MCBRIDE FINANCIAL SERVICES

McBride Financial Services

McBride Financial Services

Question a

The recent implosions of large public corporations like Enron? WorldCom? and others have resulted in a re-examination of the role of the board of directors in corporate governance. A board is obligated to make informed decisions and to monitor and oversee management (ABA? August 2001? p. 1578). When a board abdicates these responsibilities? it creates the conditions that breed management overreaching and disregard for whether conduct is ethical and within the bounds of the law. One of the precipitating factors in these corporate scandals was the existence of a CEO-centric corporate culture in which the board of directors ceded authority to the chief executive officer and essentially rubber-stamped his decisions. (See Ide? 2003? p. 839; Breeden? August 2003? p. 1). In reaction to these corporate failures? the government? regulatory agencies? self-regulatory organizations? and investors called for governance reforms. At the heart of corporate governance reform is supplanting the CEO-centric system? characterized by a passive board? with a system of checks and balances wherein the CEO and an empowered? independent board collaborate to protect shareholder interests and increase shareholder value. This paper recommends board restructuring based on the best practices contained in proposed and enacted reforms? examines board and committee responsibility in the context of the restructured board? and suggests assessment procedures to evaluate board progress in instituting corporate governance reforms. However? the final arbiter of the suitability and extent of implementation of the recommended reforms is the board? taking into consideration the unique culture of and issues confronting its corporation.

Question b

McBride fall prey to CEO-centric corporate culture if Hugh does not accept the solution proposed by us. Restructuring the corporate board of McBride is one component in the evolving corporate governance reform process. Congress has imposed specific reforms on publicly traded companies by enacting the Sarbanes-Oxley Act of 2002. The Securities and Exchange Commission has approved changes to the listing standards of the self-regulatory organizations ("SRO") to address corporate governance reform. Institutional investors are becoming more vocal in insisting on corporate accountability and on adoption of core corporate governance guidelines that establish board independence. An important focus of corporate governance restructuring is board composition. Typically? the boards of large public corporations have between eight and sixteen directors (The Business Roundtable? September 1997? [section] III? p. 10).

Question c

In the analysis of firm-level ratings? we find some evidence that firm-level ratings can predict future stock risk-adjusted return performance? although the results are weaker than for country-level ratings. Before controlling for the country-level governance? we find that B rated firms in the 2007-2008 have significantly weaker performance than A firms. The other coefficients? although not significant? have negative coefficients? indicating that these lower rated firms generally perform worse than A rated firms. However? when we control for the country-level effect we find that the significance levels on the coefficients generally fall. Indeed? none of the coefficients in Panel C remain negative and significant. In sum? while an investor would obviously be advised to consider many ...