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Assessing Corporate Governance Risk

Assessing Corporate Governance Risk. Weak, ineffective boards have cost investors, creditors & underwriters hundreds of billions of dollars over the past four years alone. Not all were spectacular failures, either. Many otherwise sound companies have experienced substantial losses.

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Assessing Corporate Governance Risk

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  1. Assessing Corporate Governance Risk

  2. Weak, ineffective boards have costinvestors, creditors & underwritershundreds of billions of dollars overthe past four years alone.

  3. Not all werespectacularfailures, either.Many otherwise sound companies have experienced substantial losses.

  4. Bad Corporate GovernanceThe Five Largest Securities Class Action Settlements

  5. Corporate governance is: The system of checks and balances designed to ensure that corporate managers are vigilant on behalf of long-term shareholder value. Corporate governance is not:Best practices, checklists, or compliance. Assessing the likely impact of weak, ineffective boards on investor value requires a more specific, more dynamic, more robust, and more substantive approach.

  6. Good Corporate Governance

  7. Bad Corporate Governance

  8. Governance-Related RiskIPO Considerations • Public investors will want a strong, effective, independent board in place to represent their interests. • Public investors will expect greater levels of disclosure and transparency. • Positive investor perceptions of a firm’s corporate governance can translate directly into share price premiums.

  9. Governance-Related RiskInternational Considerations • Controlled companies – where a single, dominant shareholder controls a majority of the shareholder voting rights – are often the rule. • Understanding the local legal and regulatory environment is critical. • Disclosure & overall reporting transparency will often be the most important indicators.

  10. Uncovering Bad Governance

  11. Uncovering Bad GovernanceKEY PLACES TO LOOK • Ownership Structures • Board Composition • Executive Compensation • Accounting Practices • Strategic Decision-making • Litigation & Regulatory Exposure

  12. Regulatory responses • Sarbanes-Oxley • 404 disclosures • SEC • PCAOB • Exchanges • Proxy vote disclosure

  13. Market responses • Wall Street analyst reports • Shareholder involvement in director selection • CalPERS/Putnam • ISS/Glass-Lewis/Proxy Governance • Moody’s downgrade

  14. Uncovering Bad GovernanceWHAT TO LOOK FOR • Conflicted relationships • Conflicted contracts • Excessive compensation • Lack of transparency • Power-driven strategies • ACTIONS/DECISIONS, NOT POLICIES • FOLLOW THE MONEY

  15. Board AnalystCompany, CEO and Director Research

  16. Director Interlocks Research

  17. Corporate Governance Screening Tool

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