Subject 9. Personal Use of Company Assets
Investors should determine whether the Company permits Board Members, management, and their family members to use Company assets for personal reasons.
Company assets are used to conduct Company business. If they are used by anybody for personal reasons, they are not available for investment in productive and income-generating activities. For Board Members, such use also creates conflicts of interest.
When reviewing this issue, investors should determine whether the Company:
- has an ethical code or policies and procedures that place strict limits on the ability of insiders to use Company assets for personal benefit;
- has lent cash or other resources to Board Members, management, or their families;
- has purchased property or other assets (such as houses or airplanes) for the personal use of Board Members, management, or their family members;
- has leased assets such as dwellings or transportation vehicles to Board Members, management, or their family members, and whether the terms of such contracts are appropriate given market conditions.
Practice Question 1John, an Independent Board Member of Company A, borrows $1 million from A at the prevailing market rate of 5.6% to finance his own independent start-up company. Should this situation be considered appropriate corporate governance practice?
A. Yes, as he pays the prevailing interest rate.
B. No, because this is a related party transaction.
C. No, because this creates a conflict of interest.Correct Answer: C
The company should not lend the money to John, no matter if he pays the market interest rate or not. Any appearance of a conflict of interest should be avoided.
Practice Question 2If a Board Member leases a company airplane for free personal use, it is an indication of ______.
A. related-party transactions
B. personal use of company assets
C. inappropriate executive compensationCorrect Answer: B
On the other hand, if a Board Member leases his or her own airplane to the Company, it will be considered a related-party transaction.
Study notes from a previous year's CFA exam:
f. describe provisions that should be included in a strong corporate code of ethics;