public company boards - going public - corporate governance...internal investigations • best...

“Best Practices for Chinese Companies”- Public Company Boards- Going Public- Corporate Governance

Barry H. Genkin China Great WallChair - Business Department Asset Management CorporationSeptember 16, 2010

©© 2010 Blank Rome LLP2010 Blank Rome LLP

2©© 2010 Blank Rome LLP2010 Blank Rome LLP

Public Company Boards – “Best Practices”

• Select CEO, monitor performance and have a succession plan should the CEO become unavailable or fail to meet expectations.

• Develop plan to deal with crisis management and have dry run simulations.

• Determine executive compensation, achieving a balance of enabling the company to recruit, retain and incentivize talented executives, while avoiding criticism for “excessive” compensation.



• Determine qualifications and background for board candidates.

• Interview and nominate director candidates, monitor and evaluate board performance and seek to continuously improve board performance, with a special emphasis on independent directors.

• Establish a strong board committee structure.

• Provide business and strategic advice to management and approve the company’s long-term strategy and financial modeling.



• Determine the company’s risk profile (financial, safety, reputation, etc.) establish standards for monitoring and managing risk.

• Monitor company’s performance and evaluate it against the overall economy and peer companies.

• Establish strong standards for compliance with legal and regulatory requirements, and monitor compliance and respond rapidly to issues.



• Assume leadership involvement with regard to any proposed transaction that appears to create a conflict between the best interests of stockholders and those of management, including takeovers.

• Assure quality of information presented to board in a timely manner.

• Set high standards of social responsibility of the company, including human rights and monitor performance and compliance.



• Require strong oversight of company’s financial statements and internal controls (through Audit Committee).

• Closely monitor investor relations and interface with shareholders as appropriate.

• Adopt corporate governance guidelines and committee charters which are considered “best practices” and revisit periodically.


Chinese Companies – Going Public –“Best Practices”

• Interest in Chinese companies will continue, especially those which are well run, have strongfinancials, strong management and wherethere is transparency.


Advanced IPO Planning (a/k/a cleaning up Company’s Act)

• Develop impressive management and professional teams

• Strong IR and PR

• Strong CFO – public company experience– PRC Advisors

Best Results – Planning starts 1 year to 18 months before

The Team - Relationships


Advanced IPO Planning (cont’d)

• Developing internal auditing capabilities

• Forging relationships with potential underwriters

• Auditors (PRC/U.S.)

• SEC counsel/PRC counsel



• Separating chairman from CEO position

• Need for independence of chairman

• Independent board members (really)– Varied disciplines

Board Committee Structure



• Hold management accountable

• Make commitment of time

• Audit Committee

• Compensation Committee

• Whistleblower Policy

• Internal Controls

• Enterprise Risk Management



• Strong Business Plan – simple is okay.– Grow the company’s business with an eye to the

public market place.• Be sensitive to lines of business and PE ratios in

connection therewith

The Business



• Obtain audited or auditable financial statements.

• Using IPO acceptable accounting principles.

• Internal controls and systems.

• The microscope of revenue recognition

• Segment reporting.

Financial



• SOX compliance – adopt the right policies –– worst thing is policy you can’t comply with

• Eliminate insider and related party transaction

Strong Corporate Governance



• Prepare for thorough due diligence

• Identify problems and fix them – don’t wait for underwriter or investors to discover them

• Integrity and trust paramount

Due Diligence



• Electric Data Room

• Organization and thoroughness creates credibility

• Get translations done early



• Excessive insider transactions - not at arms’length

• Violations of the FCPA

• Embrace “life in the fishbowl”

• LACK OF TRANSPARENCY


Summary of Major Corporate Governance Principles – “Best Practices”


Structure of the Board of Directors

• Best Practice

• Governing bodies of all organizations (whether designated as boards of directors, boards of trustees or otherwise, hereafter called “boards of directors”) should include completely independent directors and these directors should preferably constitute a majority of all directors, with the possible exception of privately held companies.


Available Time

• Best Practice

• Select independent directors who are willing and able to devote the necessary time to their director duties and preferably persons who have competencies that assist the organization and that complement the competencies of other directors.


Information Pipeline

• Best Practice

• Directors must have their own information pipeline into the company, separate from the information provided to them by management and the independent auditors, in order to fulfill their state law fiduciary duties. An internal auditor reporting to the board of directors or its audit committee can fulfill this function.


Independent Director Meet with Management

• Best Practice

• Except in the case of a private company unless there is a lead or presiding director, the chairman of the board should be an independent director and independent directors should meet separately from management directors at least once a year. If the chairman of the board is not an independent director, a lead or presiding director who is independent should be appointed.


Committees• Best Practices• Directors of all organizations must establish audit

committees, compensation committees, and, in appropriate cases, nominating/corporate governance committees composed entirely of independent directors or, alternatively, must perform the duties of such committees acting through the whole board of directors, which should consist of a majority of completely independent directors. All important committees of the board of directors should evaluate their own activities annually.


Audit Committee• Best Practice• The audit committee must include persons who have the

ability and willingness to fully understand the organization’s accounting, and they must, at a minimum, hire and determine the compensation of the independent auditor, preapprove all auditing and nonauditing services performed by the independent auditor, and assure themselves of the independence of the auditing firm. The audit committee is responsible for overseeing the organization’s financial reporting process and should understand and be familiar with the organization’s system of internal controls.


Internal Auditor• Best Practice• All organization (with the possible exception of small

private companies) should have an internal auditor, hired and compensated by the audit committee of the board of directors and reporting directly to the board of directors. The primary responsibility of the internal auditor should be to assist the board of directors to perform its fiduciary duties to monitor management. Other operational duties may be assigned to the internal auditor by management, but these other duties should not interfere with the primary responsibility of the internal audit. Internal auditing services may be outsourced.


Compensation Committee

• Best Practice

• The compensation committee must, at a minimum, establish the compensation of the top officers of the organization, use the internal auditor to verify that the compensation given to the top officers is consistent with what the committee authorized, and, either alone or together with a separate nominating/corporate governance committee, must determine that the compensation policies of the organization are consistent with an ethical, law-abiding culture.


Size of Board

• Best Practice

• Board of directors should be kept to a reasonable size, since large boards of directors tend to be ineffective.


Fairness Opinions (Material Transactions)

• Best Practice

• An organization should obtain a fairness opinion from a qualified and independent third party in the event of any material transaction involving a potential conflict of interest, such as an insider loan, purchase or sale, or a material merger or acquisition. Investment bankers and other qualified third parties rendering fairness opinions should be free of conflicts of interest.


Shareholder Communication

• Best Practice for Public Companies

• Public companies should establish an effective procedure for shareholders to communicate with the board or one of its committees, such as the nominating/corporate governance committee.


Focus – Long-Term Shareholder Value


• Board compensation should include incentives to the directors to focus on long-term shareholder value as part of director compensation, and, therefore, a meaningful portion of director compensation should be in the form of long-term equity. Directors should be required to hold a meaningful amount of the public company’s stock as long as they are on the board.


Oversee Management

• Best Practice

• Board of directors should confine their activities to overseeing the management of the organization and should not engage in day-to-day management activities or in micromanagement.


Collegial Atmosphere

• Best Practice

• Although directors can engage in constructive criticism, ask tough questions of management at board meetings, and disagree with each other, the discussions should be kept collegial with a view to developing a consensus.


Monitor Management Performance

• Best Practice

• Directors must determine what information they need from management to properly monitor management’s performance.


Metrics – Monitor Management

• Best Practice

• Directors should develop metrics to monitor the performance of management and review such metrics from time to time to determine their efficacy.


Establish Record of Diligence

• Best Practice• Directors must take the time to fully consider

important matters to the organization and establish a record of due diligence. In transactions in which there are potential conflicts of interest, a special committee composed of completely independent directors should be formed. These special committees must establish a complete record of due diligence in order for their decisions to be respected by the courts.


Identify Major Risks

• Best Practice• Directors must either directly or through

committees identify the major risks of an organization, prioritize those risks, and establish internal controls and a compliance program to help ameliorate such risks. The major risk analysis should be used to develop a committee structure within the board of directors, with each committee having an oversight role with respect to each major risk.


Succession Plan - CEO

• Best Practices

• The board must establish a succession plan for the chief executive officer.


Annual Operating Plan

• Best Practice

• The board is responsible for obtaining an annual operating plan from management, including annual budgets, and monitoring the performance of the annual operating plan.


Long-Term Strategic Plan

• Best Practice

• The board has a responsibility for making certain that the organization has a long-term strategic plan and overseeing the implementation of such strategic plan by management.


Executive Decision Making

• Best Practice

• The board of directors and the chief executive officer should have a clear understanding of the types of decisions that can be made by management without board approval and those which require board approval.


Internal Investigations

• Best Practices

• When conducting internal investigations that may involve top management or may be potentially embarrassing to the organization or top management, such investigations must be conducted by an independent board committee (typically the audit committee) and completely independent counsel should be used.


Zone of Insolvency

• Best Practice

• When the organization is in the “vicinity of insolvency,” directors should seek the advice of counsel to assist them in performing their potential fiduciary duties to creditors.


Loans – Violate SOX

• Best Practice

• Directors should not authorize personal loans or other personal extensions of credit to management or directors of private or not-for-profit organizations, or to management or directors of public companies not subject to Sarbanes-Oxley, except in the most compelling circumstances and only with arm’s-length terms and documentation.


Corporate Governance – Corporate Culture

• Best Practice

• Corporate culture is the key to corporate governance. The key to corporate culture is leadership from the top and a compensation system that rewards not only financial performance, but provides positive and negative incentives to employees to report legal risks and wrongdoing up the ladder. All organizations should adopt a law compliance and ethics policy that states the policies and values of the organization and should effectively enforce such policy.


Whitleblower Policy

• Best Practice

• A whistleblower policy should be established for all organizations (except to the extent prohibited by certain foreign laws) since, according to a 2004 survey by the Association of Certified Fraud Examiners, fraud is detected 40 percent of the time by tips.


Emergency Operating Plan

• Best Practice

• All organization should have an emergency operations plan, in case of fire, flood, explosion, and the like.


Press Media Policy

• Best Practice

• All organizations should adopt a press and media policy that sets forth the titles of the one or possibly two individuals who have the authority to speak for the organization. Any spokesperson for the organization must be properly trained for that role.


Majority Vote Rules


• Public companies should adopt a by-law that provides that if a majority of the shareholders actually voting withhold their votes for a particular director, such director will not be elected.

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