Good Corporate Governance: What Does It Really Mean?

In July of 2016, thirteen of the top corporate CEO’s issued an open letter to the public entitled Commonsense Corporate Governance Principles. Despite the diversity of the group and varied opinions on specific principles of corporate governance, the group felt it was important to find some common ground at the highest level of corporate structure. Commonsense Corporate Governance Principles is intended to be a starting point for constructive dialogue within all levels of corporations to foster the economic growth among shareholders, employees, and the greater economy.

Why Good Corporate Governance Matters

There is no disagreement among corporate leaders that the health of public and finance corporations is critical to national growth and stability now and in the future. The thousands of publicly traded companies provide approximately one third of our country’s private sector jobs. These jobs provide workers with financial security through their financial investments, pension plans, and college savings plans. These are the lifeblood for the general population that works hard to purchase a home, send their children to college, save for retirement, and achieve other financial goals.

The financial crisis of 2008 destroyed much of the public trust in public corporations and financial markets. Restoring public trust is critical to economic growth and the health of the financial future. The key to long-term prosperity lies in strength of effective management.

Commonsense Principles of Corporate Government

The consortium collaborated and developed eight basic, commonsense principles of corporate governance. The full report is accessible online.

Composition of the Board and Internal Governance

This principle states that the directors should be loyal to the shareholders and the company without allowing management to have stronghold on them. Directors should have some experience with the business, but be willing to look to dissimilar industries for some of the best ideas. There was no disagreement that boards should have diversity of skills and backgrounds. Elections should accept votes “for” and “against” and board directors should be compensated fairly.  As a means for attracting the most highly qualified directors, the board should focus on the larger perspective and delegate the rest to management.

Several important board qualities emerged from the group, including:

• Steadfast
• Independent of mind
• Constructive
• Collaborative and collegiate
• Committed

The group highlighted the importance of having a robust orientation program and the value of periodically rotating board leadership roles. Boards should have policies on director tenure and retirement that consider balancing expertise and fresh thinking. In addition, boards should also practice regular self-assessments.

Board of Director’s Responsibilities

The consortium agreed that boards should send updates and other communications to shareholders, such as notices about CEO compensation. Directors are responsible to strengthen the company’s culture and values to shareholders and should place a high priority on addressing their proposals and concerns. Boards should give strong emphasis on choosing the right CEO and should make a practice of regularly meeting in executive session, without the CEO or other members of management present. Board directors should be forward thinking, and focus on the long-term strategies, especially with regard to mergers and acquisitions. Bylaws should outline a media policy and expect board member compliance.

Shareholder rights

Dual class voting is not a best practice. Shareholder ownership should be defined as a shareholder that has full, unhedged economic interest and all shareholders should be treated equally. Special meetings should require a reasonable minimum of outstanding shares to prevent a small majority from abusing rights or wasting time.

Public reporting

It is considered best practice for boards to be transparent with quarterly financial results. It is not considered best practices to engage in earning guidance, or an estimate of future earnings, unless it will be beneficial to shareholders. Boards should identify and disclose long-term goals, explaining them in a specific and measurable way.  They should also be able to explain how decisions and actions are consistent with long-term goals. Companies should communicate reasons for undertaking mergers, acquisitions, and major capital commitments. Companies should use Generally Accepted Accounting Principles when reporting results to shareholders.

Board Leadership

The board should make a careful decision about whether the CEO and board chair roles should be combined and explain their decision to shareholders in a proxy statement. Corporations that use the combined role should have a strong, designated lead independent director and the independent director should have clearly defined authorities and responsibilities.

Management succession planning

That board and shareholders should have access and direct exposure to senior management so that the board can evaluation them. Companies should communicate succession plans on a regular and emergency basis to their shareholders.

Compensation of management

Management compensation packages should be competitive enough to attract and retain the best people. Compensation structures vary and should be tailored to the nature of the business and industry. Compensation plans should evolve over time, but they should have continuity over multiple years so that they connect to long-term performance. Boards should communicate benchmarks and compensation plans with shareholders. Boards should consider making management offering a substantial portion of the compensation in the form of stock or equity-like instruments. Companies should have policies regarding clawback payments for cash and equity payments.

Asset managers’ role in corporate governance

Asset managers should dedicate adequate time towards evaluating matters for shareholder consideration, giving importance to long-term investment success. As part of that process, they should evaluate boards and directors. Asset managers should oversee proxy voting and other corporate governance activities. They should also have access to the company and management and vice versa. As needed, they should also have access to the board. Asset managers should proactively raise critical issues early, and present them in constructive way to enhance trust with the shareholders.

Final Thoughts

In reading the report on Commonsense Corporate Governance Principles, it becomes quickly apparent that corporate governance includes many facets of business. While the consortium didn’t agree on everything, they did agree that there is significant variation among the public companies and that each corporate governance structure should be uniquely customized according to its business and the industry. These guidelines were not intended to be absolutes, by any means. They were developed as a means for promoting trust in our nation’s public companies by giving companies a jumping off point to form their own good corporate governance principles. The group felt that the general public needed to hear from the very top that our nation’s companies are taking a hard look at their governing principles with the long-term goal of moving our nation’s financial strength upwards and onward.