7/24/2017 Corporate Governance

Corporate Governance
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What is 'Corporate Governance'

Corporate governance is the system of rules, practices and processes by
which a company is directed and controlled. Corporate governance
essentially involves balancing the interests of a company's many
stakeholders, such as shareholders, management, customers, suppliers,
financiers, government and the community. Since corporate governance also
provides the framework for attaining a company's objectives, it encompasses
practically every sphere of management, from action plans and internal
controls to performance measurement and corporate disclosure.

!--break--Governance refers specifically to the set of rules, controls, policies

and resolutions put in place to dictate corporate behavior. Proxy advisors
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and shareholders are important stakeholders who indirectly affect
governance, but these are not examples of governance itself. The board of
directors is pivotal in governance, and it can have major ramifications for equity valuation.

The Board of Directors NEW

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are elected by shareholders or appointed by other board members, and they represent shareholders
of the company. The board is tasked with making important decisions, such as corporate officer Search News, Symbols, Terms
appointments, executive compensation and dividend policy. In some instances, board obligations
stretch beyond financial optimization, when shareholder resolutions call for certain social or
environmental concerns to be prioritized.

Boards are often comprised of inside and independent members. Insiders are major shareholders,
founders and executives. Independent directors do not share the ties of the insiders, but they are
chosen because of their experience managing or directing other large companies. Independents are
considered helpful for governance, because they dilute the concentration of power and help align
shareholder interest with those of the insiders.

Good and Bad Governance

Bad corporate governance can cast doubt on a company's reliability, integrity or obligation to
shareholders. Tolerance or support of illegal activities can create scandals like the one that rocked Trading Center
Volkswagen AG in 2015. Companies that do not cooperate sufficiently with auditors or do not select
auditors with the appropriate scale can publish spurious or noncompliant financial results. Bad
executive compensation packages fail to create optimal incentive for corporate officers. Poorly
structured boards make it too difficult for shareholders to oust ineffective incumbents. Corporate
governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in
the United States, which was ushered in to restore public confidence in companies and markets after
accounting fraud bankrupted high-profile companies such as Enron and WorldCom.

Good corporate governance creates a transparent set of rules and controls in which shareholders,
directors and officers have aligned incentives. Most companies strive to have a high level of

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corporate governance. For many shareholders, it is not enough for a company to merely be
profitable; it also needs to demonstrate good corporate citizenship through environmental
awareness, ethical behavior and sound corporate governance practices.

BREAKING DOWN 'Corporate Governance'

Board Of Directors - B Of D
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Corporate Governance

Board Of Directors - B Of D
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Inside Director
A board of directors (B of D) is a group of individuals that are elected as, or elected to act as,
representatives of the stockholders to establish corporate management related policies and to make
decisions oResolution
Corporate n major company issues. Ever y public company must have a board of directors. Some
private and nonprofit companies have a board of directors as well.

Shareholder
BREA KING DOW N 'Board Of Directors - B Of D'
In general, the board makes decisions on shareholders behalf as a fiduciar y and looks out for the
financial wellbCorporate
Market-Based eing of theGovernance
company. Su...ch issues that fall under a board's pur view include the hiring
and firing of executives, dividend policies, options policies, and executive compensation. In addition
to those duties, a board of directors is responsible for helping a corporation set broad goals, support
Corporate Accountability
executives in their duties, while also ensuring the company has adequate resources at its disposal
and that those resources are managed well.
Voting Right
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Moore +

Stakeholder

Annual General Meeting - AGM

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Inside Director
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A board member who is an employee, officer or stakeholder in the company. Inside directors - and
outside directors, for that matter - have a fiduciary duty to the company of which board they sit on,
and are expected to always act in the best interests of the company. Because of their specialized
knowledge about the inner workings of the company, a strong board of inside directors is a key
element in its success.

BREAKING DOWN 'Inside Director'

Inside directors typically include a company's top executives, such as the chief operating officer, the
chief financial officer and the chief operating officer, as well as representatives of major shareholders
and lenders, and representatives of other stakeholders, such as labor unions.

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An institutional investor who is considering making a sizable investment in a company will
oftfteen insist on appointing one or more of the investor's representatives to the company's board
of directors as a condition of such investment.

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