How to research corporate governance issues

Information Outlook, Jan, 2005 by Denise Chochrek

For the past couple of years the term "corporate governance" has been whispered reverently in the hallways. This topic has reached out and touched almost every public company. With the scandals at Enron and several other large companies, new regulations come out weekly. So what is corporate governance and how does this subject affect the information professional?

Corporate governance refers to the procedures in place to ensure that a public company is accountable to its shareholders. This includes independent directors, a clear succession plan for the leaders of a company, and financial accountability. A company that ignores corporate governance risks litigation, diminished reputation, and shareholder movements aimed at the company's board of directors.

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Corporate governance has been of interest for a number of years but it was not until Congress passed the Sarbanes-Oxley Act of 2002 that it became critical. This law instructed companies and stock exchanges that corporate governance had to be taken seriously or there would be serious repercussions. As a result, the Securities and Exchange Commission (SEC) and many exchanges, such as the New York Stock Exchange, created a set of rules for companies to follow. You can go to any of the Exchange sites and listed under either corporate governance or the Sarbanes-Oxley Act you will find those guidelines.

So how do you help your company stay on top, or how do you find out if your competitors are keeping up with their corporate social responsibility?

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First, you need to be familiar with your directors. All public companies are required to have a board of directors. The board of directors works on strategic planning and makes sure the company is holding toits financial targets. The size of the board can vary. It is composed of individuals who are employed with the company, such as the CEO, and others who are not on the staff. This latter group is called independent directors. One of the most important aspects of corporate governance is ensuring that there are a fair number of independent directors overseeing the company.

What to Look for

A list of directors can be found in an SEC filing known as a proxy or 14A. You can use the free www.sec.gov or there are a number of fee-based SEC databases, such as Thompson and 10KWizard. If you are using an SEC database, you will find that the proxy is listed as either a Pre14A or a Def14A. The Pre14A is a preliminary proxy. This document often is incomplete. The names of the directors may be there, but their compensation may not. The Def14A is the final document and is the best one to use for your research.

The proxy should be your first step in learning about the board of directors. It contains:

* Names, company they are affiliated with, when they became directors

* Other companies on whose boards they are serving as a board member

* Employment history, organizations, biographical information

* Which committees they serve on

* Compensation and stock options

This material is provided by the directors themselves and presents a great starting place for your research. If you are trying to determine if a director is truly independent, the proxy will not be your last stop. From there you would head to news databases, such as Nexis or Factiva, and conduct a search on the individual.

Remember to use variations on name searches. The proxy may list a person as "William" but news articles might refer to him as "Bill." If the name is very common you may have to connect it with the companies he or she works for. It is much easier to search for "Dimitri Vendolovic" than "John Smith." When researching directors, you are looking for either bad press that might reflect on your company or the style of directing, perhaps demonstrated with another board. You are also searching for connections between the director and other directors or officers of the company.

I once researched a company that appeared from the proxy to have four independent directors out of seven. According to the proxy they all worked for different companies. None of the companies were subcontractors of the company they were serving. When I researched farther back, I found that three of them used to work for the same company during the same time period. Their proxy information did not go back that far. The fourth one had a son who was married to the daughter of the CEO of the company. These are not good examples of independent directors. If your company is looking into corporate governance, these relationships would need to be investigated. I was able to find all this information by searching for the individuals in news databases.

What About Committees?

When reading the proxy, it is also important to notice the committees.

* How many committees are there, and who are on each of the committees?

* The audit committee should be mostly independent. Is it?

* How often to the committees meet?

* Do the committees have any visible effect on the company?

* Is the audit committee charter easily available?