On July 21 2016, the CEOs of thirteen high-profile public companies, asset managers and pension and mutual funds released the Commonsense Principles of Corporate Governance. The signatories include some of the most respected names in American business and were headlined by Warren Buffett of Berkshire Hathaway Inc., Mary Barra of General Motors, Larry Fink of Blackrock, Jeffrey Immelt of General Electric, and Bill McNabb of Vanguard. Their open letter states that the purpose of the group was to reach consensus on what "good corporate governance" means in the real world, and that while they recognize that there is significant variation among public companies, they nevertheless intend the principles to serve as "a starting point" for discussion. The principles themselves can be found here, and include among others:
- Shareholder rights. Dual class voting "is not a best practice," and a company should consider having specific sunset provisions based upon time or a triggering event.
- Composition of boards of directors. A subset of directors should have professional experience directly related to the company's business and directors candidates should be drawn from a rigorously diverse pool. Boards should carefully consider a director's service on multiple boards and other commitments to ensure directors can commit substantial time to their roles.
- Director compensation and director evaluations. Companies should consider paying a substantial portion, as much as 50% or more, of director compensation in equity and require directors to retain a significant portion for the duration of their tenures. Boards should have robust evaluations and "the fortitude to replace ineffective directors."
- Board leadership. A board's independent directors should decide on the leadership structure and if it decides to combine the chair and CEO roles, there should be a strong independent lead director. The lead independent director's roles may include guiding the board's consideration of CEO compensation and the CEO succession planning process.
- Board committees. Boards should consider periodic rotation of leadership roles such as committee chairs and the lead independent director.
- Tenure and retirement age. The principles do not endorse mandatory retirement age or term limits. While board refreshment should always be considered, it should be "tempered with the understanding that age and experience often brings wisdom, judgment and knowledge."
As might be expected, most of the principles are high level and address issues that have been common sense and conventional. Indeed, many of the practices have already been adopted by most large-cap companies or are already a requirement of stock exchange regulations, such as public reporting requirements or composing boards with complementary and diverse skill sets. That said, some of the principles reflect newer ideas like rotating committee chairs and lead directors and a few are controversial, such as putting limits on dual-class voting.
What is probably most notable about the principles is what they don't address. As Glass Lewis' Greg Waters has pointed out, none of the public company signatories themselves have an independent chairperson, which likely ensured that a recommendation for their appointment was not made. The principles similarly neglect a number of prominent issues that shareholders and management still seem to disagree about, including key anti-takeover defences such as poison pills, supermajority vote requirements and staggered boards.
Though the principles may not be particularly ground-breaking or prescriptive, to the extent they can initiate discussion and debate at the board and c-suite level, then they may well have some impact. The prominence of the companies who have signed on will make it harder for boards and companies to argue against the instituting of such core principles and practices, and may shift the burden of proof onto corporations that don't comply. Moreover, turning one's mind to sound corporate governance is the first step to developing a practice and culture of transparency, long-term growth and meaningful communication between shareholders and boards. Although every company will have its own way of applying governance principles to its own specific situation, the principles are broad enough to apply in some manner to most, if not all, corporations, regardless of size, industry, or public/private status.
The author would like to thank Robert Corbeil, articling student, for his assistance in preparing this legal update.
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