Commonsense Governance Principles: Returning Governance to its “Commonsense” Roots

The new “Commonsense Principles of Corporate Governance” (“the Principles”) are a welcome and thoughtful contribution to corporate governance discourse.

Released on July 21, the Principles consist of a series of “commonsense” recommendations and guidelines concerning the roles and responsibilities of boards, companies and shareholders. They are intended to provide a basic framework for sound, long-term-oriented governance and, as such, are responsive to a growing desire across commercial interests for greater clarity in leading boardroom challenges.

The Principles were prepared by a diverse, twelve-member coalition of executives of major corporations (e.g., JP Morgan, Berkshire Hathaway, GE, GM and Verizon); asset managers (e.g., BlackRock, Vanguard Group and State Street); and one shareholder activist (ValueAct Capital Management). As the mix of coalition members suggests, the Principles reflect a consensus on basic governance guidelines that “are conducive to good corporate governance, healthy public companies and the continued strength of our public markets.”

This consensus is grounded in a shared belief amongst the coalition members that “empowered” board members and shareholders contribute to long term corporate success through the provision of “meaningful oversight.” Indeed, the Principles draw an important connection between effective corporate governance and economic prosperity. In that regard, they project frustration with the recent, antagonistic level of governance dialogue amongst investors, corporate leaders and other stakeholders.

These Principles address a number of elemental governance topics, including board composition; director responsibilities; shareholder rights; public reporting; board leadership; management succession planning; and compensation of management. They emphasize critical issues of director engagement; independence, accountability and refreshment and support a governance structure that is oriented towards the long term. Among the Principles, highlights include:

• Board Composition:
  A significant emphasis on integrity, appropriate levels of competency and experience; boardroom atmosphere (collegiality amongst board members but the exercise of constructive skepticism); director engagement (the need to commit substantial time and energy); and periodic rotation of leadership positions;
• Director Compensation:
  A commitment to fair compensation, with addition compensation for the lead independent director and committee chairs; incorporating a substantial equity payment component to director compensation; the possibility that compensation for committee service may vary (e.g., according the scope of the committee’s duties); and periodic rotation of leadership positions;
• Director Education:
  A surprising degree of support for new director onboarding initiatives and for continuous director education on industry developments;
• Committee Matters:
  A welcomed focus on the well-developed committee structure and responsibilities; disclosure to shareholders of committee structure and function;
• Board Agenda:
  Setting the board agenda to focus on “big picture issues”; emphasizing delegation to management where appropriate and reducing board time spent on “frivolous or non-essential matters”—ten specific areas for agenda focus are recommended;
• Director Refreshment:
  Balancing the need for “fresh thinking and new perspectives” with the benefits of age and experience; no recommendation is made with respect to tenure and mandatory retirement but rather a call for companies to “clearly articulate their approach” on those sensitive topics;
• Shareholder Rights:
  Challenging the concept of dual class voting (“is not a best practice”);
• Public Reporting:
  Required quarterly reporting should be framed “in the broader context” of corporate strategy with an outlook on progress (or lack thereof) towards long term goals; no obligation to provide earnings guidance; provide explanations of when and why material M&A transactions and capital commitments are being undertaken;
• Independent Leadership:
  The decision on whether to separate the CEO and Chair roles should be made by the independent directors; a detailed framework for the role of the lead independent director is offered;
• Reputation:
  An acknowledgment that protecting the corporate reputation and strengthening corporate culture are board responsibilities;
• Role of Asset Managers:
  Active and balanced (to understand the company’s perspective) engagement between asset managers and company management.

Several of the Principles’ more progressive recommendations may be controversial with some CEOs; e.g., the use of outside advisors and experts in making board education presentations; a pure, undiluted executive session practice; “unfettered” board access to the entire management team; and talent development practices that allow for direct board exposure to key company employees. The Principles also encourage the board to act promptly to address situations where the company does not have “the appropriate CEO” (suggesting a much broader evaluation perspective than non-performance).

Moreover, the Principles contribute to the ongoing discourse on diversity standards for governance by correlating “diversity along multiple dimensions” with effective governance, and by recommending that director candidates be drawn “from a rigorously diverse pool.”

It will always be difficult to condense a topic as broad as governance principles into a format that will facilitate reading and comprehension. That being said, the Principles reflect some “missed opportunities”; important governance topics that arguably deserved note. These include only a limited reference to the critical nature of the board’s enterprise risk management responsibilities; no material reference to its compliance oversight duties; and no acknowledgment of the movement towards assuring the general counsel a prominent position within the senior leadership team; the oft-referenced role of the general counsel as “lawyer-statesman.” Also notable is a generic reference to addressing “material corporate responsibility matters” without any explanation of the term.

There is no suggestion that the Principles are intended to be a “one size fits all approach,” or absolute. The coalition members recognize that “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.” Rather, they project a hope of prompting continuing, respectful dialogue on governance matters amongst key corporate constituents.

And that dialogue that should include leaders of large nonprofit corporations and private companies, for a substantial number of the Principles have applicability across all types of legal entities. In this respect, the Principles seem less focused on establishing “best practices” per se, and more on offering a consensus perspective on how “good governance” works in the real world.

The Principles are directly responsive to a growing call from the boardroom for practical guidelines on governance matters; to the desire of corporate leadership who actively seek guidance on leading practices. They are not, as some academics suggest, “mere platitudes.” Indeed, the Principles arguably represent the most significant discussion of the roles and responsibilities of boards, companies and shareholders since the 2012 release of Governance Principles by The Business Roundtable (discussed on the Forum here).

For these and other reasons, the Principles should be a discussion topic at the next Board Governance Committee meeting of companies large and small, publicly traded or nonprofit.