered reforms become effective.

As an outgrowth of our representations in this area we have published a number of advisories and articles which have been republished in law reviews, legal and other periodicals and other electronic and print media and posted on corporate governance websites. Several of our senior corporate lawyers have become identified as thought leaders in this area; they write and speak frequently on these topics.

The Future in Governance
At MLA, we charge ourselves with staying ahead of the curve. There are several identifiable areas of governance reform which remain to be defined. We believe those are:

• Internal controls, but particularly risk management. Risk management has not traditionally been a well articulated or defined task within most American corporations. We find clients are now beginning to grapple with these issues and they will be required to do so in connection with the internal control requirements which are being imposed upon them as a result of the Sarbanes-Oxley changes. We are presently engaged with several of our clients, in designing risk management processes which can be customized and fit within the operations and controls of our clients. 
• Director education . We alluded above to present work in this area. It appears that continuing director education has now been elevated to a "best practice" and may well become a requisite for continued listening on the exchanges. MLA lawyers have developed a full curriculum for director education, which we continue to modify and which has been used in whole and in part in the services described above.
• Executive compensation and employee incentives. Executive compensation remains a major focus of criticism. Our employee benefits lawyers have already begun to reconfigure and redesign plans and concepts, and in some cases installed, which will address shareholders as well as director and management concerns with these concepts, and their use in employment contracts, plans and programs.
• Compliance Investigations . Presently the corporate universe is considering whether issues once considered management's or the board's alone may not also need the impiamatur of objectivity obtained by review by outside counsel. Our work in this area is more generally described below. In executing our commitment to this new area of concern, we have developed procedures for conducting investigations generally and engaged in thought leadership activities, including articles, speeches and participation in panels in this area.

Compliance

Generally corporate compliance, particularly for public companies, is driven by the Securities Exchange Act of 1934. The advent of the Sarbanes-Oxley changes only enhances that. Sarbanes-Oxley itself was, with very few exceptions, a series of amendments to the Exchange Act; furthermore, changes to the stock exchange requirements also fall within the pervue of the Exchange Act. Failure to comply with Exchange Act provisions has serious consequences. For public companies, perhaps the most dangerous and expensive exposure is to liability arising under the Exchange Act.

Exchange Act compliance work in the MLA corporate department is principally conducted by the Corporate Finance and Securities Practice. It consists of review, revision and consultation on all aspects of the required periodic reports - quarterly reports, annual reports, proxy materials, as well as intermittent current SEC filings. It also includes advice with respect to the need for disclosures as well as the content of those disclosures, both in these reports and for press releases, analyst conferences and other public occasions. We also engage in negotiation with the SEC in connection with their review of these filings.

We confirm compliance with all aspects of the filing requirements including such items as granular testing for appropriate levels of independence for both board and committee membership, review of content and experience under whistleblower policies, appropriate levels of website postings and routine director and officer reporting of securities transactions. Presently all corporations are transitioning into the new compliance milieu. Our work with clients is extensive and detailed and involves our review and redesign of many corporate policies and procedures, even of internal processes for surfacing material information. It entails formulation of amendments for committee charters and codes of conduct and the preparation of guidelines for the conduct of compliance audits internally. Because of the specificity now required, we maintain director and officer questionnaires specific to each exchange and find that our clients no longer rely upon their own forms but use an adaptation of our current form in order to assure that they will capture all requisite information.

Independent and Special Investigations

The scrutiny of financial statements has been heightened and corporate misconduct emphasized. We have increasingly counseled clients with respect to possible irregularities brought to their attention through whistleblower procedures, in the course of audits or in the course of day-to-day operations. In most of these instances our role as outside general counsel is to help design a process of inquiry with any and all of the General Counsel, the Chief Compliance Officer, Internal Audit and the Audit Committee. Thereafter our role may be to maintain contact and monitor progress of the internal investigation. In those instances where independent counsel has been required, we have maintained the general counsel role to assess and determine next steps and final outcomes.

In a number of instances, we have undertaken investigations acting as independent outside counsel. At the present time, we see an increased number of questions raised in the course of audits of financial statements and, in an abundance of caution, Audit Committees decide to retain independent counsel to assure objective analysis and resolution of these questions. Some of our independent counsel engagements have been in this context. We have also been engaged as independent counsel when transactions were being considered by committees or boards in which one or more directors, principal stockholders or committee members might be considered to have had a role in developing or who has a relationship to the transaction being considered.

Through its longstanding government contracts practice, MLA also has substantial experience in conducting corporate internal investigations and in making voluntary disclosures to the government. Our lawyers participate in criminal and civil investigations involving the SEC, the Department of Justice, local U.S. attorney's offices and various investigative services. When the accusations turn to fraud, we have an active and highly regarded white collar defense practice. Our diversified practice includes the defense of large companies, small businesses and individuals. Led by former federal prosecutors, each with many years of criminal jury trial experience, we defend clients at all stages of the investigative and enforcement process, most often against allegations of sophisticated criminal and civil fraud. We routinely represent clients in responding to subpoenas, in answering government requests to interview employees and in going to trial.

We are also able to assist clients in identifying and engaging independent fact finders to conduct special or independent investigations. We assisted the American Arbitration Association (AAA) in its recent development of its own unique fact-finding service, the AAA Independent Fact-Finding Service. This service can provide independent factual and legal investigations and reports to corporations (as well as non-profits, judges, elected officials and others) seeking objective, independent reports or recommendations regarding factual or legal questions facing them.

Because of the unique and confidential nature of all such investigations, we do not disclose names of clients for whom such investigations were conducted or the nature of the investigations although in the context of a meeting we are comfortable outlining the nature of the engagement in most cases.