SS 8 - Corporate Finance: R25 - Corporate Governance

The attributes of the board that an investor or investment analyst must assess: 1. Board Composition & Independence

objectives of the board are to see that company assets are used in the best long-term interests of shareholders and that management strategies, plans, policies, and practices are designed to achieve this objective - at a minimum, a majority should be independent Best practice: 3/4 independent information on the business and other relationships of board members as well as nominees for the board may be obtained from regulatory filings in most jurisdictions. - In US, required in the proxy statement sent to the SEC

notable that the Monetary Authority does not require that a majority of the board members be independent

only 1/3

Share Overhang

potential dilutive effect on shareholders - the number of shares represented by the options, relative to the total amount of stock outstanding. Both of these numbers are readily available in company regulatory filings in most jurisdictions

Corporate Governance Evaluation

requires an assessment of issues relating to the board of directors, managers, and shareholders

Risks resulting from exposure to ESG issues include: 1. Legislative and regulatory risk

risk that governmental laws and regulations directly or indirectly affecting a company's operations will change with potentially severe adverse effects on the company's continued profitability and even its long-term sustainability Examples: Carbon Emissions

The attributes of the board that an investor or investment analyst must assess: 10. Board's Independent Legal and Expert Counsel

should have the ability and sufficient resources to hire such legal and other expert counsel as they require to fulfill their fiduciary duties - most companies allow the corporate counsel to advise BoD, represents a conflict of interest - Outside counsel is important

The attributes of the board that an investor or investment analyst must assess: 12. Disclosure and Transparency

tell the company's economic story as it is, not as some might want it to be in order to achieve some personal objective. Investors depend critically on the quality, clarity, timeliness, and completeness of financial information in valuing securities and assessing risk

Poison Pill

type of shareowner rights plan that some companies adopt to make a hostile takeover of the company more difficult

Director-Shareholder Conflicts

- BoD plays a critical role in checks and balances b/t managers and investors - purpose of BoD is to be an intermediary b/t managers & owners - responsible for monitoring the activities of managers, approving strategies and policies and making certain that these serve investors' interests - Conflicts occur when the BoD isn't independent or when their judgement is biased

General Electric: Governance Principles

- a particularly good example of a company code of corporate governance - established the code to guide not only its managers and board of directors in their activities and decision-making, but to serve as a benchmark by which their performance may be evaluated - published on website -

The failure of a company to establish an effective system of corporate governance represents a major operational risk to the company and its investors

- deficiencies may even imperil the continued existence of a company - major corporate collapses have shown the importance of a strong corporate governance

The attributes of the board that an investor or investment analyst must assess: 4. Annual Election of Directors

- directors may be elected either on an annual or a staggered basis - Annual election - every board memeber stans for re-election every year - ensures shareholders are able to express views Best Practice -generally supports the annual election of directors as being in the best interests of investors

Evidence supports strong Corporate Governance

- higher profitability - better investment measures - Not linked to just developed markets

Manager-Shareholder Conflicts

- most critical from investor POV -

Internal Audit Function

- should be entirely independent and separate from any of the activities being audited - should report directly to the chairman of the audit committee of the board of directors - board should regularly meet with the internal audit supervisor and review the activities and address any concerns - audit committee should discuss in the regulatory filings the responsibilities and authority it has to evaluate and assess these functions, any findings or concerns the committee has with regard to the audit, internal control and compliance systems, and corrective action taken.

Weak corporate governance systems pose the following risks to the value of investments in the company:

1. Accounting Risk - incomplete , misleading, misstated FS & Disclosures 2. Asset Risk - misappropriated assets in the form of excessive compensation or other perquisites 3. Liability Risk - Excessive obligations...typically off-balance sheet debt 4. Strategic Policy Risk - M&A that isn't in the best interest of shareholders

The committees regarded as essential by corporate governance experts include

1. Audit 2. Nomination 3. Compensation - may need to establish additional committees

The attributes of the board that an investor or investment analyst must assess:

1. Board Composition & Independence 2. Independent Chairman of the Board 3. Qualifications of Directors 4. Annual Election of Directors 5. Annual Board Self-Assessment 6. Separate Sessions of Independent Directors 7. Audit Committee and Audit Oversight 8. Nominating Committee 9. Compensation Committee 10. Board's Independent Legal and Expert Counsel 11. Statement of Governance Policies 12. Disclosure and Transparency 13. Insider or Related-Party Transactions 14. Responsiveness of Board of Directors to Shareholder Proxy Votes

Several Important Advantages of Corporations

1. Can raise large amounts of capital (thru equity and bonds) 2. corporate owners need not be experts in the industry or management of the business 3. Ownership is easily transferable 4. Limited Liability (only lose what is invested)

4 real-world examples of Corporate Governance Failure:

1. Enron 2. Tyco 3. Parmalat 4. Adelphia

Examples of Codes of Corporate Governance

1. GE 2. Monetary Authority of Singapore 3. Organisation for Economic Co-Operation and Development: OECD

The Corporate Governance of Listed Companies: A Manual for Investors: Summarizes duties & needs of Board of Directors

1. Independent majority 2. appropriate experience and expertise 3. internal mechanisms needed to support independent work 4. Directors must have access to complete and accurate information

Risks resulting from exposure to ESG issues include:

1. Legislative and regulatory risk 2. Legal Risk 3. Reputational Risk 4. Operating Risk 5. Financial Risk

2 Main sources of conflict among Agency Relationships:

1. Manager-Shareholder Conflicts 2. Director-Shareholder Conflicts

Disadvantages of Corporations:

1. More regulation 2. Agency Problems

firms and their managers, the shareholders' agents, obtain operating and investing capital from the shareholders, the owners, in two ways:

1. Retained Earnings 2. Issuing Stock thru an IPO or SEO

General Electric's Governance Principles

1. Role of Board and Management - enhance the long-term value of the company for its shareowners 2. Functions of Board - 8 scheduled meetings 3. Qualifications - highest personal and professional ethics - can't serve on more than 2 other boards (or be CEO) - doesn't believe term limits are appropriate - can't be nominated after 73rd bday 4. Independence of Directors - majority will be independent 5. Size of Board and Selection Process - annual elections - at least 10 members - size of the board should be in the range of 13 to 17 directors 6. Board Committees - Audit, Management & Development, Nominating & Corporate Governance, Public Responsibilities 7. Independence of Committee Members - Audit, Management & Development, Nominating & Corporate Governance must all be independent 8. Meetings of Non-Employee Directors 3 meetings a year w/o management 9. Self-Evaluation - annual 10. Setting Board Agenda 11. Ethics and Conflicts of Interest 12. Reporting of Concerns to Non-Employee Directors or the Audit Committee - procedures for anonymous whistle blowing 13. Compensation of the Board - 40% cash, 60% deffered stock 14. Succession Plan - reviewed by management development & compensation committees 15. Annual Compensation Review of Senior Management - approved by management development & compensation committees annually 16. Access to Senior Management - non-employee directors encourages to take 2 regulatory scheduled visits to GE businesses a year w/o corporate management 17. Access to Independent Advisors - right to retain outside auditors and counsel 18. Director Education - general counsel & CFO responsible for orientation to new members 19. Policy on Poison Pills - not allowed unless in the best interest of the company

3 Main Forms of business:

1. Sole Proprietorship 2. Partnership 3. Corporation

Board Self-assessment review should include:

1. an assessment of the board's effectiveness as a whole; 2. evaluations of the performance of individual board members, including assessments of the participation of each member, with regard to both attendance and the number and relevance of contributions made, and an assessment of the member's willingness to think independently of management and address challenging or controversial issues; 3. a review of board committee activities; 4. an assessment of the board's effectiveness in monitoring and overseeing their specific functions; 5. an evaluation of the qualities the company will need in its board in the future, along with a comparison of the qualities current board members currently have; and 6. a report of the board self-assessment, typically prepared by the nominations committee, and included in the proxy in the United States and in the corporate governance report in Europe.

Should assess the following elements of a statement of corporate governance policies:

1. codes of ethics; 2. statements of the oversight, monitoring, and review responsibilities of directors, including internal control, risk management, audit and accounting and disclosure policy, compliance assessment, nominations, compensation awards, and other responsibilities; 3. statements of management's responsibilities to provide complete and timely information to the board members prior to board meetings, and to provide directors with free and unfettered access to control and compliance functions within the company; 4. reports of directors' examinations, evaluations, and findings in their oversight and review function; 5. board and committee performance self-assessments; 6. management performance assessments; and 7. training provided to directors prior to joining the board and periodically thereafter.

In assessing the quality of disclosure, some indicators of good quality financial reporting are:

1. conservative assumptions used for employee benefit plans; 2. adequate provisions for lawsuits and other loss contingencies; 3. minimal use of off-balance sheet financing techniques and full disclosure of assets, liabilities, revenues, and expenses associated with such activities; 4. absence of nonrecurring gains; 5. absence of noncash earnings; 6. clear and adequate disclosure; 7. conservative revenue and expense recognition methods; 8. use of LIFO inventory accounting (during periods of generally rising prices); 9. bad-debt reserves that are high relative to receivables and past credit losses; 10. use of accelerated depreciation methods and short lives; 11. rapid write-off of acquisition-related intangible assets; 12. minimal capitalization of interest and overhead; 13. minimal capitalization of computer software costs; 14. expensing of startup costs of new operations; and 15. use of the completed contract method of accounting for contracts.

The core attributes of an effective corporate governance system are:

1. delineation of the rights of shareholders and other core stakeholders 2. clearly defined manager and director governance responsibilities to stakeholders 3. identifiable and measurable accountabilities for the performance of the responsibilities 4. fairness and equitable treatment in all dealings between managers, directors, and shareholders 5. complete transparency and accuracy in disclosures regarding operations, performance, risk, and financial position -Investors and analysts should determine whether companies in which they may be interested have these core attributes

2 major objectives of Corporate Governance:

1. eliminate or mitigate conflicts of interest, particularly those between managers and shareholders 2. ensure that the assets of the company are used efficiently and productively and in the best interests of its investors and other stakeholders

Board of Directors Responsibilities

1. establish corporate values and governance structures for the company to ensure that the business is conducted in an ethical, competent, fair, and professional manner; 2. ensure that all legal and regulatory requirements are met and complied with fully and in a timely fashion; 3. establish long-term strategic objectives for the company with a goal of ensuring that the best interests of shareholders come first and that the company's obligations to others are met in a timely and complete manner; 4. establish clear lines of responsibility and a strong system of accountability and performance measurement in all phases of a company's operations; 5. hire the chief executive officer, determine the compensation package, and periodically evaluate the officer's performance; 6. ensure that management has supplied the board with sufficient information for it to be fully informed and prepared to make the decisions that are its responsibility, and to be able to adequately monitor and oversee the company's management; 7. meet frequently enough to adequately perform its duties, and meet in extraordinary session as required by events; and 8. acquire adequate training so that members are able to adequately perform their duties. - responsibilities vary depending on nature of company and industry

The responsibilities of the nominating committee are to:

1. establish criteria for evaluating candidates for the board of directors; 2. identify candidates for the general board and for all committees of the board; 3. review the qualifications of the nominees to the board and for members of individual committees; 4. establish criteria for evaluating nominees for senior management positions in the company; 5. identify candidates for management positions; 6. review the qualifications of the nominees for management positions 7. document the reasons for the selection of candidates recommended to the board as a whole for consideration.

Factors that indicate lack of independence:

1. former employment with the company, including founders, executives, or other employees 2. business relationships, for example, prior or current service as outside counsel, auditors, or consultants, or business interests involving contractual commitments and obligations; 3. personal relationships, whether familial, friendship, or other affiliations; 4. interlocking directorships, a director of another company whose independence might be impaired by the relationship with the other board or company, particularly if the director serves on interlocking compensation committees; and 5. ongoing banking or other creditor relationships.

At a minimum the audit committee must:

1. include only independent directors; 2. have sufficient expertise in financial, accounting, auditing, and legal matters to be able to adequately oversee and evaluate the control, risk management, and compliance systems, and the quality of the company's financial disclosure to shareholders and others. - It is advisable for at least two members of the committee to have relevant accounting and auditing expertise; 3. oversee the internal audit function; the internal audit staff should report directly and routinely to this committee of the board, and, when necessary report any concerns regarding the quality of controls or compliance issues; 4. have sufficient resources to be able to properly fulfill their responsibilities; 5. have full access to and the cooperation of management; 6. have authority to investigate fully any matters within its purview; 7. have the authority for the hiring of auditors, including the setting of contractual provisions, review of the cost-effectiveness of the audit, approving of non-audit services provided by the auditor, and assessing the auditors' independence; 8. meet with auditors independently of management or other company interest parties periodically but at least once annually; and 9. have the full authority to review the audit and financial statements, question auditors regarding audit findings, including the review of the system of internal controls, and to determine the quality and transparency of financial reporting choices.

Qualifications and competencies an investor should review:

1. independence 2. relevant expertise in the industry, including the principal technologies used in the business and in financial operations, legal matters, accounting and auditing; and managerial considerations such as the success of companies with which the director has been associated in the past; 3. indications of ethical soundness, including public statements or writings of the director, problems in companies with which the director has been associated in the past such as legal or other regulatory violations involving ethical lapses; 4. experience in strategic planning and risk management; 5. other board experience with companies regarded as having sound governance practices and that are effective stewards of investors' capital as compared to serving management's interests; 6. dedication and commitment to serving the board and investors' interests (board members with such qualities will not serve on more than a few boards, have an excellent record of attendance at board meetings, and will limit other business commitments that require large amounts of time) 7. commitment to the needs of investors as shown, for example, by significant personal investments in this or other companies for which he or she serves as a director, and by an absence of conflicts of interest.

Several different types of compensation awards are in common use today:

1. salary, generally set by contractual commitments between the company and the executive or director; - shareholders prefer salary and perquisites make up a small % of total comp 2. perquisites, additional compensation in the form of benefits, such as insurance, use of company planes, cars, and apartments, services, ranging from investment advice, tax assistance, and financial planning advice to household services; - shareholders prefer salary and perquisites make up a small % of total comp 3. bonus awards, normally based on performance as compared to company goals and objectives; -Bonuses should be solely on exceeding expected performance; LT over ST 4. stock options, options on future awards of company stock; and -should align interests of managers and shareholders - can lead to dilution 5. stock awards or restricted stock. - Well-designed restricted stock awards are increasingly used by companies to reward executives for their performance as well as to remunerate lower-level employees

Sole Proprietorship

A business owned and operated by a single person - few legal formalities - unlimited liability - most numerous form of business worldwide, 70% of US businesses but small % of market cap - limited ability to raise capital - lack of transfer-ability -fewer corporate governance risks

Partnerships

A business owned and operated by more than one individual. - share many of the same advantages and disadvantages as the sole proprietorship

The attributes of the board that an investor or investment analyst must assess: 14. Responsiveness of Board of Directors to Shareholder Proxy Votes

A clear indicator of the extent to which directors and executives take seriously their fiduciary responsibility to shareholders is the response of the company to shareholder votes on proxy matters - responsiveness is a clear signal of the board's willingness to act in the best interests of the owners of the company

Principal-Agent Problem

A conflict of interest that arises when the agent in an agency relationship has goals and incentives that differ from the principal to whom the agent owes a fiduciary duty

Corporations

A legal entity with rights similar to those of a person. The chief officers, executives, or top managers act as agents for the firm and are legally entitled to authorize corporate activities and to enter into contracts on behalf of the business. - In US, represent less than 20% of all businesses but 90% of revenue

Annual vs staggered BoD elections

Annual - Allow views to be expressed and exercise right to control who represents Staggered - helps ensure continuity - some argue diminishes power of shareholders

4 real-world examples of Corporate Governance Failure: 2. Tyco

CEO of Tyco used corporate funds to buy home decorating items, including a $17,000 traveling toilette box, a $445 pin cushion, and a $15,000 umbrella stand - also borrowed money from the company's employee loan program to buy $270 million worth of yachts, art, jewelry, and vacation estates. Then, in his capacity as CEO, he forgave the loan. All told, the CEO may have looted the firm, and thereby its shareholders, of over $600 million Tyco is a striking example of excessive perquisite consumption by a CEO

The attributes of the board that an investor or investment analyst must assess: 11. Statement of Governance Policies

Companies that have a strong commitment to corporate governance frequently supply a statement of their corporate governance policies, variously in their regulatory filings, on their websites, or as part other investor information packets

The attributes of the board that an investor or investment analyst must assess: 9. Compensation Committee

Compensation should be a tool to attract, retain, and motivate the highest quality and experienced managers of the company - should incentive LT goals over ST - excessive compensation is a problem in the US

OECD Principles of Corporate Governance

I. The Rights of Shareholders - The corporate governance framework should protect shareholders' rights. II. The Equitable Treatment of Shareholders - The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. III. The Role of Stakeholders in Corporate Governance - The corporate governance framework should recognise the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. IV. Disclosure and Transparency - The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. V. The Responsibilities of the Board - The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.

The attributes of the board that an investor or investment analyst must assess: 8. Nominating Committee

In most corporations, currently, nominations of members of the board of directors and for executive officers of the company are made by members of the board, most often at the recommendation of, or in consultation with, the management of the company - may favor managements interests over shareholders Best Practice requires that nominees to the board be selected by a nominating committee comprising only independent directors

4 real-world examples of Corporate Governance Failure: 3. Parmalat

Large Italian Dairy food supplier - founders and top executives of Parmalat were accused of fictitiously reporting the existence of a $4.9 billion bank account so that the company's enormous liabilities would appear less daunting -defrauded investors (stockholders and creditors)

The attributes of the board that an investor or investment analyst must assess: 2. Independent Chairman of the Board

Most corporate boards allow a senior executive to serve as chairman, which likely isn't in the best interests of shareholders -independence of the chairman of the board does not guarantee that the board will function properly. However, independence should be regarded as a necessary condition, even if it is not a sufficient one

4 real-world examples of Corporate Governance Failure: 1. Enron

One of the largest energy, commoditiesw, and service companies -Enron executives, with the approval of members of the board of directors, overrode provisions in Enron's code of ethics and corporate governance system that forbade any practices involving self-dealing by executives - Enron's chief financial officer set up off-shore partnerships in which he served as general partner (collecting huge feels for negotiating with himself) - the partnerships also allowed Enron to hide billions of debt off the compay's BS Most, if not all, of the core attributes of good governance were violated by Enron's managers, but especially the responsibility to deal fairly with all stakeholders, including investors and creditors, and to provide full transparency of all material information on a timely basis.

Monetary Authority of Singapore: Guidelines and Regulations on Corporate Governance

Principle 1 Every Institution should be headed by an effective Board. Principle 2 There should be a strong and independent element on the Board which is able to exercise objective judgment on corporate affairs independently from management and substantial shareholders. Principle 3 The Board should set and enforce clear lines of responsibility and accountability throughout the Institution. Principle 4 There should be a formal and transparent process for the appointment of new directors to the Board. Principle 5 There should be a formal assessment of the effectiveness of the Board as a whole and the contribution by each director to the effectiveness of the Board. Principle 6 In order to fulfill their responsibilities, Board members should be provided with complete, adequate and timely information prior to board meetings and on an on-going basis by the management. Principle 7 There should be a formal and transparent procedure for fixing the remuneration packages of individual directors. No director should be involved in deciding his own remuneration. Principle 8 The level and composition of remuneration should be appropriate to attract, retain and motivate the directors to perform their roles and carry out their responsibilities. Principle 9 The Board should establish an Audit Committee with a set of written terms of reference that clearly sets out its authority and duties. Principle 10 The Board should ensure that there is an adequate risk management system and sound internal controls. Principle 11 The Board should ensure that an internal audit function that is independent of the activities audited is established. Principle 12 The Board should ensure that management formulates policies to ensure dealings with the public, the Institution's policyholders and claimants, depositors and other customers are conducted fairly, responsibly and professionally. Principle 13 The Board should ensure that related party transactions with the Institution are made on an arm's length basis.

VALUATION IMPLICATIONS OF CORPORATE GOVERNANCE

The relative quality, strength and reliability of a company's corporate governance system have direct and profound implications for investors' assessments of investments and their valuations

Risks resulting from exposure to ESG issues include: 4. Operating Risk

The risk attributed to the operating cost structure, in particular the use of fixed costs in operations; the risk arising from the mix of fixed and variable costs; the risk that a company's operations may be severely affected by environmental, social, and governance risk factors. Example - the industrial use of benzene, a powerful carcinogen and one of the most toxic chemicals known

Risks resulting from exposure to ESG issues include: 3. Reputational Risk

The risk that a company will suffer an extended diminution in market value relative to other companies in the same industry due to a demonstrated lack of concern for environmental, social, and governance risk factors.

Risks resulting from exposure to ESG issues include: 5. Financial Risk

The risk that environmental, social, or governance risk factors will result in significant costs or other losses to a company and its shareholders; the risk arising from a company's obligation to meet required payments under its financing agreements.

Risks resulting from exposure to ESG issues include: 2. Legal Risk

The risk that failures by company managers to effectively manage a company's environmental, social, and governance risk exposures will lead to lawsuits and other judicial remedies, resulting in potentially catastrophic losses for the company; the risk that the legal system will not enforce a contract in case of dispute or fraud. - Analyze disclosures in the Form 10-K Business, Risks, and Legal Proceedings sections

Corporate governance

The system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form.

4 real-world examples of Corporate Governance Failure: 4. Adelphia

Was the 5th largest provider of cable entertainment in the United States - Founders took on a lot of debt to go into expansion - also arranged a $2.3 billion personal loan which Adelphia guaranteed, but this arrangement was not fully disclosed to Adelphia's other stakeholders - fictitious transactions were recorded to boost accounting profits

Board of Directors

a critical part of the system of checks and balances that lie at the heart of corporate governance systems

The attributes of the board that an investor or investment analyst must assess: 13. Insider or Related-Party Transactions

assess the company's policies concerning related-party transactions, whether the company has entered into any such transactions, and, if so, what the effects are on the company's financial statements - Any related-party transaction should require the prior approval of the board of directors and a statement that such transactions are consistent with company policy

The attributes of the board that an investor or investment analyst must assess: 6. Separate Sessions of Independent Directors

best practice requires that independent directors of the board meet at least annually, and preferably quarterly, in separate sessions - meetings w/o management - provide an opportunity for those entrusted with the best interests of the shareholders to engage in candid and frank discussions and debate regarding the management of the company, their strategies and policies, strengths and weaknesses, and other matters of concern - should be concerned if such meetings appeared to be nonexistent, infrequent, or irregular in occurrence

The attributes of the board that an investor or investment analyst must assess: 3. Qualifications of Directors

directors need to bring sufficient skill and experience to the position to ensure that they will be able to fulfill their fiduciary responsibilities to investors and other stakeholders - evaluation of members of board should include an assessment of skills needed

One area of concern in recent years is the reporting by companies of so-called "pro forma" earnings numbers

earnings before non-cash or "non-recurring" charges - occasionally been dubbed "earnings-before-the-bad-stuff." -widely used by companies with poor performance and poor prospects

The attributes of the board that an investor or investment analyst must assess: 5. Annual Board Self-Assessment

essential that a process be in place for periodically reviewing and evaluating their performance and making recommendations for improvement - Should occur at least annually - will lead to greater efficiency and effectiveness in serving investors' and other stakeholders' interests

The attributes of the board that an investor or investment analyst must assess: 7. Audit Committee and Audit Oversight

established to provide independent oversight of the company's financial reporting, non-financial corporate disclosure, and internal control systems - essential for effective corporate governance and for seeing that their responsibilities to shareholders are fulfilled -The primary responsibility for overseeing the design, maintenance, and continuing development of the control and compliance systems rests with this committee

Corporate Governance Conclusion

good corporate governance leads to better results, both for companies and for investors

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE FACTORS (ESG)

may be as critical to the company's long-term sustainability as more traditional concerns - Range from: Climate change, labor rights, public and occupational health issues, and the soundness of the company's governance structures

Investors should be alert for o-called "repricing" of stock options

means that the company can, with approval of the board of directors, adjust the exercise price of outstanding option grants downward to the current price of the stock - allows for repricing when the stock price falls drastically - not in the interest of shareholders

A Captive Board

non-independent board, inattention or disinterest among board members, lack of cohesion and sense of purpose, or other conditions that can be detrimental to the interests of investors