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CG Disclosure, Shareholder Involvement, and International Investment Rating Perspective

CG Disclosure, Shareholder Involvement, and International Investment Rating Perspective. Dr. Amr Hassanein Chairman MERIS (Middle East Rating & Investors’ Service) June 18 th 2007. Why CGA by Rating Agencies?.

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CG Disclosure, Shareholder Involvement, and International Investment Rating Perspective

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  1. CG Disclosure, Shareholder Involvement, and International InvestmentRating Perspective Dr. Amr Hassanein Chairman MERIS (Middle East Rating & Investors’ Service) June 18th 2007

  2. Why CGA by Rating Agencies? To improve rating quality and help investors assess the credit risk of issuers and hence decide upon their investments

  3. Components of Good Corporate Governance • The board of directors. • Compensation arrangements and related practices. • Public disclosure. • The legal/regulatory structure and arrangements by which the public corporate entity exists. • Shareholder voting and other ownership prerogatives.

  4. Rating Methodology • The board of directors 1. board and committee independence; 2. apparent director quality, depth and diversity; 3. board and committee leadership; 4. general review of committee charters and processes and areas of explicit board responsibility (including stated mission and purpose); 5. board and director evaluation; director training; and director compensation and related policies, such as share ownership guidelines.

  5. Rating Methodology • Audit committee and key audit/accountability functions 1. the effectiveness of the audit committee because of its relevance for the reliability of financial reporting; 2. the audit committee charter; 3.the board’s expectations of the committee in the areas of financial accountability, risk assessment, internal controls and ethics policies and processes. • Conflicts of interest significant disclosed director and executive conflicts of interest, and how those conflicts are managed.

  6. Rating Methodology • Executive compensation and management development and evaluation 1. incentive structures of CEO and their possible impact on executive risk appetite and/or incentives that appear to pose dangers to long-term shareholder interests and creditor interests; 2. executive succession planning. • Shareholder rights

  7. Rating Methodology • Ownership 1.the presence of a majority or large minority holder of the publicly traded company, and implications this has for the governance of the corporation and for the interests of creditors. 2. the implications of director and management holdings, and executive share ownership requirements. • Governance transparency notable positive or negative

  8. Examples • Berkshire Hathaway Inc. Moody’s GSR  Aaa, Stable • Ford Motor Company Moody’s GSR  Caa1, Negative

  9. Berkshire Hathaway Inc. CG Assessment - Key Positive Attributes: • Conservative operating philosophy and financial management; • Substantial net worth of CEO in the company; • Stock ownership policies align interests of directors with long-term health of the enterprise; • Directors and officers not offered additional legal protections of D&O liability policy.

  10. Berkshire Hathaway Inc. CG Assessment - Key Areas of Concerns: • Executive succession and eventual ownership transition, which has significant implications for governance and future business strategy; • Relatively inactive board and committees, with less vigorous oversight role than at most large companies; • Low board independence compared with other large public companies; • Significant regulatory challenges, where strong board role is normally anticipated strong in shaping response.

  11. Berkshire Hathaway Inc. Key Changes Since Last CGA: • Succession planning remains key board focus. • Microsoft Chairman Bill Gates joined the board in December 2004. • General Re investigated. • Board and its committees continue to meet relatively infrequently.

  12. Berkshire Hathaway Inc. BOARD AND COMMITTEE MEMBERSHIP I=Independent NI=Non-independent C=Committee chair X=Committee member FE=Designated financial expert

  13. Ford Motor Company CG Assessment - Key Positive Attributes: • Strong oversight of internal audit and internal controls, with an appetite for ongoing self improvement; • The board’s determination to learn from prior mistakes with regards to the restructuring program; • Desire to ensure management is held accountable for executing the program successfully; • High caliber directors with good mix of skills provide balance to any concerns related to the effect on decision-making from the Ford family’s significant voting bloc

  14. Ford Motor Company CG Assessment - Key Areas of Concerns: • Dual-class stock structure resulting in disconnect between ownership and control; • Relatively low levels of board and finance committee independence, particularly for a company of Ford’s size and global stature, including relatively large number of current and former executives; • Lack of directors with executive experience in turnarounds

  15. Berkshire Hathaway Inc. Key Changes Since Last CGA: • CEO Voluntarily foregoes all new compensation. • Changes in board composition.

  16. Ford Motor Company BOARD AND COMMITTEE MEMBERSHIP I=Independent NI=Non-independent C=Committee chair X=Committee member FE=Designated financial expert

  17. THANK YOU

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