Corporate governance is based on three interrelated

components: corporate governance principles, functions

and mechanisms.

OVERSIGHT FUNCTION. The board of directors should provide strategic advice to

management and oversee managerial performance, yet avoid micromanaging.

MANAGERIAL FUNCTION. The effectiveness of this function depends on the

alignment of management’s interests with those of shareholders.

COMPLIANCE FUNCTION. The set of laws, regulations, rules, standards, and best

practices developed by state and federal legislators, regulators, standard-setting

bodies, and professional organizations to create a compliance framework for

public companies in which to operate and achieve their goals.

INTERNAL AUDIT FUNCTION. Assurance and consulting services to the company

in the areas of operational efficiency, risk management, internal controls,

financial reporting, and governance processes.

LEGAL AND FINANCIAL ADVISORY FUNDTIONS. Legal advice and assists the

company, its directors, officers, and employees in complying with applicable laws

and other legal obligations and fiduciary duties.

EXTERNAL AUDIT FUNCTION. External auditors lend credibility to the company’s

financial reports and thus add value to its corporate governance through their

integrated audit of both internal control over financial reporting and financial

statements.

MONITORING FUNCTION. Shareholders, particularly institutional shareholders,

empowered to elect and, if warranted, remove directors.

Corporate Laws

May vary from state to state. But most adopted

Model Business Corporation Act as their

corporate law

The Federal Securities Laws

Fundamental are: the Securities Act of 1933 and

Securities Exchange Act of 1934

SOX expanded the role of federal statutes by

providing measures to improve corporate

governance, financial reports, and audit

activities.

Listing Standards Adopted by national stock exchanges, these

standards are applicable to all public companies

listing their equity shares with some exceptions

Best Practices

Recommended by professional organizations

(e.g. The

Conference Board, the Business Roundtable

Institute) and investor activists (e.g. Council of

Institutional Investors)

SOX was signed into law on July 30, 2002, to reinforce

corporate accountability and rebuild investor confidence in

public financial reports. It was designed to:

(1) establish an independent regulatory structure for the

accounting profession,

(2) set high standards and new guiding principles for

corporate governance,

(3) improve the quality and transparency of financial

reporting,

(4) improve the objectivity and credibility of audit functions

and empower the audit committee,

(5) create more severe civil and criminal remedies for

violations of federal securities laws,

(6) increase the independence of securities analysts.

SOX provisions, SEC-related rules, and listing standards

influence corporate governance structure in at least three

ways:

Auditors, analysts, and legal counsel are now brought into

the realm of internal governance as gatekeepers

Legal status and fiduciary duty of company directors and

officers, (audit committee and CEO), have been more clearly

defined and in some instances, significantly enhanced

Certain aspects of state corporate law were preempted and

federalized (For example, Section 402 of SOX prohibits loans

to directors and officers, whereas state law permits such

loans)