Corporate Governance
Best Practices:
Implications for Commercial Underwriters

Adel Abouhana
2
Corporate Governance


Core concern: How do we make sure
that top managers are doing what they’re
supposed to be doing?

...
The Agency Perspective


Separation of ownership & control
◦ Principals & agents
◦ Misalignment of interests
 What’s goo...
The Stakeholder Perspective


The board has broader responsibilities
◦ Focus is on protecting key stakeholder rights


...
Best Practices
The board of directors
 Executive compensation
 Anti-takeover measures


6
The Board of Directors
Role is to monitor & evaluate top
management
 But, is the board a complete solution?


7
Best Practices:
Board of Directors
 Separate CEO & Chairman of the Board
◦ Role duality gives CEO too much power

Appoint...
Best Practices:
Board of Directors


Active board members
◦ Not a rubber-stamp board

Evidence that the directors are in ...
Best Practices:
Board of Directors
 Board composition
◦ Insiders versus outsiders

10
Best Practices:
Board of Directors
 Board composition
◦ Insiders versus outsiders
◦ “Having a board monitor itself is lik...
Best Practices:
Board of Directors
 Board composition
◦ Insiders versus outsiders
◦ “Having a board monitor itself is lik...
Best Practices:
Board of Directors
 Board composition
◦ What is meant by “independent”?
 No material relationship with t...
Best Practices:
Board of Directors
 Board composition
◦ What is meant by “independent”?
 Five year “cooling off” period ...
Best Practices:
Board of Directors
 Board members (insiders & outsiders)
◦ Limits on number of other board
memberships
 ...
Best Practices:
Board of Directors
 Board committees
◦ Key committees at least chaired by outsiders
 Audit, compensation...
Best Practices:
Board of Directors
 Board committees
◦ Compensation committee
 Conduct formal evaluation of all company ...
Best Practices:
Board of Directors
 Board committees
◦ Corporate governance (nominating)
committee
 Create charter for b...
Best Practices:
Board of Directors
 Board committees
◦ Audit committee
 Select independent auditor
 Not also employed f...
Best Practices:
Board of Directors
 Board meetings
◦ Frequency of overall board & committee
meetings
◦ Attendance
◦ “Exec...
Best Practices:
Executive Compensation
 CEO has substantial stock ownership
 Salary, bonuses, & stock options reward
sup...
Best Practices:
Anti-takeover measures
 Lack of provisions designed to thwart a
hostile takeover
◦ Golden parachutes
◦ Po...
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Corporate governance . AA best practices

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Strategic Management Responsibility: Corporate Governance Issues ... Corporate governance and relationship, Best Practices, management, and shareholders.

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Corporate governance . AA best practices

  1. 1. Corporate Governance Best Practices: Implications for Commercial Underwriters Adel Abouhana
  2. 2. 2
  3. 3. Corporate Governance  Core concern: How do we make sure that top managers are doing what they’re supposed to be doing? 3
  4. 4. The Agency Perspective  Separation of ownership & control ◦ Principals & agents ◦ Misalignment of interests  What’s good for the managers may not be what is good for the owners 4
  5. 5. The Stakeholder Perspective  The board has broader responsibilities ◦ Focus is on protecting key stakeholder rights      Shareholders Employees Vendors Customers Society as a whole 5
  6. 6. Best Practices The board of directors  Executive compensation  Anti-takeover measures  6
  7. 7. The Board of Directors Role is to monitor & evaluate top management  But, is the board a complete solution?  7
  8. 8. Best Practices: Board of Directors  Separate CEO & Chairman of the Board ◦ Role duality gives CEO too much power Appointment of lead outside director  Former CEO does not continue to sit on the board  8
  9. 9. Best Practices: Board of Directors  Active board members ◦ Not a rubber-stamp board Evidence that the directors are in contact with employees, vendors, & customers  Board composition  ◦ ◦ ◦ ◦ Size Age Diversity Expertise 9
  10. 10. Best Practices: Board of Directors  Board composition ◦ Insiders versus outsiders 10
  11. 11. Best Practices: Board of Directors  Board composition ◦ Insiders versus outsiders ◦ “Having a board monitor itself is like having the fox watch the henhouse.” 11
  12. 12. Best Practices: Board of Directors  Board composition ◦ Insiders versus outsiders ◦ “Having a board monitor itself is like having the fox watch the henhouse.” ◦ The majority should be independent ◦ Should have formal resolution requiring this AND a written definition of independence 12
  13. 13. Best Practices: Board of Directors  Board composition ◦ What is meant by “independent”?  No material relationship with the company, either directly or as a partner, shareholder or officer of a firm that has a relationship with the company 13
  14. 14. Best Practices: Board of Directors  Board composition ◦ What is meant by “independent”?  Five year “cooling off” period before can be considered independent:  Former employees of the firm  If formerly part of an interlocking directorate in which an executive of the firm sat on the compensation committee of the firm employing the director  Same applies to directors with immediate family members in the above categories 14
  15. 15. Best Practices: Board of Directors  Board members (insiders & outsiders) ◦ Limits on number of other board memberships  Average director spends 176 hours a year for each board position ◦ CEOs should not serve on each other’s boards (interlocking directorates) ◦ Directors & their firms barred from doing consulting, legal, or other work for the firm ◦ Significant stock ownership of firm by directors 15
  16. 16. Best Practices: Board of Directors  Board committees ◦ Key committees at least chaired by outsiders  Audit, compensation, corporate governance (nominating) committees ◦ Preferred: Key committees composed entirely of independent directors 16
  17. 17. Best Practices: Board of Directors  Board committees ◦ Compensation committee  Conduct formal evaluation of all company officers (including CEO) and set compensation 17
  18. 18. Best Practices: Board of Directors  Board committees ◦ Corporate governance (nominating) committee  Create charter for board  Conduct formal governance review using an external consultant  Nominate board members  Board term limits  Elections  One class of directors  Each director stands for re-election each year 18
  19. 19. Best Practices: Board of Directors  Board committees ◦ Audit committee  Select independent auditor  Not also employed for consulting work  Do not seek SEC exemption to do so  Rotate auditors – at least rotate the lead auditor, if not the entire firm, every 5 years  CEO & CFO should not be former employees of the auditing firm 19
  20. 20. Best Practices: Board of Directors  Board meetings ◦ Frequency of overall board & committee meetings ◦ Attendance ◦ “Executive” sessions  Lead outside director with term limits ◦ Risk assessment function  Reports identifying risks & methods of addressing ◦ Access to internal information 20
  21. 21. Best Practices: Executive Compensation  CEO has substantial stock ownership  Salary, bonuses, & stock options reward superior performance ◦ not size of the company AND penalize poor performance  No modification of performance goals  ◦ No re-pricing or swapping stock options  Expense stock options 21
  22. 22. Best Practices: Anti-takeover measures  Lack of provisions designed to thwart a hostile takeover ◦ Golden parachutes ◦ Poison pill provisions ◦ Greenmail 22

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