Lawyer Warns Mutuals:

SOX Act May Apply To All

Financial disclosure, governance benchmarks know no bounds

Phoenix

The Sarbanes-Oxley Act's corporate governance language does nottechnically apply to small mutual insurers, but a recent courtdecision indicates they might be expected to live by it, anattorney warned here at an industry conference.

That advice came from Nicki Locker, a partner with the WilsonSonsini Goodrich Rosati law firm in Palo Alto, Calif., during asession on corporate governance at the annual convention of theNational Association of Mutual Insurers.

Ms. Locker based her warning on a ruling, in August, by theDelaware Court of Chancery concerning the Walt Disney Companyboard's approval of a no-fault separation agreement for its formerpresident, Michael Ovitz, who was fired after one year with a $140million payout.

The court, while finding the board did not breach its fiduciaryduty, was scathing in its criticism of the board's operations, butupheld them based on the general board practices of the 1990s,according to Ms. Locker.

In 2005, board practices have "evolved to a much higherstandard," she noted, adding that while Sarbanes-Oxley does notcover mutuals, some of the act's basic requirements "have becomethe norm and what is expected of boards of directors."

Indeed, board members of non-public mutuals "will be judgedagainst general board practices," she said.

Also speaking at the session was Steve Wagner, a partner atDeloitte & Touche consultants in Boston and a member of theirU.S. Center for Corporate Governance. He and Ms. Locker presented ablueprint for good governance by boards with a number ofsuggestions.

Mr. Wagner advised that what it takes for a company to avoid anEnron-type accounting scandal is a "vibrant corporate culturecommitted to truth and doing the right thing."

Ms. Locker counseled that the tone at the top of anyorganization would have a "profound effect throughout thecompany."

Among the other points they made concerning boardgovernance:

o Boards should send messages to those in their organizationsabout acting ethically.

o They should select and hire the right person as chiefexecutive officer.

o Board members should oversee financial objectives and monitorperformance without managing performance.

o Boards should establish practices to educate their membershipand insure they have some level of financial literacy.

The speakers also suggested that boards arrange to have theopportunity to sometimes meet and hold discussions away fromexecutive management.

Directors should make sure they have fairly detailed minutesthat include a general description of the dialogue that takes placeduring meetings.

Ms. Locker suggested that boards might bring in an outsideconsultant to perform an audit of their firm's ethical culture.

Interviews with employees at companies involved in majorscandals have revealed that they went along with improperactivities because they felt there was no one to complain to.

Mr. Wagner warned that for boards today "there is a bright lightbeing shined" on their activities, and "everybody is watching. Youwant to make sure your decisions are well thought out."

Callout:

SOX standards are becoming the norm in how board actions arejudged in all types of companies