The SEC requires that the Audit Committee be composed of independent directors. According to chapter three of Corporate Governance, this means that the members shouldn’t be in management or have close business ties with someone in management over the last five years. The three people on the committee are on the board and have ownership in the corporation. Mega has used the same audit firm for 23 years. This makes me worried that there is something going on between them. The NYSE also requires that the members of the compensation committee be independent directors. Sam’s son is the chairman of the Executive Compensation Committee. The decisions they make on salaries and bonuses have to be approved by the Executive Committee, which is led by Sam. I sense a possible collusion going on between Sam and his son to get more money.
Chapter four of Corporate Governance say...
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...him. However, he didn’t continue talking with Sam, John, or anyone else on the board because of time constraints. I think that is where Jack failed his due diligence. Even though he did ask for a description of the board’s committees and found meaningful information, he should have asked Sam and John more questions. New candidates considered for the board should also make sure that no conflicts of interest exist. There is a slight one as Dryden Corporation is a competitor with Mega Corporation. However, the board has talked it through and decided that it won’t pose a threat.
My recommendation is that Jack doesn’t sit in silence at board meetings and let Sam get his way. He should test Sam and see if he will make any changes to prove that he isn’t dominating over everyone. It’s important for board members to be willing to express contrary views when necessary.
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