Glass Lewis Thoughts on the “Commonsense Principles of Corporate Governance”

Greg Waters is Director of North American Research at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. Waters. Additional posts on the Commonsense Governance Principles are available here.

On July 21, 2016 a group of 13 high profile investors and corporate executives released a set of “Commonsense Corporate Governance Principles” which opined on the roles and responsibilities of boards and investors. The Principles—which largely center on the themes of independent, experienced and diverse boards, transparency, sound board and executive compensation and long-term value creation—generally recommend practices either generally already in place at most (particularly large-cap) companies or required by regulations or stock exchange listing rules. Further, the Principles’ rejection of obligatory earnings guidance is also indicative of their focus on the long-term, an unsurprising viewpoint given that the signatories include BlackRock CEO Larry Fink and famed investor Warren Buffett, both of whom have been particularly vocal on this subject in recent years.

While the Principles may disappoint investors expecting a more comprehensive and robust approach similar to that found in the UK and other countries, there are a few areas where the principles promote forward-thinking stances. For example, the Principles criticize dual class voting structures and state that companies should consider specific sunset provisions based upon time or a triggering event to eventually eliminate dual class structures. This is notwithstanding the dual class structure at signatory Warren Buffet’s company Berkshire Hathaway. (However, unlike other dual class structures that are solely designed to ensure insider control despite disproportionate economic value, both classes of shares are widely owned and freely traded: while the two share classes otherwise enjoy the same proportionate rights, the Class B shareholders have just 1/10,000th of the votes of the Class A shares despite the B shares trading at roughly 1/1,500th of the Class A shares.)

Regarding proxy access, the Principles do not attempt to prescribe a best practice, although they do note that “a higher threshold of ownership (e.g., 5%) often has been adopted for smaller market capitalization companies.” Not all investors may agree that smaller companies “often” adopt higher thresholds given that the number of 5% proxy access bylaws adopted in the U.S. can be counted on two hands. We do not believe most investors would necessarily support a tiered ownership threshold for nominating directors based on company size since we have observed widespread investor support for proxy access at a 3% ownership threshold irrespective of company size during the past two proxy seasons.

There are several areas the Principles do not address, including key anti-takeover defenses such as poison pills, supermajority vote requirements and classified boards. The Principles generally address some issues such as special meeting rights and term/age limits for directors but do not recommend specific thresholds or tenure limits.

None of the publicly company signatories have an independent chairperson, which likely precluded recommending the appointment of an independent chairs. However, the Principles state that it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities. And companies should explain why the roles of CEO and chair are either combined or separated.

The Principles also recommend that asset managers exercise their voting rights thoughtfully and act in what they believe to be the long-term economic interests of their clients. Specifically, asset managers should devote sufficient time and resources to evaluate voting matters and should consider each company’s rationale for its positions including by engaging with executives and directors. The Principles also recommend asset managers disclose their voting guidelines and make independent voting decisions based on their own policies.

Despite the Principles’ relatively narrow scope and high level, we believe they contain enough substance to spark a dialogue inside boardrooms, which could lead to increased shareholder engagement from boards that traditionally have relied on executives and investor relations departments to lead those efforts. In our view, direct engagement between investors and boards leads to greater transparency and fosters mutual understanding of the company and its strategy, promoting long-term value creation. As a result, the Principles could have a salutary effect on companies, shareholders and the market.

Both comments and trackbacks are currently closed.