Tag Archives | board of directors

Audit Committee

An audit committee is a subcommittee of a public company’s Board of Directors. Furthermore, a Board of Directors can have several subcommittees. The committee focuses on corporate governance, specifically, the company’s internal controls and financial accounting systems.

Audit Committee Membership

A company’s committee typically includes a number of outside directors, or non-executive directors. In addition, a committee prefers individuals with financial accounting expertise.

Audit Committee Purpose

This committee has several responsibilities as well as purposes. For example, it is responsible for overseeing the company’s financial reporting. In addition, it is responsible for financial accounting policies and procedures. The duties also include the following:

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See Also:
How to Control Annual Audit Fees
Managed Sales and Use Tax Audit Programs
Double Entry Bookkeeping
Direct Method Allocation
Company Life Cycle

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General Counsel on the Board

See Also:
Ten In-House Secrets for Reducing Your Company’s Legal Costs
Red Herring
Board of Directors
Benefits of an Advisory Board
How to Form an Advisory Board

General Counsel on the Board

It was once far more common for Boards of Directors to include a lawyer who doubled as general counsel. Some boards still engage their attorney board members as legal consultants. The general counsel is especially busy before board meetings. They are reviewing the agenda to determine whether it involves legal issues or requires adoption of formal resolutions. Most important, perhaps, is the general counsel’s role in making sure that the board meets its fiduciary responsibilities.

In this article, we will briefly look at the question of the general counsel’s place at the boardroom table.

How Involved Should the General Counsel be During Board Meetings?

Unless the general counsel is actually a board member, they have to remember that their presence at board meetings is as staff to the board. Sometimes, the general counsel doesn’t remember this. Then they start engaging in debate on policy aspects as opposed to the legal implications of a given move. It is important for anybody in a board meeting to remember his or her own role.

General counsel can attend board meetings, but they should play a relatively passive role. General counsel on the board is there to observe and to flag issues if they arise. Attending the board meetings helps the general counsel to get a sense of the personalities on the board, the board’s tolerance for risk, and whether it likes to act conservatively or aggressively. Part of the general counsel’s job is to evaluate risks for the organization and help shape its response. General counsel is there to make sure that the board avoids legal problems.

Some boards want nothing more from their lawyer than to answer the questions they may pose and a strict review of legal options. The general counsel’s role at board meetings really depends in part on the management philosophy of the organization.


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Where Should a General Counsel0l Draw the Line Between Speaking Up and Staying Quiet at a Board Meeting?

Lawyers and legal issues shouldn’t dominate the decision-making process. The general counsel attends the board meetings to primarily comment on legal issues, and on other issues when requested. Once the general counsel tells the board the advantages and disadvantages, risks and alternatives, and the appropriate legal process to follow regarding a particular issue, then it’s up to the board to pick which way to address the problem in a way that makes the most sense from a business perspective.

In addition, a lawyer who is not a director should not give an opinion on policy unless asked specifically.

What Happens When a Conflict Arises Between General Counsel on the Board and the CEO to Whom the General Counsel Reports?

If there’s something going on that is illegal or clearly not in the best interest of the corporation, and the CEO isn’t reporting it to the board, then general counsel on the board has an obligation to discuss the issue with the board, usually through the chairman of the board. However, it is not the responsibility of legal counsel to go over the CEO’s head and report to the board just because the attorney may disagree with a business judgment the CEO has made. A general counsel must be able to make the distinction between when something is a business decision – such as how much you pay for a service – and when it is a legal issue – such as when you are paying so much it could be considered a kickback.

One other important thing is for the board members to know whether the general counsel is free to raise issues with the board chairman when he or she thinks that the interest of the corporation requires such. The board needs to have the comfort of knowing that the general counsel has ultimate responsibility to the board. This is much like their relationship with the auditors of the company.

Manage Your General Counsel on the Board

The general counsel, if well utilized, should be working with senior management and the board chairman to come up with continuing education for the board on legal issues affecting the company.

TIPS ON HOW TO MANAGE YOUR LAWYER

Your company must disclose to your outside lawyer its communications needs upfront!

For its part, your organization must be prepared to fully brief outside counsel when referring a matter to them. The company must brief the outside lawyer responsible for the matter on what the matter means to the corporation in a business context. Then they must outline the terms of reference for a meaningful communications linkage between the corporation and outside counsel. In other words, fully apprise the outside law firm of the corporation’s information expectations on a particular matter.

If the business manager responsible for the matter wants to be kept abreast of all developments in a matter on a real time basis, then the law firm needs to know this at the point of the initiation of the engagement… Instead of several months later or after complaints by the business manager. In many instances, a company is reluctant to convey this to outside counsel when initiating the engagement. The primary reason for this is because of the cost implications. A high service communications program between outside counsel and its client costs money to implement and administer. But, the costs are invariably incurred, perhaps even at a higher level than might otherwise be the case. This is especially true when the law firm is forced to scramble to respond to ongoing complaints or requests for updates.

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Dividends

See Also:
Dividend Yield
Capital Impairment Rule
Dividend Payout Ratio
Financial Ratios

Dividends Explained

Dividends are corporate profits distributed to shareholders. When a company makes a profit, the board of directors can decide whether to reinvest the profits in the company or to pay out a portion of the profits to shareholders as a dividend on shares. The board of directors determines the amount of the dividend on stocks, as well as the dividend payout dates.

Stockholders typically receive a certain amount of dividends per share for each share of stock they own. Tax rates on dividends, historically, have often differed from tax rates on capital gains from investments. If the dividend tax rate exceeds the capital gains tax rate, it may benefit the shareholders to avoid paying a dividend, and instead to carry out a stock repurchase.

Dividend Yield Definition

We define dividend yield as the dividend amount expressed as a percent of the current stock price. For example, if a stock will pay a $1 dividend at the end of this year, and today the stock price is $10, then that stock’s dividend yield is 10%.

10% = 1/10

Dividend yield equation

Dividend Yield = D1 / P0

D1 = Annual dividend per share amount (the dividend per share at time period one)
P0 = Current stock price (the price at time period zero)

Dividend Date Definitions

The process of distributing dividends to shareholders follows a set schedule. The board of directors announces the dividend on the dividend declaration date. Once the dividend has been declared, the company is legally obligated to pay the stated dividend to shareholders.

The next significant date is the ex dividend date. Investors who purchase the stock on or after the ex-dividend date will not receive the forthcoming dividend. Prior to the ex dividend date, the stock is considered cum dividend, or with dividend. This means that anyone buying the stock during this period will receive the forthcoming dividend.

The ex dividend day precedes the dividend record date, or the dividend date of record, by three days. Shareholders documented as owning the stock on the dividend record date will receive the dividend.

Last is the dividend payable date, or the dividend distribution date. This is the actual date on which the company pays out the dividends to its shareholders. The dividend payable date is typically about a month after the dividend date of record.

Dividend Payout Dates

• Dividend Declaration Date (stock is trading cum dividend)
• Ex-Dividend Date
• Dividend Record Date (three days after the ex-dividend date)
Payable Date for Dividend (one month after the dividend record date)

Dividend Signaling

Dividend signaling hypothesis refers to the idea that changes in a company’s dividend policy reflect management’s perceptions of the company’s future earnings outlook. Basically, it states that a change in a company’s dividend policy can be interpreted as a signal regarding future earnings. The problem is that a company can interpret the signals as contradictory messages.

Dividend Example

For example, if a company announces that it will increase its dividend yield, investors may interpret this as a positive signal. It could mean the company anticipates a profitable future and is allowing shareholders to benefit from these profits.

On the other hand, one can interpret an increase in the dividend payout rate as a negative signal. It could mean that the company has no good investment opportunities, and it has nothing better to do with its cash than to pay it out to shareholders as dividends.

Similarly, if a company announces that it will decrease its dividend payout rate, this can be interpreted as either a positive or negative signal. It could be interpreted as a positive signal because it could mean that the company has so many good investment opportunities that it needs all available cash for positive-NPV investments and projects. This could mean the company is growing and expanding.

On the other hand, if a company cuts its dividend rate, that could mean that the company anticipates lower earnings or even losses. This, of course, could be a bad sign. So as you can see, the logic behind the dividend signaling hypothesis makes sense, but because it can be interpreted in contradictory ways, the reading of the signals is not necessarily very meaningful.

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Common Stock Definition

See Also:
Intrinsic Value – Stock Options
Company Valuation
Basis Definition
Balance Sheet
Paid in Capital (APIC)
Capital Gains
American Depositary Receipts (ADRs)

Common Stock Definition

The common stock definition is shares of common stock represent ownership of a public or private corporation. Shares of common stock usually give the shareholder voting rights. Therefore, the shareholder can vote on matters of corporate policy and the selection of members of the board of directors. The more shares an investor owns, then the more influence that investor has on the company.

Shares of common stock typically trade on financial exchanges. Thus, their values fluctuate according to the company’s performance and the market’s perceptions of the company.

But if a company goes out of business and liquidates its assets, then the last ones to get their invested capital back are the common stockholders. Bondholders and preferred stock holders are reimbursed before common stockholders.

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C Corporation

See Also:
S Corporation
Limited Liability Limited Partnership (LLLP)
Cooperative (co-op)
Limited Liability Company (LLC)
Sole Proprietorship
S Corporation vs C Corporation
Conglomerate Definition

C Corporation Definition

The C Corporation definition (C-corp) is a form of business which is owned by several C-corp shareholders or holders of stock within the company. Many larger businesses adopt this model so that they can receive the large amount of financing needed to grow the company further.

C Corporation Explained

A C-corp is formed when a group puts together articles of incorporation and files these with a state. Some states carry more benefits, like Delaware, making it more appealing to set the corporation up through that state. Once articles of incorporation have been filed with the state then the C corporation receives its status as an official corporation when it gets a certificate approving the articles. The company can then issue shares to the general public after all financials are in compliance with GAAP. C corporations are the only type of entity stock exchanges list.

C corporation advantages include limited liability for management running the company. However, management is liable to answer to a Board of Directors who are responsible for ensuring that the company is acting in the best interest of shareholders. This means that a C-corp’s number one goal is to maximize shareholder wealth.

C corporation disadvantages are that the entity can receive double taxes. C-corp double taxation occurs when a company is taxed as a legal stand alone entity. Then the second tax comes if the C-corp issues dividends to its shareholders. Despite this disadvantage the C-corp is one of the most common business forms for larger companies.

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What is a Board of Directors?

See Also:
Ten In-House Secrets for Reducing Your Company’s Legal Costs
Red Herring
Benefits of an Advisory Board
How to Form an Advisory Board
Advisory Board Best Practices

What is a Board of Directors?

The board of directors is an essential part of business, what is a board of directors? The board of directors is a corporation’s governing body. Furthermore, it consists of a group of individuals elected by shareholders. The board of directors are also responsible for setting company policy and overseeing the company’s managers.

A major theme of corporate governance is the separation of ownership and control. The shareholders own the company, but the managers control the operations. The board of directors is expected to try to align the interests of shareholders and managers. Furthermore, they need to always act in the best interest of the company.

All publicly owned companies must have a board of directors. Many private companies also have a board of directors. Boards typically meet several times a year. Furthermore, compensate board members for their services. Consider members of the board insiders, for stock trading purposes. A board often includes the following

  • Inside directors
  • Outside directors
  • A chairperson

Inside Director vs. Outside Director

There are two types of directors on a board: inside directors and outside directors. Inside directors are members of the board and executives at the company, such as the chief executive officer (CEO). They have a dual role, serving as members of the governing body and working as managers at the company.

In comparison, outside directors are not executives at the company. They are independent individuals selected for their experience and expertise in the relevant industry or sector. Furthermore, outside directors serve only one role – they are not company managers – and are thus considered the more objective members of the board. The chairperson can be an inside director or an outside director.

Board of Director Responsibility

The board of directors has many responsibilities that include the following:

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Benefits of Advisory Boards

Advisory Board Definition

The definition of an advisory board is a group of business executives who meet on a consistent basis to provide leadership, support and constructive feedback to the executive leadership of a company. Furthermore, an advisory board’s purpose is to assist you in leading your company. But unlike a traditional board of directors which represents the interest of a company’s shareholders and to whom the President or CEO reports, an advisory board exists as an advocate, supporter, and resource for the President or CEO.

Benefits of Advisory Boards

The benefits of creating an advisory board include the diversity of opinion and experience it can bring to facilitate an improvement in the leadership of a company. These qualities are not typically present in the traditional board of directors. Advisory board benefits also include the following:

Tips on Advisory Boards

As the leader of an organization, it is important to understand the advisory boards’ roles and responsibilities. In addition, understand what your expectations are of an advisory board. For example, it may be to consider establishing a relationship with a company that would be considered synergistic with your company. It may be to identify a source that can provide an outside perspective on the industry that you do not have in your company. Also it can be to have someone who can provide technical knowledge that you do not have in your company. It is important to be clear on what your expectations are from an advisory board.

Advisory boards offer you the opportunity to engage with a group of experienced professionals regarding the issues facing your company on a routine basis. It also gets their perspective on the performance and outlook for your company and its industry, at a nominal cost.

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See Also:
Ten In-House Secrets for Reducing Your Company’s Legal Costs
General Counsel on the Board
Red Herring
How to Form an Advisory Board
Advisory Board Best Practices

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