12 - The Board of Directors Flashcards
The Securities and Exchange Act sets forth rules and responsibilities for board directors. Also, SEC has a rule requiring companies to bring shareholder resolutions to a vote by all shareholders. However, the SEC has allowed companies to exclude from the proxy and shareholder vote those proposals that deal “with a matter relating to the conduct of the __________________” of the company. Executive ____ has been considered part of this exclusion.
ordinary business operations
pay
The Sarbanes-Oxley Act included the following:
- (a) Adoption of or changes to a corporate code of _____ must be disclosed in a timely manner.
- (b) CEOs and CFOs must certify in _____ their quarterly and annual financial statements.
- (c) Material changes in the status of the company’s financial ______ must be disclosed in real time.
- (d) Publicly traded companies must have only independent directors on their _____ committee.
- (e) External auditors are barred from providing ______ services without express approval of the board.
- (f) Publicly traded companies must review their internal _____ systems, make appropriate changes, and have the results verified by independent audit.
- (g) _______ are increased for fraud and other white-collar crimes, including destroying records and falsifying documents.
- (h) Insiders are prohibited from trading company stock during _______ periods for company stock bene t plans.
- (i) Insiders are prohibited from receiving new ____.
- (j) Insider trading transactions are to be reported within ___ days.
- (k) CEOs and CFOs are to forfeit compensation realized from restatement of nancial statements because of _______.
- (l) Employees are protected from retaliation for _______.
- ethics
- writing
- condition
- audit
- nonaudit
- control
- Penalties
- blackout
- loans
- two
- misconduct
- whistle-blowing
Some companies find it advantageous to form advisory boards. The most typical reason for their formation is high-level _______ and/or excellent _______. Chief executive officers (CEOs) can easily access professional opinions on new ventures or markets, receive assistance in developing needed core competencies and/or reach high-level decision makers. Advisory board members often nd such service more attractive than regular board service. It requires less of a time commitment and may incur no nancial liability. The CEO must determine ______ before reaching out to recruit directors. The rst director brought in should be of suf cient “_______” to attract others to the board. Individuals must clearly know what is expected of them and what they will get in return for their services.
expertise
contacts
needs
“star quality”
Directors fall into two categories: inside (employees of the company) and outside (those not employed by the company). Good governance would suggest that _______ directors should comprise at least a majority of the board, in addition to being the only ones to serve as compensation committee members.
Having decided how many outside directors to have, what should be their quali cations? The most common is an active or retired CEO from another company. Academicians, attorneys, bankers and retired government of cials account for most of the rest. The board should reflect diversity of backgrounds, experiences, gender and ethnicity. However, expertise important to the company must be represented on the board. Some companies require the CEO to leave the board at _______.
independent
retirement
discuss the election term of a board of directors.
When corporate raiders rose to prominence in the 1980s, a number of companies adopted staggered or _________ boards. These are boards with staggered terms. Typically, only one-third of the board of directors are up for election each year. Companies defend the practice as reinforcing ______. Critics say it makes it more dif cult to hold the board accountable, and it is an entrenchment vehicle. Companies argue that classi ed boards put them in a better negotiating position during a takeover because the takeover company cannot immediately replace the entire board.
Even when a shareholder resolution against a classi ed or staggered board receives a majority of the stock voted, some companies take the position that it is a nonbinding resolution. Unless a supermajority, or ___%, is acquired, it is insuf cient to amend the company’s articles of incorporation. In order to thwart this practice, some shareholders are introducing binding resolutions, which bind the corporation to act on the voting results.
_______ voting is one way to offset the classi ed board. The number of votes a shareholder has is determined by multiplying the number of shares owned by the number of directors being elected. Under this voting, it is easier to seat a director if the number of slots up for election is large rather than small.
classified
continuity
75%
Cumulative
The key questions about board meetings are: How many? Where? When? What will be discussed at each? Who gets invited?
There should be a suf cient number of meetings to discharge the _____ role of the board. Meetings are typically held at company headquarters for the convenience of the CEO and other members of management. When during the month meetings will be scheduled is a function of what will be discussed. A number of boards meet during the second or third week after the close of a ________ to review the results before issuing a public statement. It is also helpful to standardize the meeting agenda so directors know what they can expect. In addition to the directors, the board may allow speci ed members of management who are not board members to sit with them. This provides directors an opportunity to evaluate such individuals based on their behavior. Others prefer that only directors be in attendance.
governance
financial quarter
(board book)
In addition to providing directors with a copy of the board meeting agenda in advance of the meeting, it is appropriate that they receive copies of material to be discussed. This material should be in their hands at least a week before the meeting, providing them an opportunity to read it and note their questions. Ideally, the questions should be called in and answered prior to the meeting. This provides the maximum amount of time at the meeting for discussion.
The book will contain minutes of the previous meeting as well as the minutes of the board and management committees that have met since the last meeting. The book might also include reports from various operating and staff divisions describing their activities since the last meeting. A significant portion of the book will be focused on the ________ performance of the company and its various operating units. The narrative should also include comments on the present and possible future of _______ conditions affecting the company by analysts and other experts.
financial
economic
The number of directors is typically about ____, fewer for smaller companies and a little more for larger companies. One way to determine how many directors are appropriate is to determine the number of board committees and multiply it by _____. Thus, if the board had three committees, it would need nine directors. Most of these directors would be outside directors distinguishing them from inside directors. Typically, at least the CEO sits on the board as an insider. Others may include the chief operating of cer (COO) and perhaps the chief nancial of cer (CFO).
Outside directors are either dependent or independent. An independent director is one without a professional, nancial or family relationship to the company or CEO or other key of cers other than being a member of the board of directors. An outside director who does not meet the independent quali cations is often called an _______ director.
12
three
affiliated
Seven common board committees and their responsibilities are:
- (1) ________ committee—Recommending which rm to be made the company’s independent auditor, reviewing the results of internal audits and meeting separately with outside auditors
- (2) _______ committee—Proposing candidates to the board for election as of cers/ directors, reviewing the performance of board directors, proposing changes in director pay, and reviewing succession plans for the CEO and other of cers
- (3) ________ committee—Proposing changes in executive compensation plans and administering those that are approved
- (4) _______ committee—Acting on behalf of the board to the extent legally permitted
- (5) _________ committee—Approving capital budgets and proposing dividend action
- (6) ________ committee—Approving fund managers, setting nancial expectations, and reviewing results
- (7) ________ committee—Proposing speci c plans, reviewing results and reporting appropriate action to the board.
- Audit
- Governance
- Compensation
- Executive
- Finance
- Pension
- Strategic planning
A company’s _______ is its long-term objective that should be motivating, even if unattainable. All plans can be viewed in terms of whether or not they support this. The _______ consists of the pathway to the vision.
vision
mission
What is a member of the board’s liability?
Directors are expected to exercise prudent judgment, acting in good faith on an informed basis only after obtaining material facts. It is further expected that directors will call on legal and other experts in evaluating alternative actions. Directors must act without conflict of interest, keeping in mind the best interests of the shareholder and the company. Possible conflict should be ________ to other directors. If the directors have acted in this manner, the business judgment rule says they should not be held liable for mistakes or decisions that did not turn out as expected. It will be virtually impossible to nd individuals willing to serve as directors without a reasonable liability ________ in place. Directors facing the burden of paying legal and related expenses will want the company to advance them payments for costs. The company will want the director to sign a written promise to ________ the company if indemni cation is later denied. However, directors might seek the further comfort of an indemni cation agreement whereby the company agrees to reimburse the director for any legal actions not covered by the liability insurance.
disclosed
insurance policy
reimburse
discuss director performance appraisal
While most boards have a formal process for appraising the performance of the CEO, few have a similar process to evaluate individual directors. For that reason, more and more companies are rethinking the ____ and ______ limit issues.
Of those who do individual director appraisal, many use the less sensitive self-assessment rather than the more obtrusive _____ review. Self-assessments are intended to improve performance without threatening the body of directors.
Critics of individual review point out that the board should be evaluated as a whole rather than by its parts. Staggered boards also make it more dif cult to remove a newly elected nonperforming director. With or without formal appraisal, each director is expected to attend each board and committee meeting fully prepared on all issues. Effective boards receive adequate information in time for review prior to the meeting and thoroughly discuss issues during the meeting before taking action. Boards that do not perform well typically suffer from one or more of the following problems:
(a) The CEO is ______.
(b) Some directors are either not _______ or not performing to potential.
(c) Some directors are ______ at meetings.
(d) Needed ______ is either not available or not timely.
(e) _______ is voluminous and requires extensive time to evaluate.
age and term
peer
- domineering
- qualified
- disruptive
- information
- Information
depending on the makeup of the particular board, the compensation committee made up solely of outside directors could consist of former government officials, bankers, lawyers, academicians, or _______ of other firms. some people are critical of companies whose board membership consists of ________ members of management and those considered to be suppliers of _________ services.
executives
retired
contractual
Pay for executives in general and the CEO in particular is usually viewed in ______ and not in relation to performance. However, a CEO paid a fraction of the pay of a counterpart may be overpaid in relation to performance. Conversely, a CEO paid several times that of a counterpart may be underpaid in relation to performance.
Furthermore, it is important to view executive pay in relation to that of others in their own peer group. Performance should not simply be company financials, but also total shareholder return, which is stock price plus __________.
absolute dollars
reinvested dividends
Because of their fiduciary role to the shareholder, it is logical to expect members of the compensation committee to be performance oriented in direction but cautious in specific ________. A plan that is similar to those of other companies is more likely to be acceptable than an innovative creation. In large part, the conservative approach is attributable to a lack of knowledge by which to adequately judge the efficacy of a new approach. It is much easier to rely on the judgments of other boards.
In addition to having to absorb a significant amount of compensation design and basic accounting and tax considerations, the compensation committee must also be able to see those areas likely to be applicable as well as those that are inappropriate. Thus, it is critical for the compensation committee to have suf cient knowledge of company ______ and compensation ______ to be able to judge the efficacy of a specific proposal.
Typically, the committee makes performance decisions on the CEO and other executives named in the proxy. After making the awards, the committee is responsible for monitoring plan performance and acting upon salary recommendations for of cers. Thus, the committee has a basis for judging the depth of management talent or lack thereof. Administration of the actual pay program will focus on all ve components of the of cers’ pay package, including their relative mix. This committee would also determine modi cations to basic employee bene t plans.
plan design
objectives
design
