Testimony of Roger W. Raber

President and CEO

National Association of Corporate Directors

Washington, D.C.

  On

“Lessons Learned from Enron’s Collapse”

Before the

Committee on Energy and Commerce

Chaired by W. J. “Billy” Tauzin

Wednesday February 6, 2002

Room 345, Canon House Office Building

I am honored to be here today as President and CEO of the National Association of Corporate Directors (NACD), a not-for-profit professional association founded in 1977 to enhance the education and development of corporate boards.

Summary Statement

In my remarks this afternoon I will cover three main subjects.

• First, I will explain the work and mission of the NACD, especially our longstanding commitment to improving board leadership through director education.

• Second, I will define the role of the corporate board of directors, explaining the duty of care, the duty of loyalty, and the business judgment rule, and showing how the board is accountable to shareholders, and management is accountable to the board.

• Third, I will explain how corporate directors can be a solution to the kinds of problems that contributed to the collapse of Enron.

The Mission and Work of the NACD

NACD was founded in 1977 as a membership organization for corporate directors committed to improving board effectiveness. Today, NACD is still the only membership organization of its kind in the United States. At this time, the NACD has more than 10,000 active members and participants. These are individuals or entire boards who purchase our publications, attend our seminars, and receive training in their boardrooms. Most of our members and participants are directors, but some are board advisors such as attorneys and accountants. Many distinguished corporate directors add to our knowledge and practice as members of our governing board, advisory board, and faculty.

Through our publications, seminars, and services, which cover both basic and emerging issues, NACD promotes high board standards and creates forums for peer interaction. We have 12 chapters where directors meet to learn about, discuss, and respond to current issues. Since 1977, our Director’s Monthly publication has featured “best practice” articles by and for corporate directors —over 2,000 articles to date. Also, for the past decade, NACD has issued annual “Blue Ribbon Commission” reports on issues such as director professionalism and evaluation, executive and director compensation, and the board’s role in strategy, among other topics. Furthermore, NACD also conducts research on governance trends, tracking over 100 issues steadily over time and across company sizes and industries. Finally, our members, directors, and officers also communicate with the media, regulators, institutional investors, and others where needed to improve understanding of board issues.

The Role of the Corporate Board of Directors

The board of directors has an important place in the corporate system. Corporations are owned by shareholders. Boards are accountable to shareholders, and managers are accountable to the board. Corporations are chartered through state corporation laws. These laws vary by state, but they share common features.

One common feature in state corporation laws is the notion of director duty—namely the twin duties of care and loyalty. The duty of care says that corporate directors must exercise care in their decisions, just as they would in their own decisions. The duty of loyalty says that directors must be loyal to the company, remaining free of any conflicts of interest as they vote on particular matters. A judicial doctrine called the business judgment rule shields directors’ decisions from liability as long as the directors exercised care and were free of conflicts of interest.

Another common feature in state corporation laws is the notion that corporations are “managed under the direction of a board of directors.” The nature of this direction varies. A small new corporation may just have a few key officers, who are all directors and owners as well. If a corporation sells stock to the general public, however, ownership shifts to non-managers. These non-manager-owners need protection. This is the role of state and federal securities laws. For example, securities laws require full, timely, and clear disclosure of important (“material”) information. Also, securities laws ensure that owners have representation on boards, through voting on nominations of particular directors.

As companies grow, boards often grow, and form committees, such as an audit committee, a compensation committee, and a nominating committee. They also may form special committees to look at sensitive issues. The NACD recommends that these committees be composed of qualified, independent directors. Our recommendations have made a difference. For example, today, partly as the result of concepts advocated by a member of our board of directors, in a Blue Ribbon Committee report to the Securities and Exchange Commission and stock exchanges, the boards of publicly listed companies must have an audit committee composed entirely of independent directors who are (or who will spend time to become) financially literate. This is only one of the many reforms NACD has advocated in the past 25 years.

Lessons Learned: Directors as a Solution

In closing, I would like to explain how directors can be a solution to the kinds of problems that allegedly occurred at Enron. (For a detailed response to the specific issues raised in the Enron case, I refer the committee to the January 31, 2002, issue of our newsletter, DM Extra, which can be viewed on our web site, nacdonline.org. I include a copy for the record.)

In general, I believe that there are three keys to board effectiveness: independence, information, and integrity—especially the courage to ask the tough questions.

Independence. NACD commends the SEC and stock exchanges for requiring “independent” audit committees. Meanwhile, independent nominating and compensation committees are now on the rise. Unless this beneficial trend continues, we anticipate stock exchange requirements mandating the independence of these committees.

Information. Directors need to be well informed about governance, and about the companies and industries they serve. A vital source of information is financial statements. Overall, the financial statements of U.S. companies do a good job of disclosure, keeping up with new challenges of financial reporting, but we want to make sure that oversight groups for accounting standards remain free from undue influence by any particular constituency. Ongoing education for directors is also important. A number of major institutional investors actively encourage director education in their portfolio companies. The late Jean Head Sisco, in her speech as NACD Director of the Year in 2000, went so far as to suggest that the stock exchanges require newly listed companies to provide evidence of ongoing director education.

Integrity. Last but not least, there is integrity. Directors should have the “duty of curiosity” to ask difficult questions, such as, “Do these numbers reflect our true profitability?” “What will this policy do for the employees in our 401-k plan?” “Isn’t it risky to have our auditors do some of our internal auditing work?” After Enron, more directors will be asking such questions. We will do our part to make sure that they do.

In summary, directors play an important role in the governance of corporations. Whatever actions you recommend as a committee, I ask you to remember that in the long run, corporate directors can be an important part in helping your actions succeed.

I thank you for your time.