Corporate governance: AHEAD OF THE GAME

BY JOHN MORROCCO

Public concerns over good corporate governance and financial accuracy and transparency have spawned a host of new regulations and laws in recent months, as well as recommendations for others.

One of the most highly publicized events was last month's signing of sworn statements by CEOs and CFOs certifying their company's financial statements, as mandated by the U.S. Securities & Exchange Commission. The SEC required sworn statements from the principal executive and financial officers of all publicly traded companies with revenues of more than $1.2 billion affirming the accuracy and transparency of financial reports for 2001 and the first half of 2002. Phil Condit and Mike Sears certified Boeing's financials on Aug. 12, along with the overwhelming majority of CEOs and CFOs at the nearly 700 companies who had a mid-August deadline from the SEC.

The move to certify financial results is just one of a number of changes advocated by the SEC, whose primary mission is to protect the interest of investors and maintain the integrity of the U.S. securities markets. The commission works closely with the stock exchanges and Congress in setting and enforcing regulations to do just that. Indeed, lawmakers recently passed the Sarbanes-Oxley Act, signed into law by President George Bush on July 31, which took some of the SEC's recommendations a step further and added others.

Sarbanes-Oxley extended the certification requirement to all publicly traded companies and made it mandatory for each financial filing with the SEC going forward. Other major elements of the legislation include strengthening the independence of auditors and corporate boards of directors, especially their audit committees; tighter rules on executive compensation; and increased disclosure requirements. Some of the provisions of the act became effective immediately, while others have yet to be defined fully and will come into effect later. Congress left much of the refinement and implementation to the SEC.

The independence of corporate boards of directors is also a focus of a series of recommendations made by the New York Stock Exchange to help restore investor confidence. The NYSE filed these proposed changes to its listing standards with the SEC on Aug. 16. Boeing shares have been listed on the exchange since 1934.

Based on an evaluation conducted by Goldman Sachs, Boeing today ranks at or near the top of all companies in corporate governance. Here's how the company's guidelines match up with some of the key changes:

Independent Directors

The NYSE recommendations call for companies to have a majority of independent directors, compared with the current requirement for three of its audit committee members to be independent. (Sarbanes-Oxley requires all members of the Audit committee be independent.) A new, tighter definition of "independent" from the NYSE would require the board to affirm a director has no material relationship with the listed company. In addition, there is a five-year "cooling-off" period for former employees of the company and its independent, external auditor, as well as immediate family members of both.

Boeing: The company's existing governance principles call for a "substantial majority of independent, nonmanagement directors." Indeed, nine of the eleven members of Boeing's board of directors are considered "independent" under the NYSE's proposed tighter definition. Boeing's board of directors also has regular executive meetings without management present, another NYSE recommendation.

Board Committees

The NYSE wants company boards to include Nominating, Compensation and Audit committees, as well as calling for these committees to be composed solely of independent directors. Current rules only require this for Audit committees. They also should have written charters.

Boeing: Boeing's board of directors already has Audit, Compensation, Finance, and Governance and Nominating committees. Only nonemployee directors may serve on these committees. Audit committee members must also be "independent," pursuant to current NYSE rules. All key committees have written charters that address their purpose, goals and responsibilities.

Audit committee authority

Both Sarbanes-Oxley and the NYSE recommendations include provisions to increase the authority and responsibilities of the Audit committee. These include giving the Audit committee the sole authority to hire and fire a company's independent auditor and to approve any significant nonaudit relationship with the independent auditor. It also must have the ability to engage independent counsel and other expert advisors. Additionally, Sarbanes-Oxley requires the SEC to propose rules for certifying that one member of the Audit committee is a "financial expert."

Boeing: The audit committee is responsible for evaluating and selecting outside auditors, subject to ratification by the full board. The committee also reviews the external auditor's annual audit plan and report. The board of directors, or any of its committees, may seek legal or other expert advice from an independent source outside of the company.

Code of Ethics

Sarbanes-Oxley will require companies to disclose in periodic reports whether they have a code of ethics for senior financial officers.

Boeing: The company has an extensive code of ethics for all employees.