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Principles of Corporate Governance

Business Law Alert Joseph D. Masterson, John P. Vail

Last week a prominent group of large public company executives and principals of leading institutional investors created a website and published a nine-page outline of “Commonsense Principles of Corporate Governance.” Their stated goal is to foster constructive dialogue regarding corporate governance based on core principles that are broadly (but not universally) accepted and may be the basis for promoting long-term, sustainable economic growth for the benefit of shareholders, employees, and the economy.

The website and the principles themselves acknowledge that public company corporate governance will necessarily vary among companies based on their size, products or services, history, and leadership. Not every principle will be appropriate for every company, and the application and relationships of the principles will be different for different companies.

Not every matter of current debate is addressed in the principles, which take no position regarding proxy access, board responses to proposals that win significant shareholder support, and board tenure. The principles that are included are organized into eight broad categories, including some 59 recommendations and guidelines, but the website mentions six of them in its introduction encouraging active and constructive dialog.

  1. No public company board should be beholden to management, so every public company board should meet regularly without the CEO present and should have active and direct engagement with the full executive team.
  2. Diversity enables better decisions, so boards should include members with complementary and diverse skills, backgrounds, experiences, and a balance of tenured directors with new members who bring fresh thinking and perspectives. Neither gender diversity nor racial diversity is specifically mentioned.
  3. Every board should have a strong leader who is independent of management. If the board chooses to combine the roles of CEO and chairman, there should be a strong independent lead director with clearly defined authority and responsibilities.
  4. Companies should not feel compelled to give earnings guidance, and should do so only if they believe it is beneficial to shareholders.
  5. Corporate transparency needs to be based on a common accounting method, so any non-GAAP data should clarify rather than obscure GAAP results, and stock- or options-based compensation should always be included in any non-GAAP measurements of earnings.
  6. Because constructive engagement with shareholders is necessary for good governance, institutional investors should have access to company management and (sometimes) the board, and they should have access to institutional investors decision makers on governance topics.
For more information, or assistance in comparing these principles with a company’s established governance structures and guidelines, contact your Quarles & Brady attorney.