Learning about a company isn’t really complete without learning about corporate governance. And this is important because you don’t want to invest in stocks with shaky records in terms of corporate governance.
First, let’s answer the question:
What is Corporate Governance?
Corporate governance refers to the policies within a firm that articulates the relationships and responsibilities between the management, stakeholders, and directors.
You can find these policies in the company’s charter and bylaws, along with a bunch of corporate laws and regulations.
The Purpose of Corporate Governance
Basically, the main reason why corporate governance is important is because there should be enough checks and balances in place, making it difficult or impossible for anyone to commit illegal or unethical activities.
Here are some of the best ways to get a feel of a company’s corporate governance.
Financial Information and Transparency
Financial information and transparency has something to do with the qualities and timeliness of the company’s disclosures and operational events.
Sufficient transparency tells us that a company’s financial releases are written in a manner that the stake holders can understand what the management is trying to do. As such, the stake holder will have a clear and good grasp of a company’s present financial situation.
Stake Holders’ Rights
This section of corporate governance has something to do with the study of the extent the company’s policies provide benefits to the stake holders’ interests.
After all, being owners of a company gives the stake holders access to the board of directors if they have concerns or if they want to raise questions and address something.
A company with good governance provides shareholders a certain amount of ownership voting rights to call meetings to discuss pressing issues with the board.
In addition, another area for good governance when it comes to ownership rights is whether or not a company has large amounts of takeover defenses or other measures that make it difficult for changes in management, directors, and ownership to take place.
The Structure of the Board of Directors
First off: what is the board of directors?
The board of directors consists of representatives from the company and representatives from outside the company. The combination of inside and outside directors is a move to offer an independent assessment of the management’s performance, ensuring that the interests of the shareholders are represented.
Your keyword when it comes to analyzing the board of directors is independence. Here are important things to note:
The board of directors is responsible for protecting shareholders’ interests
They have to ensure that the upper management of the company is also protecting the rights of the shareholders.
The board of directors can hire or fire that members of the board on behalf of the shareholders
A board that consists of insiders will usually not serve as objective critics of the management and will defend their actions as good and beneficial, usually without regards to the circumstances.
Since board is a very important part of a company, the information about them can be found in the DEF 14A proxy statement.