Corporate governance issues: United States and the European Union.

Implementation of Section 301 was convoluted and ambiguous to foreign issuers of Europe. For example, the Section provides that issuers should have an independent audit committee, but does not demand creation of audit committees from registrants. (106) Further, in the absence of an audit committee, the independence requirements of the Section still must be fulfilled by all of the board members of a registrant. (107) Such imprecise requirements were problematic for European companies listed in the United States, given some such companies are incorporated under the civil law systems of their respective countries, where the two-tier board requirement does not provide for independent directors on the executive or managing board level, and representatives of employees compose half of the supervisory board. (108) Hence, the impact on the different European corporate governance systems could not be ignored. Some commentors sought for the SEC to exempt the applicability of Section 301 based upon the doctrine of comity, (109) but the supposed harshness of Section 301 was mitigated by the SEC's final implementing rules. Under these rules, all foreign issuers listed in the United States are exempt from the obligation to have an audit committee, provided that: 1) the foreign issuer has an alternative structure such as a board of auditors according to its own national law; 2) the same board of auditors is separate and distinct from the board of directors; 3) no executive director is a member of the board of auditors; 4) the board of auditors is not appointed by the board of directors; 5) the foreign issuer's national laws provide standards that assure the independence of the board of auditors from management; and 6) the foreign issuer's national laws or its bylaws provide that the board of auditors is responsible for appointing and monitoring the activities of the outside auditor. (110)

D. Code of Ethics

In light of the Enron debacle, the defects in corporate governance also demonstrated the level to which business ethics had ebbed, thereby revealing lessons about business leadership, corporate regulation, and government regulation. Enron was characterized as "a culture that valued only deal-making and money." (111) It "failed because its leadership was morally, ethically and financially corrupt." (112) What, then, happened to corporate governance rules? Did they fail, or were they inadequate? As one scholar stated, "corporate governance is fundamentally a weak check and balances approach, in that it has historically relied on reasonably honest and honorable managers and directors (in the face of agency theory to the contrary)." (113) "A financial and moral corruption machine emanating from senior management, ensnaring a trusting or negligent board, shaped the corporate culture and ethical climate, and ensnared the auditors, the external attorneys, and to some degree, the politicians and regulators." (114) In the face of these kinds of allegations and findings, (115) SOX enacted sections dealing with ethics. Section 406 required the SEC to implement rules mandating: 1) implementation of a code of ethics for senior financial officers (or persons performing similar functions) of financial statement issuers; and 2) disclosure by the issuers of whether or not such a code has been adopted, and, if a code has not been adopted, the reason why. (116)

These rules were also applicable to foreign issuers (over European objection), as they were similar to the European method of regulating corporate governance through codes and the subsequent compelling of issuers to disclose whether they comply with code recommendations, and if not, why not. (117)

The Act also suggested the code of ethics must include standards reasonably necessary to promote ethical conduct in handling conflicts of interest, disclosure in reports to be periodically filed by the issuer, and compliance with governmental regulations. (118)

Section 307, on the other hand, requires the SEC establish minimum standards of professional conduct for attorneys practicing before the SEC. (119) The Section also requires all lawyers to simultaneously report evidence of a material violation of fraud and other corporate misconduct to the company's senior management and, if necessary, to the board of directors. (120) This requirement is endorsed by the final 2003 rules implementing SOX provisions relating to "minimum standards" of professional conduct--attorneys representing issuers before the SEC are required to report violations of securities laws, breaches of fiduciary duty, or other similar violations by the issuer to the issuer's chief legal officer and CEO. (121) If no appropriate response is provided, then the attorney must report the evidence to the issuer's audit committee or the board of directors. (122) The enactment of Section 307 was said to be flawed, however, because it was a usurpation of the regulation of corporate law by the federal government from the states. (123)

Again, the dilemma for the European community concerning this law was it would be inequitable to foreign lawyers, due to their conflicting home country ethics requirements and their lack of expertise in assessing violations of U.S. laws. (124) However, these rules will tend to exclude most foreign attorneys since the regulation applies to those licensed to practice law in the United States. (125) Indeed, the SEC responded to foreign concerns by excluding foreign attorneys who are not admitted to practice in the United States and do not advise on U.S. law (or would do so only on a consultative basis with a U.S. lawyer); also exempt are foreign practicing attorneys if their compliance with the U.S. requirement would be prohibited by their respective foreign law. (126)

IV. CORPORATE TAKEOVERS, CONSTITUENCY STATUTES AND SHAREHOLDERS RIGHTS

The most fundamental principle of corporate governance is a function of the allocation of power within a corporation between its stockholders and its board of directors. (127) While the stockholders' major power is the right to vote on specific matters, paramount of which is the election of directors, (128) the power to manage the corporation, on the other hand, is vested in the corporate board, 129 which is duly elected by the shareholders. (130) While these fundamental tenets of corporate law provide for a separation of control and ownership, the shareholders' franchise has been characterized as the '"ideological underpinning[s]' upon which the legitimacy of the directors managerial power rests." (131)

Intertwined with the power vested in management is the corollary that they, as fiduciaries, have a principal duty to maximize the interest of shareholders. (132) But should this always be the case, or should some other constituencies be taken into consideration; and, if so, when and why should the shareholder interest become secondary? (133) In the United States, until the mid-1960s, it was difficult to oust incumbent management of a publicly-traded corporation, simply because, among other reasons, it was difficult to acquire a corporation against the objection of its incumbent managers (which required their approval of the acquisition in the first place). (134) Hostile takeovers later became an important and common method by which to not only oust incumbent management but also to acquire the target company. (135) In other words, a tender offer for the shares is made by the acquirer directly to the shareholders of the target corporation (not to the board of directors for approval), the acquirer thereby bypassing the board and presumably facing little or no resistance. (136)