Assessing The Board of Directors

When an analyst evaluate the investment quality of a corporation’s debt or equity, he/she should look at the following board of director elements:

  • Board Independence: The analyst must review the board’s roster to determine if one or more board members could be subject to management influence.

  • In some instances company executives actually sit on the board.

  • Board members who lack independence may not be company executives, but could have close personal or business ties to management.

  • Analysts should look for a board that is at minimum three quarters (75%) independent.

  • Arguments have been made that a board should be 100% independent and that no company executives may serve on the board.

  • Independent Chairman of the Board: At a substantive number of public companies, the board chairman is also the CEO of the company.  The argument is that the board requires this type of insider expertise.
  • Director Election Process: The full annual election of directors is considered to be more investor friendly than a staggered election schedule, where only a portion of the board sets are elected each year.
  • Director Qualifications: Do board members possess sufficient expertise to oversee the company?
  • Board Self-Assessment: are board members, at a minimum, reviewing their own performance on an annual basis?
  • Separate Sessions for Independent Members: If the board is not 100% independent, are the independent members holding at least annual meetings that exclude the presence of company management?
  • Board Audit Committee: The audit committee should be 100% independent and meet regularly throughout the year to review financial reporting, non-financial public disclosures, and internal control practices.
  • Board Nominating Committee: Nominees to the board should be selected by a committee that is 100% independent.
  • Board Compensation Committee: Analysts should determine if executive compensation is tied to the attainment of long-term goals rather than short term financial metrics.
  • Independent Legal Counsel: The board needs access to appropriate resources so independent legal and other expert advice can be called upon.
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