Lesson 5 of 7 · All lessons in this module
- Principal-agent relationships and agency costsVideo lesson
- Managers versus shareholders: five ways interests diverge
- Controlling versus minority shareholders, and shareholders versus creditors
- Reporting, shareholder meetings, activism and takeovers
- Creditor protections and board committees
- Employees, customers, suppliers and governments
- Risks of weak governance and benefits of strong governance
Lesson 5 of 7 · 14 min
Creditor protections and board committees
Creditors protect themselves through indentures, collateral and committees, while the board delegates detailed oversight to independent committees for audit, nominations and governance, and pay, without giving up its own responsibility.
In short
- A bond indenture sets out the bond's terms, the issuer's obligations and bondholders' rights; covenants require or prohibit actions; assets may be pledged as collateral.
- An official creditor committee represents (especially unsecured) bondholders once a company is in bankruptcy; an ad hoc committee of bondholders approaches a struggling issuer to propose restructuring.
- Core board committees: audit, nominating/governance and compensation/remuneration. The board keeps ultimate responsibility.
- Audit committee: independent members, at least one financial expert; oversees financial reporting, internal audit, and recommends the external auditor and its pay.
- Compensation committee: independent; sets executive pay and performance criteria; favours long-vesting shares and long-term incentive plans over short-term options; say on pay gives shareholders a non-binding voice.
- Other committees: risk (common in financial services) and investment (common at insurers).
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