Corporate Governance

the system of checks and balances designed to ensure that corporate managers are just as vigilant on behalf of long-term shareholder value as they would be if it was their own money at risk. It is also the process whereby shareholders-the actual owners of any publicly tradedfirm-assert their ownership rights, through an elected board of directors and the CEO and other officers and managers they appoint and oversee. In the heels of corporate scandals including the Enron debacle in 2002, a series of sweeping changes are being sought, such as forcing boards to have a majority of independent directors, granting audit committees power to hire and fire accountants, banning sweetheart loans to officers and directors, and requiring shareholder's approval for stock option plans. More specifically, the following principles stitute good governance:

1. To avoid conflicts of interest, a company's board of directors should include a substantial majority of independent directors-independent meaning that directors don't have financial or close personal ties to the company or its executives.
2. A company's audit, nominating, and compensation committees should consist entirely of independent directors.
3. A board should obtain shareholder approval for any actions that could significantly affect the relationship between the board and shareholders, including the adoption of anti-takeover measures such as "poison pills."
4. Companies should base executive compensation plans on pay for performance and should provide full disclosure of these plans.
5. To avoid abuse in the use of stock options (and executive perquisites), all employee stock option plans should be submitted to shareholders for approval.

Institutional Shareholder Services, Inc. (http://www.issproxy.com/), an influential proxy advisor, started scoring companies on governance issues.