Sunil Reddy is an analyst for Worldwide Financial Services. Reddy thinks that Worldwide’s procedures for analyzing companies for inclusion in client portfolios would be more robust if it included a review of the company’s board of directors. Reddy prepares a list of five items concerning the board of directors that analysts should assess:
Item 1: Frequency of separate sessions for independent directors.
Item 2: Use of independent legal counsel as opposed to company in-house counsel.
Item 3: Composition of the nominating committee.
Item 4: Composition of the compensation committee.
Item 5: Whether the board has staggered or annual elections.
Which of the items on Reddy’s list are attributes of a board of directors that are important for an analyst to assess?
A) All five items.
B) Items 1, 3, and 5 only.
C) Items 2, 3, and 4 only.
Your answer: A was correct!
All five of the items on Reddy’s list are important factors that an analyst should review when assessing a board of directors.
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Question is on Item 4. What about the compensation committee must be assessed? I was under the impression that the entire board must be at least 75% independent and only the audit and nominating committees must be 100% independent. I saw no rules in the text regarding the compensation committee composition–only thing about compensation committee I saw is regarding their practices on compensation.
