Principles of Corporate Governance 2012

The following post comes to us from Alexander M. Cutler, chairman & CEO of The Eaton Corporation and chair of Business Roundtable’s Corporate Governance Committee. This post is based on the foreword and introduction of a Business Roundtable publication; the full version is available here.

Business Roundtable is recognized as an authoritative voice on matters affecting American business corporations and, as such, has a keen interest in corporate governance. Business Roundtable is an association of chief executive officers of leading U.S. companies with more than $6 trillion in annual revenues and more than 12 million employees. Member companies comprise nearly a third of the total value of the U.S. stock markets and represent nearly a third of all corporate income taxes paid to the federal government. Annually, they return more than $267 billion in dividends to shareholders and the economy. Business Roundtable companies give more than $7 billion a year in combined charitable contributions, representing nearly 60 percent of total corporate giving. They are technology innovation leaders, with $86 billion in annual research and development spending—nearly half of all total private R&D spending in the U.S. Only through sustainable, non-inflationary, long-term economic growth will America’s citizens, communities and companies remain competitive in the rapidly changing international economy. Business Roundtable asserts that to do this, the United States must create policies that foster a flexible and available workforce, sustainable cost structures and fair rules.

Business Roundtable has long been a leading advocate of best practices in corporate governance. Past publications of Business Roundtable that have addressed corporate governance matters include Principles of Corporate Governance (May 2002, November 2005, April 2010), Executive Compensation: Principles and Commentary (November 2003, January 2007), The Nominating Process and Corporate Governance Committees: Principles and Commentary (April 2004) and Guidelines for Shareholder-Director Communications (May 2005). Other publications from Business Roundtable that have addressed corporate governance include Statement on Corporate Governance (September 1997), Executive Compensation/Share Ownership (March 1992), Corporate Governance and American Competitiveness (March 1990), Statement on Corporate Responsibility (October 1981) and The Role and Composition of the Board of Directors of the Large Publicly Owned Corporation (January 1978).

Since April 2010, when Business Roundtable last updated its Principles of Corporate Governance, U.S. public corporations have continued to adopt best practices within the framework of strengthened securities market listing standards and legal requirements that developed beginning with the passage of the Sarbanes-Oxley Act of 2002 and have continued with the financial crisis and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Business Roundtable continues to believe, as we noted in Principles of Corporate Governance (2005), that the United States has the best corporate governance, financial reporting and securities markets systems in the world. These systems work because of the adoption of best practices by public companies within a framework of laws and regulations that establish minimum requirements while affording companies the ability to develop individualized practices that are appropriate for them. Even in the challenging times posed by the ongoing difficult economic environment, corporations have continued to work proactively to refine their governance practices, and develop new practices, as conditions change and “best practices” continue to evolve.

Given the fundamental nature of the changes that have occurred during the past decade in the framework of laws and regulations related to corporate governance, in the economy, and in best practices, Business Roundtable believes it is appropriate, once again, to restate our guiding principles of corporate governance. These principles, we believe, should help guide the ongoing advancement of corporate governance practices and, thus, advance the ability of public corporations to compete, create jobs and generate long-term, sustainable economic growth. Although Business Roundtable believes that these principles represent best practices in corporate governance, we understand that variations exist among U.S. public companies and their shareholders. Accordingly, we believe that no one approach is right for all corporations. Each corporation should look to these principles as a guide in developing structures, practices and processes that are appropriate for it in light of its needs and circumstances. In addition, because transparency is a critical part of effective corporate governance, each corporation should provide complete and accurate disclosure about its governance practices so that shareholders and other interested parties can understand them.

Business Roundtable supports the following guiding principles:

First, the paramount duty of the board of directors of a public corporation is to select a chief executive officer and to oversee the CEO and senior management in the competent and ethical operation of the corporation on a day-to-day basis.

Second, it is the responsibility of management, under the oversight of the board, to operate the corporation in an effective and ethical manner to produce long-term value for shareholders. The board of directors, the CEO and senior management should set a “tone at the top” that establishes a culture of legal compliance and integrity. Directors and management should never put personal interests ahead of or in conflict with the interests of the corporation.

Third, it is the responsibility of management, under the oversight of the board, to develop and implement the corporation’s strategic plans, and to identify, evaluate and manage the risks inherent in the corporation’s strategy. The board of directors should understand the corporation’s strategic plans, the associated risks, and the steps that management is taking to monitor and manage those risks. The board and senior management should agree on the appropriate risk profile for the corporation, and they should be comfortable that the strategic plans are consistent with that risk profile.

Fourth, it is the responsibility of management, under the oversight of the audit committee and the board, to produce financial statements that fairly present the financial condition and results of operations of the corporation and to make the timely disclosures investors need to assess the financial and business soundness and risks of the corporation.

Fifth, it is the responsibility of the board, through its audit committee, to engage an independent accounting firm to audit the financial statements prepared by management and issue an opinion that those statements are fairly stated in accordance with Generally Accepted Accounting Principles, as well as to oversee the corporation’s relationship with the outside auditor.

Sixth, it is the responsibility of the board, through its corporate governance committee, to play a leadership role in shaping the corporate governance of the corporation and the composition and leadership of the board. The corporate governance committee should regularly assess the backgrounds, skills and experience of the board and its members and engage in succession planning for the board.

Seventh, it is the responsibility of the board, through its compensation committee, to adopt and oversee the implementation of compensation policies, establish goals for performance-based compensation, and determine the compensation of the CEO and senior management. Compensation policies and goals should be aligned with the corporation’s long-term strategy, and they should create incentives to innovate and produce long-term value for shareholders without excessive risk. These policies and the resulting compensation should be communicated clearly to shareholders.

Eighth, it is the responsibility of the corporation to engage with longterm shareholders in a meaningful way on issues and concerns that are of widespread interest to long-term shareholders, with appropriate involvement from the board of directors and management.

Ninth, it is the responsibility of the corporation to deal with its employees, customers, suppliers and other constituencies in a fair and equitable manner and to exemplify the highest standards of corporate citizenship.

These responsibilities and others are critical to the functioning of the modern public corporation and the integrity of the public markets. No law or regulation can be a substitute for the voluntary adherence to these principles by corporate directors and management in a manner that fits the needs of their individual corporations.

Business Roundtable continues to believe that corporate governance should be enhanced through conscientious and forward-looking action by a business community that focuses on generating long-term shareholder value with the highest degree of integrity.

The principles discussed here are intended to assist corporate boards of directors and management in their individual efforts to implement best practices of corporate governance, as well as to serve as guideposts for the public dialogue on evolving governance standards. As noted above, there is no “one size fits all” approach that will be suitable for all corporations. However, to the extent that a corporation follows governance practices that diverge from common practice, it should consider disclosing the reasons for this and why its practices are appropriate for it, consistent with its size, industry, culture and other relevant factors.

The full publication, which includes governance guidelines for key corporate actors, is available here.

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