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. — 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.
the short answer, the CEO/CFO etc can’t decide on their own compensation, if the board is independent, wouldn’t it be best practices to have as many independent members on this committee?
so youre saying that compensation committee composition has no real “rules” besides the fact that the ceo cant be on it? is this confirmed or just a guess?
see pg 220 cfai text, should be “expert” in compensation matters, verify with outside councel and be well informed
ok so i guess the reason why item 4 is relevant to the analysit is because by compensation committee they mean the “type” of people on it (knowledge, actions background) have to be of a certain standard. less about a numbers game. thanks.