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Assessing The Board of Directors

CFA® Exam, CFA® Exam Level 2, Corporate Finance

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.
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‹ Conflicts of Interest in a Corporate Environment

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In this Course

  • CFA Level 2: Corporate Finance 2 – Introduction
  • Introduction to Corporate Governance
  • Types of Business Organizations
  • Conflicts of Interest in a Corporate Environment
  • Assessing The Board of Directors
  • Investment Valuation and Corporate Governance

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