Reading 41: The corporate Governance of listed companies: A manual for investors
1. Define corporate governance
- Corporate governance is the set of internal controls, processes and procedures by which firms are managed. If defines the appropriate rights, roles and responsibilities of management, the board of directors and shareholders within an organization. Good corporate governance practices seek to ensure that:
- The board of directors protect shareholder interests.
- The firm acts lawfully and ethically in dealings with shareholders.
- The rights of shareholders are protected and shareholders have a voice in governance.
- The board act independently from management.
- Proper procedures and controls cover management’s day-to-day operations.
- The firm’s financial, operating and governance activities are reported to shareholders in a fair, accurate and timely manner.
- Describe practices related to board and committee independence, experience, compensation, external consultants and frequency of elections, and determine whether they are supportive of shareowner protection.
- The duty of the board is to act in the shareholder’s long-term interests.
- An effective board needs to have the independence, experience and resources necessary to perform this duty.
- Investors should consider whether the following statements hold true:
- A majority of the board of directors is comprised of independent member.
- The board meets regularly outside the presence of management.
- The chairman of the board is also CEO or former CEO in the firm ⇒ impair the ability & willingness of independent board members.
- Independent board members have a primary or leading board member in cases, where the chairman is not independent.
- Board members are closely aligned with supplier, customers, share-option plan or pension adviser.
⇒ An independent board ⇒ fairly & properly benefit management and those who have influence over management.
⇒ For specific: compensation, M&A, legal, regulatory, financial matters & issues relating to the firm’s reputation. A truly independent board will have the ability to hire external consultants without management approval.
- Frequency of board elections
While reviewing firm policy regarding election of the board, investors should consider:
- Whether there are annual elections or staggered multiple-year term (classified board). A classified board may serve another purpose – to act as a takeover defense.
- Whether the board filled a vacant position for a remaining term without shareholder approval.
- Whether shareholders can remove a board member.
- Whether the board is proper size for the specific facts and circumstances of the firm.