 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.

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) 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)