Corporate governance
Using Schweser notes for this - CFAI materials just too long and boring
Corporate governance is the system of internal controls and procedures by which companies are managed. Firm's checks and balances.
Duty of board is to protect shareholders' long term interests. Investors should consider:
- Is a majority of board independent members
- Board meets regularly outside presence of mgmt
- Is chairman CEO or former CEO - this could impair judgment
- Independent board members have a leading member in cases where chairman is not independent
- Board members have no conflicting relations - can excuse themselves when needed
Frequency of board elections
- Should be able to approve or reject board members annually
- Classified board - may need a multiple yr term perhaps as a takeover defense
- Is the board the proper size?
Board independence
- Board = independent IF decisions are not controlled or biased by mgmt
- No material relationships
- No groups with a controlling interest
- No advisors etc
- Any entity which has a cross directorship
- Need independence, experience and resources
- Avoid having compensation for finders' fees and consulting fees
- Firm should disclose any material relationships
Experience
- Consider any public statements of board members
- Necessary experience/qualifications
- Have they served on board long enough/too long?
- Capable in technologies etc.
- Attendance records
Code of ethics - have one
Board Committees
- Audit - make sure accounting is all good
- All audit committee members must be independent
- Proper accounting
- Compensation
- Link compensations to performance and profitability
- Compensation appropriate levels
- Nominations
- Recruiting of new board members
- Review experience/quals/performance of current members
- Other
- These typically fall outside normal governance codes, so be wary of these
- Independence is critical
Voting procedures
- Make sure company doesn't require attendance at meetings to vote
- Can use share blocking (good thing) - prevents those who want to vote from trading shares for a set period before annual meeting
- Confidential Voting
- This is a good thing apparently
- Can encourage unbiased voting
- Cumulative Voting
- Shareholders may be able to cast cumulative votes allotted for one or a limited number of board nominees
- Be cautious if there is a considerable minority shareholder group that may vote cumulatively together
- Voting for other corporate changes
- Articles, bylaws, voting rights, poison pill, provisions for change in control
- Shareholders should be able to vote in all matters
- Also review share buybacks and issuance of new stock
- Consider whether mgmt is actually bound/likely to implement these suggestions
Different classes of common equity
- Some classes of shares may separate voting rights from economic value
- Typically harder to raise capital when this is the case
- Should consider whether inferior equity's interest is still protected
Shareowner legal rights - should have legal recourse to their ownership through regulators etc. 'Dissenters' rights' require a firm to repurchase shares at FMV in the event of a problem
Takeover defenses
- Golden parachutes - rich compensation packs for execs who would lose jobs
- Poison pills - provisions that grant rights to existing shareholders in the event a certain percentage of shares are acquired
- Greenmail - use of corporate funds to buy back shares of acquiror at a premium
- All of these could decrease shareholder value
- Consider whether investors need to approve such measures
End
9:15 am
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