At a time when corporate malfeasance is high on the public radar, it is important to understand corporate structure and how the checks and balances within a public company operate. GMI, a corporate governance and accounting research firm, provided 24/7 Wall St. a list of 30 companies with the worst corporate boards. GMI rated the boards based on the firm’s own proprietary ratings of measures such as board attendance, related party transactions, and the number of independent board members.
24/7 Wall St. screened the GMI list in two ways. In our first article published in May, we looked mainly at companies where a single shareholder holds control of the company, as is the case with Facebook. In this article we concentrated on companies that have a market cap greater than $10 billion.
According to best practices in corporate governance, the board of directors and management shouldn’t be so closely aligned. If they are too close, the board can’t adequately perform its role as an independent supervisor over management. The breakdown or the absence of this kind of system was highlighted recently in the case of JPMorgan’s huge trading loss.
As part of its board, JP Morgan (NYSE: JPM) has a Risk Policy Committee that is “responsible for oversight of the CEO’s and senior management’s responsibilities to assess and manage the corporation’s credit risk, market risk, interest rate risk, investment risk, liquidity risk and reputational risk, and is also responsible for review of the corporation’s fiduciary and asset management activities.” Where was this committee when the bank was engaged in a trade that lost billions of dollars? The answer is the it did not fulfill its fiduciary obligation
At Chesapeake Energy (NYSE: CHK) it has been alleged that founder, CEO and Chairman Aubrey McClendon took advantage of the company by making personal investments in the Chesapeake wells. Part of Chesapeake’s Nominating and Corporate Governance Committee job is to monitor violations of the company’s Code of Business Conduct and Ethics. Where was the committee before the SEC stepped in to evaluate McClendon’s actions? It was not acting in a way that benefits the company’s thousands of shareholders who lost money as the scandal over the McClendon financial violations spread
When analyzing GMI’s worst boards list, 24/7 Wall St. took a detailed look at the number of independent directors compared to the number of board members as well as the interconnectedness among board members. Another factor we looked at was whether the CEO was also the chairman. A board entrenched with company insiders may not have as strong oversight of management as a fully independent board might. And on a board where a number of family members serve both on the board and in management objective oversight is at risk.
Finally, we looked at how long board members have served. Members who have been on a board for well over a decade — particularly boards with several such members — may be too close to management to execute their fiduciary responsibilities.
Based on these factors, here are the nine worst corporate boards in America.