Corporate Governance Best Practices Implications For Commercial Underwriters

Corporate Governance Best Practices Implications For Commercial Underwriters - Transcript

Corporate Governance
Best Practices:
Implications for Commercial Underwriters
Dr. Gail S. Russ
Dr. Meredith Downes
Associate Professors of Management
Illinois State University

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Corporate Governance
• Core concern: How do we make sure that
top managers are doing what they’re
supposed to be doing?

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The Agency Perspective
• Separation of ownership & control
? Principals & agents
? Misalignment of interests
• What’s good for the managers may not be what is
good for the owners

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The Agency Perspective
• The Agency Problem:
? The misalignment of agents & principals’
interests leads to agents (managers) pursuing
strategies that are not in the best interests of the
principals (stockholders).

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The Agency Perspective
• The Agency Problem:
? The misalignment of agents & principals’
interests leads to agents (managers) pursuing
strategies that are not in the best interests of the
principals (stockholders).
? Focus is on protecting shareholder rights

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The Stakeholder Perspective
• The board has broader responsibilities
? Focus is on protecting key stakeholder rights
• Shareholders
• Employees
• Vendors
• Customers
• Society as a whole

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Best Practices
• The board of directors
• Executive compensation
• Anti-takeover measures

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The Board of Directors
• Role is to monitor & evaluate top
management
• But, is the board a complete solution?

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Best Practices:
Board of Directors
• Separate CEO & Chairman of the Board
? Role duality gives CEO too much power

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Best Practices:
Board of Directors
• Separate CEO & Chairman of the Board
? Role duality gives CEO too much power
• Appointment of lead outside director

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Best Practices:
Board of Directors
• Separate CEO & Chairman of the Board
? Role duality gives CEO too much power
• Appointment of lead outside director
• Former CEO does not continue to sit on the
board

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Best Practices:
Board of Directors
• Active board members
? Not a rubber-stamp board

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Best Practices:
Board of Directors
• Active board members
? Not a rubber-stamp board
• Evidence that the directors are in contact
with employees, vendors, & customers

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Best Practices:
Board of Directors
• Active board members
? Not a rubber-stamp board
• Evidence that the directors are in contact with
employees, vendors, & customers
• Board composition
? Size
? Age
? Diversity
? Expertise

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Best Practices:
Board of Directors
• Board composition
? Insiders versus outsiders

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Best Practices:
Board of Directors
• Board composition
? Insiders versus outsiders
? “Having a board monitor itself is like having
the fox watch the henhouse.”

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Best Practices:
Board of Directors
• Board composition
? Insiders versus outsiders
? “Having a board monitor itself is like having
the fox watch the henhouse.”
? The majority should be independent

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Best Practices:
Board of Directors
• Board composition
? Insiders versus outsiders
? “Having a board monitor itself is like having
the fox watch the henhouse.”
? The majority should be independent
? Should have formal resolution requiring this
AND a written definition of independence

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Best Practices:
Board of Directors
• Board composition
? What is meant by “independent”?
• No material relationship with the company, either
directly or as a partner, shareholder or officer of a
firm that has a relationship with the company

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Best Practices:
Board of Directors
• Board composition
? What is meant by “independent”?
• Five year “cooling off” period before can be
considered independent:
– Former employees of the firm
– If formerly part of an interlocking directorate in which an
executive of the firm sat on the compensation committee
of the firm employing the director
– Same applies to directors with immediate family members
in the above categories

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Best Practices:
Board of Directors
• Board members (insiders & outsiders)
? Limits on number of other board memberships
• Average director spends 176 hours a year for each
board position

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Best Practices:
Board of Directors
• Board members (insiders & outsiders)
? Limits on number of other board memberships
• Average director spends 176 hours a year for each
board position
? CEOs should not serve on each other’s boards
(interlocking directorates)

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Best Practices:
Board of Directors
• Board members (insiders & outsiders)
? Limits on number of other board memberships
• Average director spends 176 hours a year for each
board position
? CEOs should not serve on each other’s boards
(interlocking directorates)
? Directors & their firms barred from doing
consulting, legal, or other work for the firm

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Best Practices:
Board of Directors
• Board members (insiders & outsiders)
? Limits on number of other board memberships
• Average director spends 176 hours a year for each
board position
? CEOs should not serve on each other’s boards
(interlocking directorates)
? Directors & their firms barred from doing
consulting, legal, or other work for the firm
? Significant stock ownership of firm by directors

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Best Practices:
Board of Directors
• Board committees
? Key committees at least chaired by outsiders
• Audit, compensation, corporate governance
(nominating) committees

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Best Practices:
Board of Directors
• Board committees
? Key committees at least chaired by outsiders
• Audit, compensation, corporate governance
(nominating) committees
? Preferred: Key committees composed entirely
of independent directors

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Best Practices:
Board of Directors
• Board committees
? Compensation committee
• Conduct formal evaluation of all company officers
(including CEO) and set compensation

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Best Practices:
Board of Directors
• Board committees
? Corporate governance (nominating) committee
• Create charter for board

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Best Practices:
Board of Directors
• Board committees
? Corporate governance (nominating) committee
• Create charter for board
• Conduct formal governance review using an
external consultant

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Best Practices:
Board of Directors
• Board committees
? Corporate governance (nominating) committee
• Create charter for board
• Conduct formal governance review using an
external consultant
• Nominate board members

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Best Practices:
Board of Directors
• Board committees
? Corporate governance (nominating) committee
• Create charter for board
• Conduct formal governance review using an
external consultant
• Nominate board members
• Board term limits

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Best Practices:
Board of Directors
• Board committees
? Corporate governance (nominating) committee
• Create charter for board
• Conduct formal governance review using an
external consultant
• Nominate board members
• Board term limits
• Elections
– One class of directors
– Each director stands for re-election each year

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Best Practices:
Board of Directors
• Board committees
? Audit committee
• Select independent auditor
– Not also employed for consulting work

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Best Practices:
Board of Directors
• Board committees
? Audit committee
• Select independent auditor
– Not also employed for consulting work
– Do not seek SEC exemption to do so

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Best Practices:
Board of Directors
• Board committees
? Audit committee
• Select independent auditor
– Not also employed for consulting work
– Do not seek SEC exemption to do so
• Rotate auditors – at least rotate the lead auditor, if
not the entire firm, every 5 years

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Best Practices:
Board of Directors
• Board committees
? Audit committee
• Select independent auditor
– Not also employed for consulting work
– Do not seek SEC exemption to do so
• Rotate auditors – at least rotate the lead auditor, if
not the entire firm, every 5 years
• CEO & CFO should not be former employees of the
auditing firm

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Best Practices:
Board of Directors
• Board meetings
? Frequency of overall board & committee
meetings

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Best Practices:
Board of Directors
• Board meetings
? Frequency of overall board & committee
meetings
? Attendance

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Best Practices:
Board of Directors
• Board meetings
? Frequency of overall board & committee
meetings
? Attendance
? “Executive” sessions
• Lead outside director with term limit

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Best Practices:
Board of Directors
• Board meetings
? Frequency of overall board & committee
meetings
? Attendance
? “Executive” sessions
• Lead outside director with term limits
? Risk assessment function
• Reports identifying risks & methods of addressing

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Best Practices:
Board of Directors
• Board meetings
? Frequency of overall board & committee
meetings
? Attendance
? “Executive” sessions
• Lead outside director with term limits
? Risk assessment function
• Reports identifying risks & methods of addressing
? Access to internal information

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Best Practices:
Executive Compensation
• CEO has substantial stock ownership

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Best Practices:
Executive Compensation
• CEO has substantial stock ownership
• Salary, bonuses, & stock options reward
superior performance
? not size of the company

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Best Practices:
Executive Compensation
• CEO has substantial stock ownership
• Salary, bonuses, & stock options reward
superior performance
? not size of the company
• AND penalize poor performance

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Best Practices:
Executive Compensation
• CEO has substantial stock ownership
• Salary, bonuses, & stock options reward
superior performance
? not size of the company
• AND penalize poor performance
• No modification of performance goals
? No re-pricing or swapping stock options

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Best Practices:
Executive Compensation
• CEO has substantial stock ownership
• Salary, bonuses, & stock options reward
superior performance
? not size of the company
• AND penalize poor performance
• No modification of performance goals
? No re-pricing or swapping stock options
• Expense stock options

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Best Practices:
Anti-takeover measures
• Lack of provisions designed to thwart a
hostile takeover
? Golden parachutes

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Best Practices:
Anti-takeover measures
• Lack of provisions designed to thwart a
hostile takeover
? Golden parachutes
? Poison pill provisions

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Best Practices:
Anti-takeover measures
• Lack of provisions designed to thwart a
hostile takeover
? Golden parachutes
? Poison pill provisions
? Greenmail