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