Directors compliance is that area of legal compliance issues that involves members of the board of directors of publicly held companies. Under the U.S. Sarbanes-Oxley Act, or SOX, all members of any board of directors for publicly held companies must be held accountable for their actions. Large fines and sentences to prison discourage violation of the Act. Directors are responsible for internal control within the company to assure that legal compliance is achieved, and that their own behavior meets the new standards for ethics set forth in the Act. Compliance is a best practice for corporations.
The need for directors compliance is directly the result of scandals and wrong doings by board members at Enron, WorldCom, and other major corporations prior to enactment of SOX. Internal auditors are required to report to the corporation audit board, which may be made up of board directors. Stipulations for membership in audit boards include that at least one board member be an accounting expert. The duties of the board, number of members, powers and responsibilities are normally set down in the business bylaws.
One area of concern with membership on boards of publicly held companies is that the members do not have a conflict of interest. Their responsibility is to the owners of the business entity as a best practice, but their responsibilities are different from those of the business managers and owners. All their actions are to be directed toward the financial benefit of the company. They are elected by the shareholders but they are separate from the shareholders.
Under the best practices of business, the directors must be highly ethical in their personal operations, avoiding conflicts of interest that would affect their conduct on the board of directors for a business entity. They may not serve on the board of a competing company. Other restrictions regarding transactions with the company may also apply. They must be aware of applicable laws that affect business operations and assure the public and shareholders that all policies, processes and other legalities are in compliance with SOX laws. Directors compliance is an important issue for corporations.