Thursday, July 21, 2016

Is Good Corporate Governance Just a Matter of Common Sense?

Jamie Dimon (JP Morgan Chase), Warren Buffet (Berkshire Hathaway), Mary Barra (General Motors), Jeff Immet (GE), Larry Fink (Blackrock) and other executives think so and have published a set of "Commonsense Principles of Corporate Governance" for public companies. There are more specifics in the Principles, but the key points cribbed from the front page of the new website are as follows:

Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;

■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;

■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities;

■ Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;

■ A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (“GAAP”) to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and

■ Effective governance requires constructive engagement between a company and its shareholders. So the company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision makers on those issues.

I expect that shareholder activists, proxy advisory firms, and corporate governance nerds like myself will scrutinize the specifics against what the signatories’ companies are actually doing. Nonetheless, I commend these business leaders for at least starting a dialogue (even if a lot of the recommendations are basic common sense) and will be following this closely.

Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Management, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink


As I just posted on Steve Bainbridge's blog:

I feel for the CEOs who signed this joint statement. I guess they figure that if they are proactive, they might be able to keep the shareholder empowerment people off their backs. However, this is not going to happen. As I said in my speech at the Journal of Corporation spring banquet back in 2012 (comments on the speech provided by Steve Bainbridge):

"Finally, I do not see an end to shareholder activism even if activists succeed in getting binding proxy access, majority voting, declassification of boards, binding say-on-pay, etc. implemented at all the largest public companies. After all, an end to their activism means an end to the benefits they can derive from such activities. Therefore, for shareholder activists, there is no ultimate goal to achieve. If so, then what we are dealing with can be referred to as “creeping shareholder activism,” a constant movement toward shareholder empowerment without regard for what is lost in the process in terms of efficient decision making."

Director primacy (who coined this term?) needs to be maintained in order for healthy decision making to occur at public companies. Unfortunately, by deferring confrontation to another day, director primacy is slowly being eroded across corporate America.

Posted by: Bernard S. Sharfman | Jul 21, 2016 3:19:18 PM

Thanks for your comment Bernard. I plan to track the companies here with their actual performance against these goals and see whether any shareholder proposals use these statements/principles against the companies. I did not dissect each point as Steve Bainbridge did so ably, but I do plan to do a company by company look in the future.

Posted by: MARCIA NARINE | Jul 21, 2016 3:25:16 PM

Also, I find it quite baffling that the principles state that "Dual class voting is not a best practice." My bafflement is the result of Warren Buffett being one of the signatories, perhaps the world's most famous beneficiary of the dual class share structure. Go figure.

Posted by: Bernard S. Sharfman | Jul 22, 2016 6:43:20 AM

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