module 41

  1. 2 essentials to appropriate operations of an organizations and reliable financial reporting....
    1) effective corporate governance

    2) Appropriately designed internal controls
  2. Effective Corporate Governance involves.......
    • 1) establishing incentives (i.e. forms of compensation)
    • =base salary and bonuses
    • =stock options
    • =stock grants
    • =perks

    2) monitoring devices
  3. Forms of Compensation

    Base salary and bonuses
    * managers are compensated based on performance mostly measure by amount of profit

    CONS: might focus on short term profits to earn bonuses, delay expenses during profit measurement time
  4. Forms of Compensation

    Stock Options
    * makes managers want to increase stock price

    CONS: manager might increase stock price in the short term at the expense of long term stock value, might encourage management to take more risk, stock prices might go down and this won't be an incentive
  5. Forms of Compensation

    Stock Grants
    • * 2 types:
    • 1)Restricted stock - managers usually can't sell them for a certain period of time so they can focus on long term performance

    2)performance shares - issuance of stocks based on performance.
  6. Forms of Compensation

    Executives perquisites (perks)
    * i.e. retirement benefits, use of corporate assets, high severance aka golden parachutes, corporate loans
  7. best form of executive compensation
    * combo of fixed compensation and incentive compensation that is related to long term stock prices aka balance scorecards.

  8. Monitoring Devices
    • * Board of Directors
    • *NYSE & NASDAQ Rules related to corporate governance and director independence
    • *Internal Auditors
    • *External Auditors
    • *Investment banks and securities analysts
    • *Creditors
    • *Credit rating agencies
    • *Attorneys
    • *SEC
    • *IRS
    • *Corporate takeovers
    • *Shareholder activism
  9. Monitoring Devices

    Board members must be......
    • + competent
    • + most of them are independent
    • + trained
    • + provided with complete and accurate information
  10. Boards are responsible for.......
    • + hiring and firing top management
    • + voting on majore operating and financial proposals
    • + providing advice to management
    • + ensuring accurate financial reporting by corp.
  11. Board of Directors committees
    • The nominating/corporate governance committee
    • The audit committee
    • The compensation committee
  12. Nominating / corporate governance committee
    • + oversees board organization, committee assignments
    • + determines director qualifications and training
    • + develops corporate governance principles
    • + oversees CEO succession
  13. The Audit Committee
    • at least 1 member as "financial expert" based on The Sarbanes-Oxley Act
    • appoint, determine compensation, and oversee the work of external auditor
    • external auditor reports directly to them
    • internal auditor has direct access to them
    • establish procedure for the receipt and treatment of complaints regarding acct. or auditing matters
    • section 302 of Sarbanes Oxley Act makes officers responsible for maintaining effective internal control and requires the principal executive and financial offices to disclose all significaant internal control deficiences to companys auditors and audit committee
  14. The Compensation committee
    • reviews & approves CEO compensation based on meeting performance goals
    • makes recommendations to board with respect to incentive & equity based compensation plans
    • attempts to align incentives with shareholder objectives & risk appetite
  15. NYSE & NASDAQ Rules
    • Have a majority of independent directors on their board
    • Determine the independence of members
    • Identify certain relationships that preclude a board member from bring independent
    • Have nonmanagement directors meet regularly scheduled executive sessions
    • Adopt and make publically available code of conduct applicable to all directors or executive officers
    • Have an independent audit committee

    A director is NOT INDEPENDENT......
    • an employee of corp or affilate in the last 5 yrs (3 yrs for NASDAQ)
    • if a family member has been an officer of corp or affilate in the last 5 yrs (3 yrs for NASDAQ)
    • a former partner or employee of corp's external auditor in the last 5 yrs (3 yrs for NASDAQ)
    • a family member in the last 3 years received more than $120k in payments from corp other than for director compensation
    • is and executive of another entity that received significant amt of revenue from corp.
  17. Internal Auditors
    • perform audit of risk management activities, internal control and other governance processes for the corporation
    • chief audit executive should report functionally to audit committee and administratively to CEO of corp
  18. wExternal auditors
    responsible for performing an audit of the corp's financial statements and internal control in accordance of PCAOB
Card Set
module 41
Monitoring Devices