IDA: An Intelligent Document Analysis System for Evaluating Corporate Governance Practices Based on SEC Required Filings

IDA: An Intelligent Document Analysis System for Evaluating Corporate Governance Practices Based on SEC Required Filings

Ying Zheng (Department of Computer Sciences, Towson University, Baltimore, MD, USA) and Harry Zhou (Department of Computer Sciences, Towson University, Baltimore, MD, USA)
Copyright: © 2015 |Pages: 13
DOI: 10.4018/ijsi.2015040105
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This article presents an intelligent corporate governance analysis and rating system, called IDA System, capable of retrieving SEC required documents of public companies and performing analysis and rating in terms of recommended corporate governance practices. With the techniques of analogical learning, local knowledge bases, databases, and question-dependent semantic networks, the IDA system is able to automatically evaluate the strengths, deficiencies, and risks of a company's corporate governance practices based on the documents stored in the “SEC EDGAR database by (U.S. Securities and Exchange Commission 2013)”. A produced score reduces a complex corporate governance process and related policies into a single number which enables concerned government agencies, investors and legislators to assess the governance characteristics of individual companies.
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The Problem Domain

The required documents by SEC include 8-k, 10-K and DEF 14A (proxy statement) contain passages that are of interest in terms of corporate governance practice. Among the key elements included in the corporate governance section are: bylaws, code of conduct and ethics, board of directors’ information, board committee mandates, basis for executive compensation, and information on insider purchases and sales. Relevant corporate governance and disclosure data should be woven into the company’s 10-K and proxy statement. These filings are important source documents for the rating system. We designed and selected 200 questions based on Corporate Governance Handbook 2005 Developments in Best Practices, Compliance, and Legal Standards by Carolyn Kay (2005)”. Based on the handbook, these questions are used to retrieve valuable information about the companies to help investors understand corporate governance of the companies they’re willing to invest. Some of these 200 questions are listed below:

  • 1.

    Does the company provide employment agreements that protect executive producers?

  • 2.

    Does the management is required to hold accumulated stock for the long-term?

  • 3.

    Does the compensation committee have policies and programs to recapture incentives from management in case of malfeasance?

  • 4.

    Does the company use industry standards to decide on type of compensation and level of compensation for executives?

  • 5.

    Does the company measures and tracks adherence to ethical conduct?

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