Moderator: Welcome to today's Law Week Viewpoint discussion with Fred Krebs, Broc Romanek and Susan Hackett. Fred, Broc and Susan, we're glad to have you with us. Let's begin with this question: What are the most significant changes in how a business operates that we will see as a result of the reforms being discussed due to the recent scandals?

Fred Krebs and Broc Romanek: Thank you. We are pleased to be with you today. We are in the midst of a revolution in corporate governance as a result of the recent scandals. There will be significant changes, including the role of the board of directors and its oversight of management -- the days of the imperial CEO are over. There will be greater disclsoure of information to the public -- financial and governance documents. The role of advisors, especially outside auditors, will change due to new requirements of independence and the necessity to deal directly with the board of directors. These changes will come from the New York Stock Exchange, NASDAQ, the SEC and recent legislation such as the Sarbanes-Oxley Act.

Moderator: We've heard a lot about the Sarbanes-Oxley Act. Please talk about that.

Fred Krebs and Broc Romanek: Sarbanes-Oxley is intended to restore investor and public confidence. The act affects practices of a number of groups; the public will receive more detailed financial information sooner; the corporate community is required to implement a number of changes in their internal operating procedures; accountants are subject to a new oversight board which will implement a new regulatory framework; lawyers will have new responsibilites and possible disclosure standards; and financial analysts will have new restrictions on conflicts and relationships with banks and clients.

Moderator: How will the NYSE and NASDAQ's proposed listing standards impact the independence of boards?

Fred Krebs and Broc Romanek: The proposed stricter definitions probably will not impact most companies since their boards already have a majority of independent directors.
Some companies might not have completely independent nominating committees and that will change. Perhaps the biggest impact will be the requirement for independent directors to meet in executive session. This should further empower independent directors as they "learn" more about each other and will have more opportunity to voice concerns over management's strategies, etc.
What we will see as a result of these rules and other legistlation like Sarbanes is a change in the relationship between the board and management.

Moderator: Please talk about the new rules for CEOs and financial officers.

Fred Krebs and Broc Romanek: First, CEOs and CFOs must certify the quarterly and annual financial disclosrues -- they need to affirm that they are not misleading; what this means in practice is that they must read and be certain that the information is accurate; they also must be satisified that the company internal procedures are sufficient to provide this information. In addition companies must adopt a new code of conduct to govern the activities of its senior management ...

Moderator: How is the topic of executive compensation dealt with by the new reform?

Fred Krebs and Broc Romanek: So far, it is being dealt with indirectly. However, the board of directors' compensation committee will have new powers under the proposed NYSE and NASDAQ listing standards, such as firing/hiring compensation consultants. In addition, the movement towards expensing options and awarding performance-based options is growing. Still, more reform may be forthcoming as many investors are submitting shareholder proposals this proxy season on compensation practices issues. This debate also was furthered by the points made in the September report from The Conference Board's Commission on Compensation. Finally, members of the Delaware judiciary recently made speeches indicating it may be willing to apply the law of corporate waste to excessive executive compensation arrangements if corporate America does not take action on its own.

Moderator: How will the role of attorneys change? Will attorneys have to become whistleblowers?

Fred Krebs and Broc Romanek: Attorneys, especially in-house attorneys, have traditionally played the role of the conscience of the corporation and leaders in compliance or preventive law practices. A common refrain post Enron was, "where were the lawyers?" Unfortunately, some lawyers, as well as other advisors and management, failed to step forward consistent with their professional obligations; in other situations they spoke out internally but management declined to respond. Sarbanes-Oxley imposed specific requirements for attorneys to raise issues within the company -- to go up the chain of command, including reporting to the board of directors. A related SEC rulemaking is pending.

The issue of attorney whistleblowers is very complex and controversial and part of the pending SEC rulemaking. No one disputes reporting within the client organization but questions/concerns arise when lawyers are required to go public -- which would be a violation of their professional obligation of confidentiality. Such disclosures, if mandated, would change the fundamental relationship with the client and may lead the client to freeze out the attorney and not provide necessary information.

Moderator: Will the role of accountants change?

Fred Krebs and Broc Romanek: Yes. It is reported that auditing fees may increase as much as 50 percent as the level and nature of their activities change. You'll see a separation of audit and consulting functions, and more services will be prohibited by those accountanting entities providing audit services. There is a new public oversight board, previously noted, which -- once it becomes operational -- will implement a new regulatory framework. Generally, accountants and financial advisors wlil be more closely scrutinized for adherence with the letter and spirit of the law; likewise, accountants will likely become "harsher" in requiring clients to adhere to the spirit of accounting standards. There is discussion about possible changes to generally accepted accounting principles (GAAP), to make them less rules-based and more principles-based, as they are overseas.

Moderator: What are some corporate governance best practices that are currently in place?

Fred Krebs and Broc Romanek: Activist investors say that what used to pass as "best practices" are now the minimum standard. Some companies may have a leg up on improving their practices because they were traditionally more focused on ethics and compliance prior to the advent of recent corporate failures. The concept of true independence on a board is cultural and is difficult -- if not impossible -- to "legislate." On paper, Enron's board may have appeared independent, but their soft relationships were not.

Some companies with practices that are worthwhile and deserve mention include: Pfizer, General Electric, The Coca-Cola Company, and others. You might want to check out the link noted on the sidebar for the National Association of Corporate Directors as a resource for board best practices. ACCA's Web site includes a number of resources for those interested in compliance and preventive law best practices.

Moderator: What about the law of unintended consequences: the unintended results from these reforms?

Fred Krebs and Broc Romanek: No good deed ever goes unpunished! As the most pervasive governance reforms in several decades, the full impact may take several years to unfold.

For example: the nature and level of liability for different market participants is difficult to predict, but there likely will be additional lawsuits. Further, it may be increasingly difficult to attract and keep qualified directors, especially those who would serve as audit committee members. And clearly, the role and relationship between corporate clients and lawyers may be fundamentally altered.

In a broader sense, the certifications, processes, and administrative oversight/review could significantly affect the willingness of management to take appropriate business risks because of the potential for second-guessing with the benefit of 20/20 hindsight.

At the same time, everyone agrees it is time to move forward aggressively to reinstill public and consumer confidence. The concerns are not about reforms, but the tendency to over-reaction.

Moderator: As we near the end of our time, are there any thoughts you'd like to leave us with?

Fred Krebs and Broc Romanek: The Sarbanes-Oxley Act and related regulations leave a number questions that we must struggle to answer in the coming months. From ACCA's perspective (regarding the role of in-house lawyers), our focus will be on delivering to our members the resources they will need to help their corporate clients more effectively respond to the changing environment.

We've enjoyed this opportunity to discuss these issues with you today, and we encourage everyone to further explore the related links noted on the sidebar. Thank you.

Moderator: Our thanks to Fred Krebs, Broc Romanek, Susan Hackett, the American Corporate Counsel Association and all who participated.