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Good Corporate Governance Survey

Evaluation criteria of what makes good corporate governance.
by

Stephanie E

on 23 April 2011

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Transcript of Good Corporate Governance Survey

Board Profile Scoring Criteria Encana Nexen 1 1 1 1 1 1 Specific Industry Experience Finance Human Resources Law Accounting/Business Marketing 4.5/6 4/6 Diversifying the Board Evaluating Board Compensation Package Shareholder Voting Rights CEO Succession Plan Corporate Social Audit Committee Whistle Blowing Shareholder Activism Risk Oversight Scoring Criteria Encana Nexen 0 1 1 No female resides on the board Less than three females reside on the board Three or more females reside on the board 1/2 2/2 Good Corporate Governance Survey Rebu George Brad Martens James Morningstar Stephanie Evans v.s. KEY ISSUES TO GOOD CORPORATE GOVERNANCE Scoring Criteria Encana Nexen 0 1 1 1 No visible disclosure of board performance evaluation Mention of an annual board performance evaluation Formal and transparent process easily accessible to the public Third party role assessment of board. (e.g. Psychologist) 3/3 2/3 Performance Shareholders have the right to vote on a variety of issues, including but not limited to the election of the board of directors.

For the election of directors, firms have a choice between plurality, slate, and majority voting systems.

Additionally, firms can offer cumulative voting rights which give minority shareholders a stronger voting power. Scoring Criteria Encana Nexen 0 1 2 1 Plurality voting system Slate voting system Majority voting system Cumulative voting rights 1.5/3 1.5/3 In the past compensation practices have been based primarily on financial performances, such as return on equity or net income.

The shortfall of focusing on financial measures is accounting is generally backwards looking and reflects other factors that are out of management's control.

Non-financial measures are more future-oriented.

An emerging best practice is a mix of both financial and non-financial measures to create executive compensation packages. Scoring Criteria Encana Nexen 0 1 1 Use of only financial measures Use of at least one non-financial measure Use of more than one non-financial measure 2/2 2/2 In the event of a sudden CEO retirement, illness, or termination, the company should have a CEO succession plan.

The contigency plan will allow the firm to maintain the continuity of business operations and allow for the smooth transition to a new CEO.

A smooth transition is important to maintain the confidence of current a future investors. Scoring Criteria Encana Nexen 0 1 1 CEO succession plan either does not exist or cannot be located CEO succession plan exists Disclosure of a well detailed succession plan is available to public 0/2 1/2 Practicing good CSR can lead to increased innovation, productivity, and competiveness. Therefore increasing process efficiencies, access to capital, and reputation.

International Organization for Standardization (ISO) released ISO SR26000 as recommended guidelines for social responsibility. Scoring Criteria Encana Nexen 0 1 1 No disclosure of CSR activities, principles, or practices Disclosure of CSR activities, principles, or practices CSR activities, principles, or practices are clearly evident 2/2 2/2 A member with a sufficient designation is more qualified to sit on the audit committee than a member who is only financially literate.

A designation provides a thorough education and understanding on accounting and finance.

A sufficient designation includes, but not limited to, Chartered Accountant, Certified General Accountant, Certified Managerial Accountant, and Chartered Financial Analyst. Scoring Criteria Encana Nexen 0 1 1 No member has a nationally recognized designation (e.g. CA or MBA) At least one member has a nationally recognized designation (e.g. CA or MBA) More than one member has a nationally recognized designation (e.g. CA or MBA) 2/2 2/2 A whistle blowing program encourages employees to come forth with misconduct without fear of reprimand.

In Canada, implementing a whistle blowing policy that protects employees is considered a best practice to corporate governance. Scoring Criteria Encana Nexen 0 1 No visible whistle blowing policy exists Visible whistle blowing policy exists 1/1 1/1 Shareholder activism is the a public dispute between the firm and the shareholders.

If left unresolved, there may be a negative impact, such as a proxy fight, that could tarnish the reputation of the firm.

Often, these public disagreements are due to a lack of communication between the board and the shareholders. Scoring Criteria Encana Nexen 0 1 The firm ignored a case of shareholder activism The firm was a target for shareholder activism; but the board took action that satisfied both the shareholder and the board The firm has never been a target for shareholder activism Scoring Criteria Encana Nexen 0 1 1 1 1 Risk oversight is not addressed Risk committee or a sufficient risk oversight management system in place At least 4 meetings annually for discussion of risk oversight More than 4 meetings annually for discussion of risk oversight Clearly defined mandate/charter of roles and responsibilities 0/4 3/4 Responsibility 2 1/2 2/2 Diversification of board members’ experience and educational backgrounds allows the board to make decisions from a variety of differing perspectives.

Necessary functional expertise include finance, human resources, law, accounting/business, marketing, and specific industry experience. Maximum score is 6, and minimum score is 0. If the firm is missing the expertise in any one category, the firm will receive a score of 0 for that category.

If the board of directors has at least one member with expertise and experience in the specific industry, the firm will receive a score of 1.

For each other category, if the board of directors has at least one member with expertise in each particular area, the firm will receive a score of 0.5. If the member has a sufficient designation or degree (e.g. MBA) for that particular area, the firm will receive a score of 1. Maximum score is 2, and minimum score is 0. If there are no female board members, the firm will receive a score of 0.

If the firm has less than three (therefore one or two) female board members, the firm will receive a score of 1.

If the firm has three or more female board members, the firm will receive a score of 2 (1 for less than three and 1 for three or more).
Maximum score is 2, and minimum score is 0. If the firm uses only financial measures in the CEO compensation package, or does not disclose the breakdown of the compensation package, the firm will receive a score of 0.

If the firm uses at least one non-financial measure in the CEO compensation package, the firm will receive a score of 1.

If the firm uses more than one non-financial measure in the CEO compensation package, the firm will receive a score of 2 (1 point for at least one and 1 point for more than one).
Maximum score is 3, and minimum score is 0. If the firm does not disclose of an annual evaluation of its board members, the firm will receive a score of 0.

If the firm mentions that there is annual evaluation of its board members, the firm will receive a score of 1.

If the firm provides a higher level of disclosure on the process in which it annually evaluates its board members, the firm will receive a score of 2 (1 point for mentioning, and 1 point for full disclosure).

If the firm uses a third party to help assess the effectiveness of each individual board member (e.g. psychologist), the firm will receive an additional score of 1 more point. Maximum score is 3, and minimum score is 0. If the firm operates shareholder voting under a plurality system, the firm will receive a score of 0.

If the firm operates shareholder voting under a slate system, the firm will receive a score of 1.

If the firm operates shareholder voting under a majority system, the firm will receive a score of 2.

If the firm also offers a cumulative voting rights, the firm will receive an additional score of 1. Maximum score is 2, and minimum score is 0. If the firm does not disclose of an existing CEO succession plan, the firm will receive a score of 0.

If the firm discloses that a CEO succession plan does exist, the firm will receive a score of 1.

If the firm discloses a detailed CEO succession plan to the public, the firm will receive a score of 2 (1 point of existence, 1 point for details).
Maximum score is 2, and minimum score is 0. If the firm does not disclose of any activities, principles, or practices that promote sustainable development and the triple bottom line, the firm will receive a score of 0.

If the firm discloses activities, principles, or practices that promote sustainable development and the triple bottom line, but the firm’s CSR efforts are not clearly evident, the firm will receive a score 1.

If the firm discloses activities, principles, or practices that promote sustainable development and the triple bottom line, and the firm’s CSR efforts are clearly evident, the firm will receive a score 2 (1 point for disclosure and 1 point for evidence). Maximum score is 2, and minimum score is 0. If the audit committee has financially literate members, but none of those members have a sufficient designation, the firm will receive a score of 0.

If the audit committee has financially literate members, and at least one of those members has a sufficient designation, the firm will receive a score of 1.

If the audit committee has financially literate members, and more than one of those members have a sufficient designation, the firm will receive a score of 2 (1 point for at least one and 1 point for more than one).
Maximum score is 1, and minimum score is 0. If the firm’s audit committee does not maintain a whistle blowing policy, the firm will receive a score of 0.

If the firm’s audit committee maintains a whistle blowing policy, the firm will receive a score of 1.
Maximum score is 2, and the minimum is 0. If the firm has no record of shareholder activism being taken against their firm, the firm will receive a score of 2.

If a firm had a case of shareholder activism but effectively resolved any concerns, the firm will receive a score of 1.

If the firm had case of shareholder activism in which there were no actions taken to resolve the concerns, the firm will receive a score of 0. Maximum score is 4, and minimum score is 0. If the firm does not address the risks subjected to the firm, the firm will receive a score of 0.

If there is adequate disclosure of appropriate risk management, whether in the form of a risk committee/subcommittee or a sufficient risk oversight system, the firm will receive a score of 1.

If the firm’s risk management system or risk committee meet at a minimum of four times a year to discuss relevant risks associated with the firm, the firm will receive a score of 1.

If the firm’s risk management system or risk committee meet above the minimum of four times a year to discuss relevant risks associated with the firm, the firm will receive a score of 2 (1 point for at least four per year, and 1 point for more than four per year).

If the firm discloses to the public an easily accessible mandate for the risk committee (or sufficient risk management system) that clearly defines the responsibilities and roles of the risk oversight, the firm will receive an additional score of 1.
WEAKNESSES & RECOMMENDATIONS Component Encana Nexen Board Profile Diversifying the Board Evaluating Board Performance Compensation Package Shareholder Voting Rights CEO Succession Plan Corporate Social Responsibility Audit Committee Whistle Blowing Shareholder Activism Risk Oversight 4/6 2/2 2/3 2/2 1.5/3 1/2 2/2 2/2 1/1 2/2 3/4 4.5/6 1/2 3/3 2/2 1.5/3 0/2 2/2 2/2 1/1 1/2 0/4 TOTAL _______ (%) 22.5/29 (78%) _______ 18/29 (62%) Whistle Blowing Policy Diversify the Board Risk Committee Diversification can bring more insights to the board which provides the company access to additional perspectives.

Having female board members has been proven to increase the bottom line. 1 1 0 1 0 1 1 1 0 1 0.5 1 Board members are elected on the board based on their competencies and abilities to fill the roles that are vital to a high-performing board. To determine which roles are missing or which roles are not being adequately utilized, the board must be evaluated on a frequent basis.
Generally, the evaulation process involves self-assessment and a review with the nomination committee.
An emerging best practice is to have an external third party, such as a psychologist, independently review each member's performance. - 1 1 0 0 1 1 1 - 1 1 - 1 0 - 1 0 0 0 0 0 1 1 0 1 1 - 1.5 - 0 - 1.5 - 0 - 1 - 1 - - 2 - 1 - - 1 1 - 1 1 - 1 1 - 1 1 Encana's board of 11 members should be more diversified in gender and age.
Only 3 women currently sit on the board when there should be 5-6 women.
The age range of the board sits between 50-69. Encana may benefit from a younger board member's perspective. ? QUESTIONS
Risk committee or a sufficient risk oversight management system in place 0 1 1 1 0 0 0 0 0 0 Allow the public access to a well detailed whistle blowing policy.

Review the policy annually. Encana should implement a risk committee

Natural Gas is a considerally risky business, especially concerning envirnonment A risk committee or subcommittee is a good way to sufficiently bring risk oversight issues to the board.

Risk oversight should be assessed periodically. Quarterly at a minimum.

Adequate risk oversight adds to good corporate governance as it reduces the risks of potential future events by keeping the board aware of relevant risks.
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