KAF: Corp.finance 5: corporate governance

Summarize corporate governance considerations (source: cur 4, pg 156-157)

THE BOARD

Investors & shareholders should

Determine whether a Company's Board has, at minimum, a majority of Independent Board Members
Determine whether Board Members have the qualifications the Co. needs for the challenges it faces.
Determine whether the Board & its committees have budgetary authority to hire Independent third-party consultants without having to receive approval from management
Determine whether Board Members are elected annually, or whether the Co. has adopted an election process that staggers the terms of Board Member election
Investigate whether the Co. engages in outside business relationship with management or Board Members, or individuals associated with them, for goods & services on behalf of the Co.
Determine whether the Board has established a committee of Independent Board Members, including those with recent & relevant experience of finance & accounting, to oversee the audit of the Co.'s financial reports
Determine whether the Co. has a committee of IBMs (Independent Board Members) charged with setting executive remuneration/compensation
Determine if the Co. has a nominations committee of IBMs that is responsible for recruiting Board Members
Determine whether the Board has other committees that are responsible for overseeing management's activities in selected areas, such as corp. governance, M&A, legal matters, or risk management.

MANAGEMENT

Investors & shareholders should:

Determine whether the Co. has adopted a code of ethics, & whether the Co's actions indicate a commitment to an appropriate ethical framework
Determine whether the Co. permits Board Members & management to use Co. assets for personal reasons
Analyze both the amounts paid to executives for managing the Co's affairs, & the manner in which compensation is provided to determine whether compensation paid to its executives is commensurate with the executives' level of responsibilities & performance, & provides appropriate incentives.
Inquire into the size, purpose, means of financing & duration of share-repurchase programs & price stabilization efforts.

SHAREOWNER RIGHTS

Investors & shareowners should:

Determine whether the Co. permits shareholders to vote their shares by proxy regardless of whether they are able to attend the meetings in person
Determine whether shareowners are able to cast confidential votes
Determine whether shareowners can cast the cumulative number of votes allotted to their shares for one or a limited number of Board norminees
Determine whether shareowners can approve changes to corp. structures & policies that may alter the relationship btw shareowners & the Co.
Determine whether & under what circumstances shareowners can nominate individuals for election to the Board
Determine whether & under what circumstances shareowners can submit proposals for consideration @ the Co's annual general meeting.
Determine whether the Board & management are required to implement proposals that shareowners approve.
Examine the Co's ownership structure to determine whether it has different class of common shares that separate the voting rights of those shares form their economic value
Determine whether the corp. governance code & other legal statutes of the jurisdiction in which the Co. is headquartered permit shareowners to take legal or seek regulatory action to protect & enforce their ownership rights.
Carefully evaluate the structure of of existing or proposed takeover defenses & analyze how they could affect the value of shares in a normal market environment & in the event of a takeover bid.

IMPORTANT DEFINITIONS

corporate governance: system of internal controls & procedures by which individual co. are managed. Good corp. governance practices seek to ensure that:

the Co. acts in a lawful & ethical manner in their dealings with all stakeholders & their representatives
all shareholders have the same right to participate in the governance of the Co. & receive fair treatment from the Board & management, & all rights of shareowners & other stakeholders are clearly delineated & communicated.
the Board & its committees are structured to act independently from management, individuals or entities that have control over management, & other non-shareholders group.
appropriate controls & procedures are in place covering management's activities in running the day-to-day operations of the Co.
the Co's operating & financial activities, as well as its governance activities, are consistently reported to shareowners in a fair, accurate, timely, reliable, relevant, complete & verifiable manner

Independence: a Board member considered as Independent member MUST NOT have a material business or other relationship with some specific individuals/groups
Board members or Directors: all individuals who sit on the Board, including Executive Board Members, Non-Executive Board Member, Independent Board Members

Ex-BM: members of executive management
IBM: individual who meets the "Independence" qualification.
Non-ex BM: neither Ex-BM nor IBM. represent interests that may conflict with those of other shareowners (such as: union)

Board of Corp. Auditors in countries with a Two-Tier Board structure (such as Japan)
Board of Directors in countries that use a Unitary Board

Two structures of Board

Two-Tier Board (Dual Board): has 2 elements: Management Board & Supervisory Board

consists exclusively of Ex-mgnt & its charged with running the Co. on a daily basis &
setting the corp. strategy for the Co.
do NOT sit on the Co's Supervisory Board

may include all: Ex BM, Non-ex BM & IBMs.
Oversees & advises mgnt & helps set corp. strategy, it could ignore daily activities but can't ignore important matters i.e. mergers, acquisitions, divestitures & sales (spin-off?)

firm in which shareonwers have an ownership position
in which investors are considering an investment
(hic, so, all positions used "firm" in Corp. finance should be change into "company". the reason is that i'm lazy to type company so i use "firm" for shorter typing)

Investors: all individuals or institutions who are considering investment opportunities in shares & other securities of the Co.
Shareowners (shareholders, in my typing /:) ): distinguished from investors by referring only to those individuals, institutions or entities that OWN shares or common or ordinary stocks in the Co.

KAF