Controlling CEO Behavior: Analyst’s Toolkit

by David MacDougall, for The Street, March 10, 2010.

BOSTON (The Street) — Investors and company management have an inherently strained relationship.

Management is supposed to be shareholders’ proxy, acting on their behalf to guide the company to success. Yet it’s often in management’s interest to take risks that are incongruent with its main responsibility. Because of this problem, it’s important for companies to follow strong corporate-governance practices to protect shareholders and keep management in line.

Studies have shown that superior investment gains are correlated with strict corporate governance. Practices such as independent board control, separation of the chairman and chief executive officer positions and appropriate compensation packages are important to align management and shareholders.

Many companies have the most obvious parts of good corporate governance under control, thanks, in part, to regulations from stock-market exchanges and other governing bodies. Ideally, about 75% of board members should be independent, meaning they’re not connected to management in any way. That could lead to unsavory quid-pro-quo behavior.

The audit, compensation and nominating committees should comprise only independent members. These committees are vital because they monitor the company’s financial reporting, set compensation levels and elect board members.

Apple (AAPL), General Electric (GE) and ExxonMobil (XOM) have these practices under control, but they violate another important rule…(continue reading)

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