Corporate Finance

The Corporate Governance of Listed

Companies :A Manual for Investors
Reading - 41

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Boards characteristics and Practices
• The board should act in the interest of the shareholders and
investors should determine the following :
– The board members meet without the presence of
management .
– Majority of board of directors is comprised of independent
members and not management .
– Independent board members have a lead member if the board
chair is not independent .
– The chairman of the board is the also the CEO or a former CEO
of the firm.
– Investors should determine whether board members distance
themselves on issues that may create a conflict.

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Boards characteristics and Practices . .
• Investors should consider whether there are annual board
elections or multiple year terms.
• Shareholders can remove a board member and whether the
board filled a vacant position without the shareholders
approval.
• Investors should determine whether the board and its
committee have the authority to hire independent third party
consultants without receiving approval from management.
• The remuneration committee has hired external advisers in
the past to determine appropriate compensation for key
executives.

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Board Independence and Importance
• A board is independent when its decisions are not biased or
not influenced by the management of the firm .The board
member should not have any material benefit from :
– Shareholders having controlling interest and can influence the
firms management.
– The firms advisers auditors and their families.
– The firm and its subsidiaries ,former employees and executives.
– Executive management and their families.
• Any decision benefiting the management and harming
shareholders interest reflects shows that board members are
not independent.
• The firms should disclose all the commercial relationships it
has with the board members or nominees.

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Strong and Weak Code of Ethics
• A company’s code of ethics sets standards for ethical conduct
based on basic principles of integrity trust and honesty.
• Ethical breaches result in fines ,sanctions and management
turnover affecting the company’s performance.
• Investors should determine whether board members and
management use company assets for personal reasons.
• Companies with ethical codes post them on their public
websites ,in their annual reports.
• Investors may find information about loans to company
executives board members in the “Related party
transactions” sections of a company’s annual report.
• The ethical code should prohibit advantages to the firm’s
insiders that are not offered to shareowners.

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Audit Committee
• The audit committees objective is to ensure that the financial
information reported by the company to shareowners is
complete, reliable, relevant and timely.
• Investors must determine the following:
Proper accounting and auditing procedures have been followed

All board members serving on the audit committee are independent

Committee members are financial experts

The audit committee controls the audit budget

The external auditor is free from management influence

Conflicts between auditor and firm are resolved in a manner that favors the shareholder

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Remuneration / Compensation Committee
• It is responsible for ensuring that compensation and other awards
encourage executive management to act in ways that enhance the
company’s long term profitability and value.
• Investors when analyzing committee should determine whether :
– Executive compensation is appropriate .
– The firm has provided details to shareholders regarding compensation
in public documents.
– Polices and procedures for this committee are in place .
– The terms and conditions of options granted to management and
employees are reasonable.
– The firm and the board receive shareholder approval for any share
based remuneration plans.
– The firm has provided loans or the use of company property to board
members.

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Nominations Committee
The purpose of the nomination committee :
– It is responsible for recruiting new board members with
qualities and experience .
– Creating nomination policies and procedures.
– Monitors the performance ,independence skills and expertise of
existing board members to determine whether they meet the
current and future needs of the company and the board.
– Preparing for the succession of executive management .
• Investors should review the following:
– The criteria for the new board members.
– Expertise and background of existing board members.
– The attendance records of the board members at regular and
special meetings.
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Voting rules
• The ability to vote ones share is fundamental right of the
share ownership. If the company makes it difficult for
shareowners to vote or express their views , it could affect
the company’s performance.
• Investors should consider whether the company:
– Allows proxy voting by some remote mechanism.
– Limits the ability to vote shares by requiring the presence at
annual general meeting.
– Coordinating the timings of the AGM at different locations but
on the same day in order to prevent the shareholders from
casting their rights.

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Voting Rules . .
• Confidential voting : Investors should determine if
shareholders are able to cast confidential votes to encourage
unbiased voting . Thus investors should consider :
– The firm uses third party to tabulate shareowner votes.
– Third party agent retains voting records.
– The third party agent is subject to an audit to ensure accuracy.
– Shareholders are entitled to vote only if they are present.
• Cumulative voting: It enables shareholders to vote in a
manner that enhances the likelihood that their interests are
represented on the board.
– Investors should consider whether the company has a significant
minority shareowner group that might be able to use
cumulative voting to serve it s own interests.

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Takeover Defenses
• Take over defenses are provisions that make a company less
attractive to a hostile bidder or more difficult to acquire.
• When reviewing a company’s anti takeover measures
investors should :
– Inquire whether the company is required to receive shareowner
approval for takeover measures.
– Inquire whether the company has received any formal
acquisition interest in the past.
– Inquire whether the firm may use its cash to pay off a hostile
bidder . Shareholders should take steps to discourage the
board doing the activity.

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Take over Defenses . .
• Take over defenses include:
– Golden parachutes is the provision where large severance
packages for top managers who lose their jobs as a result of a
takeover.
– Poison pills are the provisions that grant rights to existing
shareholders in the event a certain percentage of a company’s
shares are acquired
– Greenmail is the provision for the use of corporate funds to
buy back the shares of a hostile acquirer at a premium to their
market value.
• Their effect is to decrease the share value.

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 Thank You…

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