An investors or investment analyst must assess the following attributes of the board:
Board Composition and Independence
An independent board director is defined as one who has no direct or indirect material relationship with the company, its subsidiaries or any of its board directors, other than as a board director or shareholder of the company. Stated simply, an independent board director must be free of any relationship with the company or its senior management that may impair the director's ability to make independent judgments or compromise the director's objectivity and loyalty to shareholders.
The board should be comprised of a substantial majority of independent directors. A board with this makeup and one which is diverse in its composition is more likely to limit undue influence of management and others over the affairs of the board. The decisions of such a board will be more likely to aid the company's long-term success.
Independent Chairman of the Board
Is the board chair also the CEO of the company? If yes, the board chair may have too much influence and impair the ability and willingness of other independent directors to exercise their independence judgment. However, many corporate managers argue that it is essential for efficient and effective board functioning that the chairman be the senior executive in the company because only such an executive has the knowledge and experience necessary to provide needed information to the board on questions on strategy, policy and the operational functioning of the company.
Clearly, independence of the chairman of the board does not guarantee that the board will function properly but it is a necessary condition for board independence.
Qualifications of Directors
Directors who have appropriate experience and expertise relevant to the company's business are best able to evaluate what is in the best interest of shareholders. They must be able to contribute business judgment to board deliberations and decisions, based on their experience in relevant business, management disciplines or other professional life.
If directors lack the skills, knowledge and expertise to conduct a meaningful review of the company's activities, and are unable to conduct in-depth evaluations of the issues affecting the company's business, they are more likely to defer to management when making decisions.
Annual Election of Directors
Companies that prevent shareholders from electing directors on an annual basis limit shareholders' ability to change the board composition, for example, when directors fail to act on their behalf, or to elect individuals with needed expertise in response to a change in company strategy.
In a classified or staggered board, directors are typically elected in two or more classes, serving terms greater than one year. Using an example of a three-year staggered board, at each annual meeting, one third of the directors or nominees would be eligible for shareholder ratification for a three-year period.
Corporate governance best practice generally supports the annual election of directors as being in the best interest of investors.
Annual Board Self-Assessment
Board members should meet at least once a year to review and evaluate their performance and make recommendations for improvement. The process of self-assessment should focus on board responsibilities and individual members' accountability for fulfilling their responsibilities.
Separate Sessions of Independent Directors
Do independent directors regularly meet without the presence of management, and report on their activities at least annually to shareholders' The purpose of these meetings is to provide an opportunity for those entrusted with the best interests of the shareholders to engage in candid and frank discussions and debate regarding the management of the company, their strategies and policies, strengths and weaknesses, and other matters of concern.
Audit Committee and Audit Oversight
The audit committee plays a critical role in ensuring the corporation's financial integrity and consideration of legal and compliance issues. The primary objective is to ensure that the financial information reported by the company to shareholders is complete, accurate, reliable, relevant and timely.
In most corporations, currently, nominations of board members and for executive officers of the company are made by board members, most often at the recommendation of, or in consultation with, the management of the company. In such circumstances, the criteria for selection of nominees may favor management's best interests at the expense of the interests of shareholders. Consequently, corporate governance best practice requires that nominees to the board be selected by a nominee committee comprising only independent board members.
The committee is responsible for:
Executive compensation practices provide a window into the effectiveness of the board. Through the compensation committee, the board should implement rational compensation practices that respond to the company's equity policy, including conditional forms of compensation that motivate executives to achieve performance that is better than that of a peer group. With shareholders' interest and fairness in mind, the committee should ensure that the executive compensation packages are commensurate with the level of the responsibilities of the executive, and appropriate in light of the company's performance. All policies should be disclosed to shareholders upon adoption by the full board.
The committee should have only independent board members on the committee. Committees lacking independence could award excessive compensation due to management pressures, could provide incentives for actions that boost short-term share prices at the expense of long-term profitability and value.
Investors should determine whether the composition of the compensation packages is appropriate.
Board's Independent Legal and Expert Counsel
The fact that the corporate counsel, which is paid by the management, is charged to advise the board represents a direct conflict of interest. That is, the corporate council cannot be wholly independent with regard to the advice given to the board. The board should have the ability and enough resources to hire independent legal and other expert counsel to help them fulfill their fiduciary duties. Specifically, the board should have the authority to decide whether to hire external counsel, whom should be hired, and how the external should be compensated, etc without having to receive approval from management. This mechanism provides the board with the ability to obtain expert help in specialized areas, to circumvent potential areas of conflicts with management, and to preserve the integrity of the board's independent oversight function.
Statement of Governance Policies
Companies committed to corporate governance often provide a statement of corporate governance policies. Analysts should assess:
Disclosure and Transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
Insider or Related-Party Transactions
Insider or related-party transactions involve buying, selling, and other transactions with directors, executives, partners, employees, family members and so on. They are not illegal or necessarily a violation of any kind. However, directors are supposed to make independent decisions. Receiving personal benefits from the company can create an inherent conflict of interest.
Responsiveness of Board of Directors to Shareholder Proxy Votes
The ability to vote one's shares is a fundamental right of share ownership. Sometimes a company makes it difficult for shareholders to vote their common shares. The ability to propose needed changes can prevent erosion of shareholder value. This could pressure the board or management to change the way they do business.
An analyst should review all such proxies put to the shareholders, determining the shareholders' consensus as reflected in the relative size of the affirmative vote, and determine the directors' response to the vote as reflected in the actions taken by the board and management.
I. his daughter works for the company as a secretary.
All of them are considered as "material relationships".
I. The board reports on their activities to shareholders every six months.
I: The board should report to shareholders at least annually.
CFO is a member of management. The board should have the authority without having to receive approval from management.
Staggered terms for board directors in a classified board make it more difficult for shareholders to make fundamental changes to the composition and behavior of the board.
I. provides more flexibility to nominate new board directors to meet changes in the market place than an annually elected board.
I. Related-party transactions are illegal.
I. They are not illegal or necessarily a violation of any kind.
I. the members.
I. have authority over the audit of the entire corporate group, including foreign subsidiaries and affiliated companies.
III. The external auditors don't prepare the financial statements.
I. All members of the audit committee must be independent board directors.
Although I and II are not required, these practices are highly recommended.
III: Note that the non-audit consulting services are usually approved by the management, not the board.
I. The nomination committee is responsible for recruiting top executives.
I. It is responsible for recruiting new board directors.
A. Yes, as he pays the prevailing interest rate.
The company should not lend the money to John, no matter he pays the market interest rate or not. Any appearance of conflict of interest should be avoided.
Shareholders should be able to nominate individuals for election to the board under certain circumstances.
A. Identifiable and measurable accountabilities for the performance of responsibilities.
A. To maintain a certain level of continuity and skill of the board, no board member should be removed from the board under any circumstances.
Shareowners should be able to vote to remove a Board Member under certain circumstances. Besides, corporate governance best practice generally supports the annual election of Board Members as being in the best interest of investors.
A. related-party transactions.
On the other hand, if a board director leases his or her own airplane to the company, it will be considered as a related-party transaction.
I. Board directors cannot have any material relationship with the company, other than as a board director or shareholder of the company.
A. II and III
I. Independent Board Members cannot have any material .... .
II. They cannot use Company assets for personal use.
III is true. However, this would be a sign of weak corporate governance.
I. Proxy voting is not permitted.
A. I, II and IV
They are all warning signs of weak corporate governance.
A. The independence of its audit committee.
While all subcommittees of the board play an essential role, for some of them, it is particularly important that they be made up of independent directors. When it comes to audit, compensation and nominations, there would just be too much conflict if the directors heading these committees were in fact members of the company's management team.
A. The amount of compensation directors make outside of their directorship role, which may impair their motivation to become effective directors in the subject company.
If outside compensation was such a driving force in directors' actions, then chances are that they would have refused the role of director in the first place. Many directors are established executives with hefty compensation levels.
A. The qualification of directors in terms of knowledge of the industry in which the subject corporation operates in.
While a regularly scheduled number of meetings is important to attend, the number of excess or special meetings doesn't say much. In fact, sometimes, a high frequency of meetings could indicate that the company is troubled and that the board has a weak handle on the situation.
A. Respond to shareholder inquiries about the corporation within an adequate period of time.
While it is true that board members must respond to shareholder inquiries, this process is generally done at the annual shareholders meeting. In order words, it would not be possible for a shareholder at any time to pick up the phone and call a director with a particular inquiry. Instead, firms usually have an investors relation department which handles such inquiries.
A. Submit financial statements to the independent auditors.
The role of preparing and submitting financial statements to independent auditors falls on management. However, the board is responsible for appointing the independent auditor.
A. Ensure that all laws and regulations are adhered to by the corporation.
Generally, the board of directors does not get involved in the micro management of the firm. Tasks, such as entering into long term contracts with suppliers and vendors, are left up to management discretion.