Page 37 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 24.c: Explain conflicts that arise in agency
relationships, including manager–shareholder conflicts and READING 24: CORPORATE GOVERNANCE
director–shareholder conflicts.
Managers and shareholders: Shareholders want to maximise wealth, but managers may instead seek to maximize their own wealth:
• Empire building;
• Granting excessive compensation and perquisites.
• Investing in risky ventures (you reap when it goes well but bare no losses when it goes bad).
• Not taking enough risk.

Directors and shareholders: Directors align more with management interests rather than those of shareholders:
• Lack of independence.
• Board members have personal relationships with management.
• Board members have consulting or other business agreements with the firm.
• Interlinked boards.
• Directors are overcompensated.
LOS 24.d: Describe responsibilities of the board of directors and explain qualifications and core competencies that an investment analyst should look for in the
board of directors.
LOS 24.e: Explain effective corporate governance practice as it relates to the board of directors and evaluate strengths and weaknesses of a company’s
corporate governance practice.

• Institute corporate values and corporate governance mechanisms.
• Ensure firm complies with all legal and regulatory requirements in a timely manner.
• Create long-term strategic objectives that are consistent with the shareholders’ best interests.
• Determine management’s responsibilities and how managers will be held accountable.
• Hire, appropriately compensate, and regularly evaluate the performance of the chief executive officer (CEO).
• Require management to supply the board with complete and accurate information in order for the board to make decisions.
• Meet regularly to conduct its normal business, and attend extraordinary sessions when necessary.
• Ensure board members are adequately trained to perform board functions.

In order to determine the effectiveness of a board of directors, investors or investment analysts must assess:
• The composition of the board of directors and whether or not directors are independent.
• Whether the board has an independent chairman.
• Qualifications of directors, How the board is elected.
• Board self-assessment practices.
• Frequency of separate sessions for independent directors.
• Audit committee and audit oversight, Nominating committee.
• Compensation committee and the compensation awarded to management.
• Use of independent or expert legal counsel.
• Statement of governance policies