Assessing The Board of Directors

This lesson is part 5 of 6 in the course Corporate Finance Part 2

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.