Assessing Corporate Governance Risk

Weak, ineffective boards have cost investors, creditors & underwriters hundreds of billions of dollars over the past four years alone. Company Name Lost Value Parmalat 10,000,000,000 Healthsouth 12,000,000,000 Qwest 104,000,000,000 Worldcom 180,000,000,000 Adelphia 6,500,000,000 KMart 4,000,000,000 Tyco 86,000,000,000 Vivendi 56,000,000,000 Global Crossing 40,000,000,000 Conseco 62,000,000,000 Enron 80,000,000,000 Warnaco Sunbeam 2,000,000,000

Not all were spectacular failures, either Not all were spectacular failures, either. Many otherwise sound companies have experienced substantial losses. Company Name Lost Value AOL Time Warner 100,000,000,000 AT&T 13,000,000,000 Xerox 3,000,000,000 Merck 42,600,000,000 Halliburton 7,200,000,000 Johnson & Johnson 22,000,000,000 Rite-Aid 2,000,000,000 DaimlerChrysler AG 300,000,000 DPL Inc. 110,000,000

Bad Corporate Governance The Five Largest Securities Class Action Settlements Company Settlement Amount Cendant 3,527,000,000 Lucent 563,000,000 Bank of America 490,000,000 Waste Management 457,000,000 Rite Aid 259,000,000

Corporate governance is: The system of checks and balances designed to ensure that corporate managers are vigilant on behalf of long-term shareholder value. Corporate governance is not: Best practices, checklists, or compliance. Assessing the likely impact of weak, ineffective boards on investor value requires a more specific, more dynamic, more robust, and more substantive approach.

Good Corporate Governance

Bad Corporate Governance

Governance-Related Risk IPO Considerations Public investors will want a strong, effective, independent board in place to represent their interests. Public investors will expect greater levels of disclosure and transparency. Positive investor perceptions of a firm’s corporate governance can translate directly into share price premiums.

Governance-Related Risk International Considerations Controlled companies – where a single, dominant shareholder controls a majority of the shareholder voting rights – are often the rule. Understanding the local legal and regulatory environment is critical. Disclosure & overall reporting transparency will often be the most important indicators.

Uncovering Bad Governance

Uncovering Bad Governance KEY PLACES TO LOOK Ownership Structures Board Composition Executive Compensation Accounting Practices Strategic Decision-making Litigation & Regulatory Exposure

Regulatory responses Sarbanes-Oxley SEC PCAOB Exchanges 404 disclosures SEC PCAOB Exchanges Proxy vote disclosure

Market responses Wall Street analyst reports Shareholder involvement in director selection CalPERS/Putnam ISS/Glass-Lewis/Proxy Governance Moody’s downgrade

Uncovering Bad Governance WHAT TO LOOK FOR Conflicted relationships Conflicted contracts Excessive compensation Lack of transparency Power-driven strategies ACTIONS/DECISIONS, NOT POLICIES FOLLOW THE MONEY

Board Analyst Company, CEO and Director Research

Director Interlocks Research

Corporate Governance Screening Tool