1. Corporate Governance Best Practices: Implications for Commercial Underwriters
Dr. Gail S. Russ
Dr. Meredith Downes
Associate Professors of Management
Illinois State University

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

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

5. The Agency Perspective
The Agency Problem:
The misalignment of agents & principals’ interests leads to agents (managers) pursuing strategies that are not in the best interests of the principals (stockholders).

6. The Agency Perspective
The Agency Problem:
The misalignment of agents & principals’ interests leads to agents (managers) pursuing strategies that are not in the best interests of the principals (stockholders).
Focus is on protecting shareholder rights

7. The Stakeholder Perspective
The board has broader responsibilities
Focus is on protecting key stakeholder rights
Shareholders
Employees
Vendors
Customers
Society as a whole

8. Best Practices The board of directors Executive compensation
Anti-takeover measures

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

10. Best Practices: Board of Directors
Separate CEO & Chairman of the Board
Role duality gives CEO too much power

11. Best Practices: Board of Directors
Separate CEO & Chairman of the Board
Role duality gives CEO too much power
Appointment of lead outside director

12. 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

13. Best Practices: Board of Directors
Active board members
Not a rubber-stamp board

14. Best Practices: Board of Directors
Active board members
Not a rubber-stamp board
Evidence that the directors are in contact with employees, vendors, & customers

15. 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

16. Best Practices: Board of Directors
Board composition
Insiders versus outsiders

17. Best Practices: Board of Directors
Board composition
Insiders versus outsiders
“Having a board monitor itself is like having the fox watch the henhouse.”

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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)

24. 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

25. 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

26. Best Practices: Board of Directors
Board committees
Key committees at least chaired by outsiders
Audit, compensation, corporate governance (nominating) committees

27. 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

28. Best Practices: Board of Directors
Board committees
Compensation committee
Conduct formal evaluation of all company officers (including CEO) and set compensation

29. Best Practices: Board of Directors
Board committees
Corporate governance (nominating) committee
Create charter for board

30. Best Practices: Board of Directors
Board committees
Corporate governance (nominating) committee
Create charter for board
Conduct formal governance review using an external consultant

31. 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

32. 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

33. 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

34. Best Practices: Board of Directors
Board committees
Audit committee
Select independent auditor
Not also employed for consulting work

35. 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

36. 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

37. 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

38. Best Practices: Board of Directors
Board meetings
Frequency of overall board & committee meetings

39. Best Practices: Board of Directors
Board meetings
Frequency of overall board & committee meetings
Attendance

40. Best Practices: Board of Directors
Board meetings
Frequency of overall board & committee meetings
Attendance
“Executive” sessions
Lead outside director with term limit

41. 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

42. 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

43. Best Practices: Executive Compensation
CEO has substantial stock ownership

44. Best Practices: Executive Compensation
CEO has substantial stock ownership
Salary, bonuses, & stock options reward superior performance
not size of the company

45. 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

46. 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

47. 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

48. Best Practices: Anti-takeover measures
Lack of provisions designed to thwart a hostile takeover
Golden parachutes

49. Best Practices: Anti-takeover measures
Lack of provisions designed to thwart a hostile takeover
Golden parachutes
Poison pill provisions

50. Best Practices: Anti-takeover measures
Lack of provisions designed to thwart a hostile takeover
Golden parachutes
Poison pill provisions
Greenmail