Assessing Corporate Governance Risk
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Assessing Corporate Assessing Corporate Governance Risk Governance Risk
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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. - PowerPoint PPT Presentation
Transcript of Assessing Corporate Governance Risk
Assessing Corporate Assessing Corporate Governance RiskGovernance Risk
Weak, Weak, ineffective ineffective
boards have boards have costcost
investors, investors, creditors & creditors &
underwritersunderwritershundreds of hundreds of billions of billions of
dollars overdollars overthe past four the past four years alone.years alone.
Company Name Lost Value
Parmalat 10,000,000,000
Healthsouth 12,000,000,000
Qwest 104,000,000,000
Worldcom 180,000,000,000
Adelphia 6,500,000,000
KMart 4,000,000,000
Tyco 86,000,000,000
Vivendi 56,000,000,000
Global Crossing 40,000,000,000
Conseco 62,000,000,000
Enron 80,000,000,000
Warnaco 4,000,000,000
Sunbeam 2,000,000,000
Not all wereNot all werespectacularspectacular
failures, failures, either.either.Many Many
otherwise otherwise sound sound
companies companies have have
experienced experienced substantial substantial
losses. losses.
Company Name Lost Value
AOL Time Warner 100,000,000,000
AT&T 13,000,000,000
Xerox 3,000,000,000
Merck 42,600,000,000
Halliburton 7,200,000,000
Johnson & Johnson 22,000,000,000
Rite-Aid 2,000,000,000
DaimlerChrysler AG 300,000,000
DPL Inc. 110,000,000
Bad Corporate GovernanceBad Corporate GovernanceThe Five Largest Securities Class Action SettlementsThe Five Largest Securities Class Action Settlements
Company Settlement Amount
Cendant 3,527,000,000
Lucent 563,000,000
Bank of America 490,000,000
Waste Management 457,000,000
Rite Aid 259,000,000
Corporate governance is: Corporate governance is: The system of checks and balances designed to ensure that The system of checks and balances designed to ensure that corporate managers are vigilant on behalf of long-term corporate managers are vigilant on behalf of long-term shareholder value. shareholder value.
Corporate governance is not:Corporate governance is not: Best practices, checklists, or compliance. Assessing the Best practices, checklists, or compliance. Assessing the likely impact of weak, ineffective boards on investor value likely impact of weak, ineffective boards on investor value requires a more specific, more dynamic, more robust, and requires a more specific, more dynamic, more robust, and more substantive approach.more substantive approach.
Good Corporate GovernanceGood Corporate Governance
Bad Corporate GovernanceBad Corporate Governance
Governance-Related RiskGovernance-Related Risk IPO ConsiderationsIPO Considerations
Public investors will want a strong, Public investors will want a strong, effective, independent board in place effective, independent board in place to represent their interests.to represent their interests.
Public investors will expect greater Public investors will expect greater levels of disclosure and levels of disclosure and transparency.transparency.
Positive investor perceptions of a Positive investor perceptions of a firm’s corporate governance can firm’s corporate governance can translate directly into share price translate directly into share price premiums.premiums.
Governance-Related RiskGovernance-Related Risk International ConsiderationsInternational Considerations
Controlled companies – where a Controlled companies – where a single, dominant shareholder controls single, dominant shareholder controls a majority of the shareholder voting a majority of the shareholder voting rights – are often the rule.rights – are often the rule.
Understanding the local legal and Understanding the local legal and regulatory environment is critical. regulatory environment is critical.
Disclosure & overall reporting Disclosure & overall reporting transparency will often be the most transparency will often be the most important indicators.important indicators.
Uncovering Bad GovernanceUncovering Bad Governance
Uncovering Bad GovernanceUncovering Bad Governance KEY PLACES TO LOOKKEY PLACES TO LOOK
Ownership StructuresOwnership Structures Board CompositionBoard Composition Executive CompensationExecutive Compensation Accounting PracticesAccounting Practices Strategic Decision-makingStrategic Decision-making Litigation & Regulatory ExposureLitigation & Regulatory Exposure
Regulatory responses
• Sarbanes-Oxley• 404 disclosures
• SEC
• PCAOB
• Exchanges
• Proxy vote disclosure
Market responses
• Wall Street analyst reports
• Shareholder involvement in director selection
• CalPERS/Putnam
• ISS/Glass-Lewis/Proxy Governance
• Moody’s downgrade
Uncovering Bad GovernanceUncovering Bad Governance WHAT TO LOOK FORWHAT TO LOOK FOR
Conflicted relationshipsConflicted relationships Conflicted contractsConflicted contracts Excessive compensationExcessive compensation Lack of transparencyLack of transparency Power-driven strategiesPower-driven strategies ACTIONS/DECISIONS, NOT POLICIESACTIONS/DECISIONS, NOT POLICIES FOLLOW THE MONEYFOLLOW THE MONEY
Board AnalystBoard AnalystCompany, CEO and Director ResearchCompany, CEO and Director Research
Director Interlocks ResearchDirector Interlocks Research
Corporate Governance Screening Tool
