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Subject 1. Summary of Corporate Governance Considerations

Research findings state that there is a strong correlation between good corporate governance and better valuation results of listed companies. It is important to alert investors to the importance of corporate governance. The manual considers how investors can evaluate the quality of corporate governance.

The Board

The primary responsibility of the Board is to foster the long-term success of the corporation, consistent with its fiduciary responsibility to shareowners. To carry out this responsibility, the Board must ensure that it is independent and accountable to shareowners and must exert authority for the continuity of executive leadership with proper vision and values. The Board is singularly responsible for the selection and evaluation of the corporation's chief executive officer; included in that evaluation is assurance as to the quality of senior management. The Board should also be responsible for the review and approval of the corporation's long-term strategy, the assurance of the corporation's financial integrity, and the development of equity and compensation policies that motivate management to achieve and sustain superior long-term performance.

The Board should put in place structures and processes that enable it to carry out these responsibilities effectively. Certain issues may be delegated appropriately to committees (including the audit, compensation and corporate governance/nominating committees) to develop recommendations to bring to the Board. Nevertheless, the Board maintains overall responsibility for the work of the committees and the long-term success of the Company.

Investors and shareowners should determine whether:

  • a Company's Board has, at a minimum, a majority of Independent Board Members;
  • Board Members have the qualifications the Company needs for the challenges it faces;
  • the Board and its committees have budgetary authority to hire independent third-party consultants without having to receive approval from management;
  • Board Members are elected annually or the Company has adopted an election process that staggers the terms of Board Member elections;
  • the Company engages in outside business relationships with management or Board Members, or individuals associated with them, for goods and services on behalf of the Company;
  • the Board has established a committee of Independent Board Members, including those with recent and relevant experience of finance and accounting, to oversee the audit of the Company's financial reports;
  • the Company has a committee of Independent Board Members charged with setting executive remuneration/compensation;
  • the Company has a nominations committee of Independent Board Members that is responsible for recruiting Board Members and
  • the Board has other committees that are responsible for overseeing management's activities in select areas, such as corporate governance, mergers and acquisitions, legal matters, or risk management.


Investors and shareowners should:

  • determine whether the Company has adopted a Code of Ethics, and whether the Company's actions indicate a commitment to an appropriate ethical framework;
  • determine whether the Company permits Board Members and management to use Company assets for personal reasons;
  • analyze both the amounts paid to key executives for managing the Company's affairs and the manner in which compensation is provided (to determine whether compensation paid to executives is commensurate with the executives' level of responsibilities and performance and provides appropriate incentives); and
  • inquire into the size, means of financing, and duration of share-repurchase programs and price stabilization efforts.

Shareowner Rights

Investors and shareowners should determine:

  • whether the Company permits Shareowners to vote their shares by proxy regardless of whether they are able to attend meetings in person;
  • whether Shareowners are able to cast confidential votes;
  • whether Shareowners can cast the cumulative number of votes allotted to their shares for one or a limited number of Board nominees ("cumulative voting");
  • whether Shareowners can approve changes to corporate structures and policies that may alter the relationship between Shareowners and the Company;
  • under what circumstances Shareowners can nominate individuals for election to the Board;
  • under what circumstances Shareowners can submit proposals for consideration at the Company's annual general meeting;
  • whether the Board and management are required to implement proposals that Shareowners approve;
  • whether the Company's ownership structure has different classes of common shares that separate the voting rights of those shares from their economic value;
  • whether the corporate governance code and other legal statutes of the jurisdiction in which the Company is headquartered permit Shareowners to take legal action or seek regulatory action to protect and enforce their ownership rights; and
  • how the structure of existing or proposed takeover defenses could affect the value of shares in a normal market environment and in the event of a takeover bid.

Practice Question 1

An investment fund owns 8 percent of the outstanding voting shares of a public company. There are several larger voting blocks of shares and the investment fund is not assured of being able to elect representation on the board of directors. Which type of shareholder voting right would be most beneficial in allowing the investment fund to ensure its interests are represented on the board?

A. Proxy
B. Cumulative
C. Confidential

Correct Answer: B

Cumulative voting enhances the likelihood that minority interests are represented on the board.

Study notes from a previous year's CFA exam:

1. Summary of Corporate Governance Considerations