A group of CEOs of major public companies and institutional investors, including Jamie Dimon, Warren Buffett, Larry Fink, Mary Barra and Jeff Immelt, among others, have developed a list of “commonsense corporate governance principles,” designed to generate a constructive dialogue about corporate governance at public companies. According to the group’s open letter: “Because well-managed and well-governed businesses are the engine of our economy, good corporate governance must be more than just a catch phrase or fad. It’s an imperative — especially when it comes to our publicly owned companies…. While most everyone agrees that we need good corporate governance, there has been wide disagreement on what that actually means.”
When I read in the NYT’s DealBook column that participants in the group met in secrecy and that two major investors had dropped out and refused to sign the list of principles, I was expecting to see principles that were steeped in controversy. Not exactly. Instead, we see a long list of governance ideas that, for most part, are well-reasoned and also, for the most part, widely accepted, if not always followed (even by members of the group). After all, would anyone take issue with the advice that directors “should be business savvy, be shareholder oriented and have a genuine passion for their company” or that all “directors must have high integrity and the appropriate competence to represent the interests of all shareholders in achieving the long-term success of their company” or that the “board should minimize the amount of time it spends on frivolous or nonessential matters — the goal is to provide perspective and make decisions to build real value for the company and its shareholders”? The NYT reports that the group was asked: “‘If you inherited the company you now run and had to hire someone else to manage it, how would you set up its governance?’ It was a blue-sky question and the answers were very different from what many governance experts expect of public companies today. During the meetings, according to several who participated but said they agreed not to speak publicly, some members of the group said that rather than maintaining a board of a dozen or more people, as most public companies do, they’d have only a handful of board members, all of them experts in the business: fewer academics and consultants, more industry professionals.” Nevertheless, it’s tough to discern that type of hard-earned advice on the list.
Still, while much of the list reflects familiar themes, there are some areas where the principles do stake out strong positions, some of which may very well become subjects of dispute, especially outside of long-established public companies. In this context, however, the guidance indicates that these “principles are intended to provide a basic framework for sound, long-term oriented governance. But given the differences among our many public companies — including their size, their products and services, their history and their leadership — not every principle (or every part of every principle) will work for every company, and not every principle will be applied in the same fashion by all companies.” Below are some examples:
- On dual-class voting: “Dual class voting is not a best practice. If a company has dual class voting, which sometimes is intended to protect the company from short-term behavior, the company should consider having specific sunset provisions based upon time or a triggering event, which eliminate dual class voting. In addition, all shareholders should be treated equally in any corporate transaction.” Of course, a number of the most successful companies that have gone public in the last two decades have maintained these types of voting structures, notwithstanding disfavor by the proxy advisory firms and others.
- On earnings guidance: “A company should not feel obligated to provide earnings guidance – and should determine whether providing earnings guidance for the company’s shareholders does more harm than good. If a company does provide earnings guidance, the company should be realistic and avoid inflated projections. Making short-term decisions to beat guidance (or any performance benchmark) is likely to be value destructive in the long run.” It’s worth noting here that many smaller companies feel compelled to provide earnings guidance or risk loss of analyst coverage.
- On an interesting question for audit committees to ask the outside auditors: “In addition to its other responsibilities, the Audit Committee should focus on whether the company’s financial statements would be prepared or disclosed in a materially different manner if the external auditor itself were solely responsible for their preparation.”
- On director compensation: “Companies should consider paying a substantial portion (e.g., for some companies, as much as 50% or more) of director compensation in stock, performance stock units or similar equity-like instruments. Companies also should consider requiring directors to retain a significant portion of their equity compensation for the duration of their tenure to further directors’ economic alignment with the long-term performance of the company.”
- On rotation of board leadership roles: “Boards should consider periodic rotation of board leadership roles (i.e., committee chairs and the lead independent director), balancing the benefits of rotation against the benefits of continuity, experience and expertise.”
- On quarterly reporting: “Companies should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or not) on long-term goals.”
- On setting the board’s agenda: “The full board (including, where appropriate, through the non-executive chair or lead independent director) should have input into the setting of the board agenda.”
- On matters that should be on board agendas:
- consideration of shareholder value: “Creation of shareholder value, with a focus on the long term. This means encouraging the sort of long-term thinking owners of a private company might bring to their strategic discussions, including investments that may not pay off in the short run.”
- consideration of risk-taking: “Significant risks, including reputational risks. The board should not be reflexively risk averse; it should seek the proper calibration of risk and reward as it focuses on the long-term interests of the company’s shareholders.”
- On the use of non-GAAP financial measures: “While it is acceptable in certain instances to use non-GAAP measures to explain and clarify results for shareholders, such measures should be sensible and should not be used to obscure GAAP results. In this regard, it is important to note that all compensation, including equity compensation, is plainly a cost of doing business and should be reflected in any non-GAAP measurement of earnings in precisely the same manner it is reflected in GAAP earnings.” (See this column in the NYT arguing that a new auditing standard for stock compensation, which will take effect in 2017, will mean that “it will no longer be necessary to deduct stock option costs” in non-GAAP earnings measures.)
- On board access to non-executive personnel: “As authorized and coordinated by the board, directors should have unfettered access to management, including those below the CEO’s direct reports.”
- On long-term strategic thinking: “A company should take a long-term strategic view, as though the company were private, and explain clearly to shareholders how material decisions and actions are consistent with that view.”
- On a call for universal majority voting: “Directors should be elected by a majority of the votes cast ‘for’ and ‘against/withhold’ (i.e., abstentions and non-votes should not be counted for this purpose).”
- On access to and by asset managers: “An asset manager’s ultimate decision makers on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the company’s board. Similarly, a company, its management and board should have access to an asset manager’s ultimate decision makers on those issues.”
- With regard to reliance by asset managers on proxy advisory firms: “Asset managers may rely on a variety of information sources to support their evaluation and decision-making processes. While data and recommendations from proxy advisors may form pieces of the information mosaic on which asset managers rely in their analysis, ultimately, their votes should be based on independent application of their own voting guidelines and policies.
- With regard to voting policies of asset managers: “Asset managers should make public their proxy voting process and voting guidelines and have clear engagement protocols and procedures.”
But, on other current controversial issues, the group staked out its position to not take a position, opting instead for a balanced view. Here, the principles apparently reflected substantial compromise, particularly in light of the circumstances of many of the group members.
- On board tenure: “It is essential that a company attract and retain strong, experienced and knowledgeable board members. Some boards have rules around maximum length of service and mandatory retirement age for directors; others have such rules but permit exceptions; and still others have no such rules at all. Whatever the case, companies should clearly articulate their approach on term limits and retirement age. And insofar as a board permits exceptions, the board should explain (ordinarily in the company’s proxy statement) why a particular exception was warranted in the context of the board’s assessment of its performance and composition. Board refreshment should always be considered in order to ensure that the board’s skill set and perspectives remain sufficiently current and broad in dealing with fast-changing business dynamics. But the importance of fresh thinking and new perspectives should be tempered with the understanding that age and experience often bring wisdom, judgment and knowledge.”
- On separation of the positions of CEO and board chair: “The board’s independent directors should decide, based upon the circumstances at the time, whether it is appropriate for the company to have separate or combined chair and CEO roles. The board should explain clearly (ordinarily in the company’s proxy statement) to shareholders why it has separated or combined the roles. If a board decides to combine the chair and CEO roles, it is critical that the board has in place a strong designated lead independent director and governance structure.”
- On director loyalties: “Directors’ loyalty should be to the shareholders and the company. A board must not be beholden to the CEO or management. A significant majority of the board should be independent under the New York Stock Exchange rules or similar standards.” ‘Notably, the current controversial issue of “golden leash” arrangements — third-party compensation of directors — is not even addressed. (See this PubCo post.)
According to the NYT, the galvanizing event for establishment of the group was “a frustration Mr. Dimon had about public companies. Talented executives have left public companies in droves to work at private companies — outside the harsh spotlight of the stock market, activist investors and new regulations. Many Silicon Valley companies have sought to delay public offerings for as long as possible. Publicly listed companies in the United States have become something of a dying breed. In 1996, there were 8,025 public listed companies in the United States; by 2012, the number of companies was about half: 4,101, according to the National Bureau of Economic Research. Mr. Dimon had been on the phone with Mr. Buffett lamenting what he described as the broken system for public companies and corporate governance when he asked him if he would help convene a group of the nation’s largest companies and investors to see if they could fix the problem.” Apparently the answer to that question was yes. However, whether this list provides the answer to those perceived problems is an open question.