CORPORATE GOVERNANCE IN PRACTICE Aswath Damodaran 1

2 The key questions in corporate governance at public companies Aswath Damodaran 2  Who runs this company?  Top management (CEO, CFO etc)  Pathways to the top  Who monitors these managers?  Board of Directors  Regulatory Authorities/ Government  Equity investors/ analysts  Bondholders/Banks/ Lenders/ Ratings Agencies  What are the rules of the game?  Is it rigged in favor of the incumbent managers?  Are there inside stockholders who have more power than you do?

3 Start with the company’s own reports Aswath Damodaran 3  Annual Reports  Information about board of directors  Mission statement  Corporate governance principles/ statement  Filings with regulatory authorities  With US companies, SEC filing DEF14A should contain information relevant to your search.  With non-US companies, there may or may not be an equivalent filing with the local regulatory authorities.

4 Assessing the board  Board composition  Age & Tenure (How old and how long on board)  Background (Expertise in the business)  Connections to company & CEO  Board operations  Who chairs the board?  How often does the board meet?  How good is the attendance?  Is there any evidence that the board operates as a check or at least a monitor of top management? Aswath Damodaran 4

5 Investor/Analyst Activity  Buy Side  Who are the “biggest” stockholders in the firm  What is their history on corporate governance?  Sell side  Who are the analysts that track the firm?  What are their views on the stock?  Activist  Are there any activist investors in the mix?  How “activist” are they? Aswath Damodaran 5

6 Rules of the game  How is the voting structure set up?  Multiple classes, with different voting rights?  Golden shares? (or veto votes)  Corporate Charter  Takeover clauses (anti takeover amendments etc.)  Voting rules (Proxies, voting at meetings)  Nominating rules (on directors) Aswath Damodaran 6