101 Concepts for the Level I Exam
Essential Concept 38: Evaluating Corporate Governance Policies and Procedures
Board policies and practices: To evaluate a company’s board policies and practices, we look at the following-
- Board of directors’ structure: Analysts consider whether the structure is a one-tier or two-tier structure and if this structure provides sufficient oversight, representation, and accountability to shareholders.
- Board independence: A board with a majority of independent board members is considered positive.
- Board skills and experience: A board with diverse skills and expertise directly related to the company’s core operations is considered positive.
- Board composition: A board with more diversity with respect to profession, culture, geographical background, gender, age and tenure is considered positive.
An issue related to skills and experience is board tenure. A board member’s tenure is considered long if it exceeds 10 years. This can be viewed positively (the board member has more knowledge and experience) or negatively (the board member could be too closely aligned with management).
Executive remuneration: Factors to consider while evaluating executive remuneration include:
- Transparency of compensation
- Performance criteria for incentive plans – both short term and long term
- Linkage of remuneration with company strategy
- Pay differential between the CEO and the average worker
- “Say-on-pay” provision allows shareholders to vote and/or provide feedback on remuneration issues
- A “claw-back” policy allows a company to recover previously paid remuneration if certain negative events are uncovered
Shareholder voting rights:
- Under straight voting share structures, shareholders get one vote for each share owned.
- Under dual-class share structures, company founders and management have shares with more voting power.