United States: Corporate Governance Comparative Guide

1 Legal and enforcement framework

1.1 Which legislative and regulatory provisions and codes of practice primarily govern corporate governance in your jurisdiction?

The focus of this Q&A is on US public companies, most of which are formed as corporations. When references are made in this Q&A to state law, the focus will be on Delaware law, as Delaware is the most common state of incorporation for US public companies.

The United States has not adopted a nationwide corporate governance statute or regulations. US corporate governance standards are regulated by the following:

• State law: All US jurisdictions have adopted a corporate law to regulate a company's internal operations, including some corporate governance requirements. Most states have based their corporate law on Delaware law or on the Model Business Corporations Act.
• Federal law and rules and regulations adopted by federal agencies such as the US Securities and Exchange Commission (SEC): Relevant federal statutes include:
• • the Securities Act of 1933, as amended;
  • the Securities Exchange Act of 1934, as amended;
  • the Sarbanes-Oxley Act of 2002 (SOX); and
  • the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
• The SEC uses its rulemaking authority to adopt rules related to each of the Securities Act, the Securities Exchange Act, SOX, the Dodd-Frank Act and other relevant statutes.
• Judicial decisions: These include rulings on relevant state law and federal statutes, rules, and regulations.
• Securities exchange rules: Each of the Nasdaq Stock Market and the New York Stock Exchange (NYSE) has listing standards that include corporate governance requirements.
• A company's formation documents: The articles of incorporation and bylaws influence corporate governance in matters such as shareholder rights and board composition.
• Litigation: Shareholder activism and litigation is also a significant influence on the reform of corporate governance regulations and directors' duties.
• Institutional investors: US institutional investors can apply pressure on companies to adopt practices that may not be required by law or by applicable listing standards, but that operate in the best interests of the stockholders.

1.2 Is the corporate governance framework in your jurisdiction primarily based on hard (mandatory) law and regulation or soft (eg, ‘comply or explain') codes of governance?

The US corporate governance framework is a combination of hard law and soft codes of governance. Companies are subject to the corporate laws of the states in which they are formed and operate. Public companies also are subject to:

• federal law such as the Securities Act, the Securities Exchange Act, SOX and the Dodd-Frank Act;
• rules and regulations issued pursuant to federal statute by relevant federal agencies, such as the SEC;
• the listing standards of a national securities exchange, such as Nasdaq or the NYSE; and
• federal court interpretations of relevant federal laws, regulations or rules.

Common law and the company's formation documents play roles in corporate governance.

Relevant soft codes of corporate governance include:

• the effective corporate governance standards and strong shareholder rights standards advocated by the Council of Institutional Investors;
• Commonsense Governance Principles 2.0, issued by a group of more than 24 CEOs of prominent companies and institutional investors;
• the Institutional Shareholder Services (ISS) group of companies' review of a company's corporate governance standards through its Governance QualityScore ratings system;
• the Investor Stewardship Group's Framework for US Stewardship and Governance;
• the Business Roundtable's Principles of Corporate Governance; and
• Glass Lewis's research and related solutions.

The California Public Employees' Retirement System is an institutional investor that advocates for strong corporate governance in those companies in which it invests.

1.3 Which bodies are responsible for drafting and enforcing the rules and codes that make up the corporate governance framework? What powers do they have?

State corporate law governs the basic aspects of a company's existence and a company's actions, and is created by the relevant state legislature and administered by a state agency. The Delaware General Corporation Law, for example, has been developed by the Delaware General Assembly and is administered by the Division of Corporations in the Office of the Secretary of State; the division is authorised to promulgate regulations for the regulation of companies formed in Delaware. State attorneys general can enforce relevant corporate governance standards in that state's corporate law.

Federal corporate law, such as SOX and the Dodd-Frank Act, is enacted by Congress and implemented by a relevant federal agency. The SEC has interpreted legislation and adopted its own rules and regulations on public company corporate governance. The SEC has the power to file civil and criminal complaints to enforce corporate governance standards.

Public companies listed on a national securities exchange must comply with continued listing standards of the exchange to maintain their listings. Companies that do not comply with these corporate governance requirements may be publicly reprimanded, suspended or, in extreme cases, delisted.

Institutional investors and groups of such investors create independent corporate governance standards. Such investors engage with the companies in which they invest and have significant influence to create and enforce their corporate governance perspective.

Shareholders in public companies can enforce certain corporate governance standards through direct suits and shareholder derivative lawsuits.

2 Scope of application

2.1 Which entities are captured by the rules and codes that make up the principal elements of the corporate governance framework in your jurisdiction?

State corporate law and related common law apply to all companies formed or operating in that state.

The Securities Act, the Securities Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Act apply to all public companies. The Securities and Exchange Commission's (SEC) rules and regulations also apply to all public companies.

Listing standards apply to those public companies listed on the relevant exchange.

2.2 What exemptions, if any, from the principal elements of the corporate governance framework are available in your jurisdiction?

There are limited exemptions from the principal elements of the US corporate governance framework. These include the following:

• Under Title IX of the Dodd-Frank Act, companies with less than $75 million in market capitalisation receive permanent exemption from the auditor attestation requirements under Section 404(b) of that statute.
• The Jumpstart Our Business Startups Act allows defined emerging growth companies to elect to be exempt from SEC reporting requirements for up to five years, including the auditor attestation requirement under Section 404(b) of the Dodd-Frank Act.
• A controlled company listed on the New York Stock Exchange or Nasdaq may rely on the controlled company exemption to avoid certain corporate governance listing standards, including the requirement that the listed company's board be composed of a majority of independent directors. A ‘controlled company' is a company of which more than 50% of the voting power for the election of its directors is held by a single person, entity or group. A controlled company that chooses to take advantage of any or all of these exemptions must disclose that choice, that it is a controlled company and the basis for the determination in its annual proxy statement or, if the company does not file an annual proxy statement, in its annual report on Form 10-K filed with the SEC.

Nasdaq's Rule 5615 exempts defined ‘asset-backed issuers', other passive issuers', ‘cooperatives' and ‘limited partnerships' from certain of Nasdaq's corporate governance requirements.

2.3 What are the principal issues covered by the codes of governance in your jurisdiction?

US corporate governance codes – such as those found in state law, federal law, listing standards and voluntary standards such as the Commonsense Governance Principles 2.0 – address issues such as the following:

• the composition and internal governance of the board of directors, including:
• • membership;
  • election of directors;
  • nominating directors;
  • compensation and stock ownership;
  • committee structure and service;
  • tenure and retirement age; and
  • effectiveness;
• directors' duties of loyalty and care to the company and director independence;
• board responsibilities, including:
• • communicating with third parties; and
  • critical activities and setting the agenda;
• shareholder rights, including:
• • proxy access;
  • dual class voting; and
  • written consents and special meetings;
• public reporting, including:
• • transparency in quarterly financial results;
  • earnings guidance; and
  • use of non-Generally Accepted Accounting Principles financial measures;
• board leadership, including:
• • separation of CEO and chair positions; and
  • responsibilities of the lead independent director;
• management succession planning;
• executive compensation, including:
• • current versus long-term components of compensation;
  • disclosure of benchmarks and performance measurements;
  • terms of equity compensation; and
  • clawback policies; and
• asset managers' role in corporate governance.

3 Ownership and control

3.1 What are the typical ownership structures in your jurisdiction?

Ownership interests in corporations are denominated as shares. Many public companies have multiple classes of common stock, with the most popular variant of this structure having:

• one class of common stock with a high number of votes per share (typically 10 votes); and
• another class of common stock that has the traditional one vote per share.

In general, except for voting rights, the two classes of common stock have the same rights, rank and privileges. Certain public companies, such as Alphabet, Inc, have a third class of common stock that has no voting rights. Both the New York Stock Exchange and Nasdaq allow companies with multi-class share structures to list on the exchanges but do not allow companies, once listed, to reduce or restrict the voting rights of existing shareholders.

3.2 How are companies typically controlled in your jurisdiction, both structurally and in practice?

US companies are managed by a single-tier, unitary board of directors elected by the shareholders and subject to fiduciary duties owed to the company and its shareholders. Shareholders are the owners of a company, but have little impact on the management or operations of a company.

The board need not seek shareholder approval for most actions, excluding:

• amendment to the company's articles of incorporation;
• merger; or
• the sale of all or substantially all of the company's assets.

Shareholders – especially institutional investors – can and do engage company management on a range of issues.

Under relevant state law, directors must be natural persons, but need not be shareholders in the company. The board is charged with exercising its business judgement in the best interests of the company and its shareholders. Boards delegate much of the day-to-day management of a company to senior officers, all of whom serve at the pleasure of the board.

The board has regular meetings, as specified in the company's articles of incorporation or its bylaws, and convene more frequently in special meetings, subject to the notice and quorum requirements set out in the articles of incorporation or bylaws or relevant state law. Boards may act in such meetings through duly constituted committees or through written consents in lieu of meetings. Some state law requires the consent to be unanimous, while others only require the consent to have the approval of the number of directors needed to approve an action at a board meeting.

4 The board: structure and appointment

4.1 How is the board typically structured in your jurisdiction?

US companies are managed by a single-tier, unitary board of directors elected by the shareholders and subject to fiduciary duties owed to the company and its shareholders. The size of the board of directors can range from as few as three directors to 15 or more, depending on the company's organisational documents. Eighty-two per cent of the S&P 500 had 12 or fewer directors on their board of directors. Institutional Shareholder Services suggests that boards should not have fewer than six or more than 15 directors and considers a board of between nine and 12 directors to be the ideal size. Changes to the size of a board may require an amendment to the company's articles of incorporation and may, if specified in the company's formation documents or state law, require shareholder approval.

The corporate laws of most states (including but not limited to Delaware) and the New York Stock Exchange (NYSE) and Nasdaq rules allow a company to divide its board of directors into multiple classes where each class of directors serves a multiple-year term. At each annual stockholders' meeting, one class of directors is up for re-election, while the other class(es) are not.

Boards may, and in some cases must, have committees, such as a nominating committee, an audit committee and a compensation committee.

4.2 Are board committees recommended or mandated? If so, which areas should/must they cover?

The corporate laws of most states (including but not limited to Delaware) allow a board to establish committees.

Each of the Securities Exchange Commission (SEC), the NYSE and Nasdaq requires that each company have an audit committee comprised entirely of independent directors. Audit committees provide oversight of:

• the financial reporting process;
• the audit process;
• the company's system of internal controls; and
• compliance with laws and regulations.

The exchanges require that the audit committee be comprised of at least three independent directors, each of whom:

• satisfies the exchange's independence requirements;
• meets the SEC's enhanced independence standards for audit committee members under Rule 10A-3 under the Securities Exchange Act;
• is financially literate (NYSE) or can read and understand fundamental financial statements (Nasdaq); and
• for Nasdaq companies only, did not participate in preparing the company's financial statements at any time in the past three years.

Each of the NYSE and Nasdaq requires public companies (except for those exempted as stated in question 2.2) to have a compensation committee comprised entirely of independent directors, each of whom:

• meets the exchange's independence requirements; and
• is evaluated under an enhanced independence review.

The compensation committee is responsible for determining and reviewing the compensation of directors, the chief executive officer and senior management.

The NYSE requires listed companies, subject to the exemptions discussed in question 2.2, to have a nominating committee comprised entirely of independent directors. This committee is responsible for director nominations and developing and overseeing the company's corporate governance policies.

4.3 Are there any requirements or recommendations to appoint independent board members? If so, how is ‘independence' defined?

While state corporate law is silent, NYSE and Nasdaq require that a majority of all members of a company's board be independent. Relevant SEC rules implemented pursuant to Sarbanes-Oxley Act require that all members of an audit committee and a compensation committee be independent.

For audit committees, the SEC defines ‘independence' as a member not:

• accepting directly or indirectly any compensation from the company or any of its subsidiaries; or
• being an affiliate of the company or any of its subsidiaries.

For compensation committees, the SEC leaves the definition of ‘independence' up to each exchange after considering relevant factors, including:

• the source of compensation of the committee member, such as any consulting, advisory or other fees paid by the company to the member; and
• whether the committee member is affiliated with the company or any of its subsidiaries or affiliates.

A company can adopt the independence standards of the NYSE or Nasdaq, or additional or more stringent independence standards. NYSE defines an ‘independent director' as one who the board of directors affirmatively determines has no material relationship with the company, either directly or as an officer, partner or stockholder of a company that has a relationship with the company. Nasdaq defines an ‘independent director' as one who is not an executive officer or an employee of the company and who does not have a relationship that, in the opinion of the board of directors, would interfere with exercising independent judgement in carrying out a director's responsibilities.

4.4 Do any diversity requirements or recommendations apply with regard to board composition?

California requires public companies headquartered in California to have at least one director from an underrepresented community on their board by the end of 2021.

Item 407(c) of Regulation S‐K requires disclosure in a company's annual proxy statement of whether, and if so how, its nominating committee considers diversity in identifying nominees for director.

Pursuant to Nasdaq Rule 5605(f), Nasdaq-listed companies, subject to certain exceptions, must disclose statistical information on the company's board of directors related to director diversity. Such companies must disclose this information by the later of:

• 8 August 2022; or
• the date on which the company files its proxy or information statement for its 2022 annual shareholders' meeting.

In addition, by 7 August 2023, Nasdaq-listed companies, with certain exceptions, must also have at least:

• one female director; and
• one director who self-identifies as a part of an underrepresented community.

In the case of the California statute and the Nasdaq rule, ‘underrepresented' is an individual who self-identifies as:

• Black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native; or
• lesbian, gay, bisexual, transgender or a member of the queer community.

Several large institutional investors have highlighted board diversity as a key priority. For example, Institutional Shareholder Services (ISS) generally votes against the chairman of the nominating committee at companies where there are no women on the board, subject to certain mitigating factors. Glass Lewis will recommend voting against the nominating committee chair of a board with fewer than two female directors beginning in 2022.

4.5 How are board members selected and appointed? What selection criteria (if any) apply in this regard?

Board members are selected and nominated by a company's nominating committee, and elected by the shareholders at a company's annual meeting. Activist shareholders may also submit their own director nominees to a shareholder vote in proxy contests.

The NYSE, but not Nasdaq or the SEC, requires a company to have a nominating committee comprised of independent members; although relevant Nasdaq rules allow for one member of the committee to be non-independent.

Nominating committees usually consider the following issues when selecting board candidates:

• whether the candidate has worked for, served on the board of, or has other relevant experience in the same industry as the company;
• whether the candidate has financial and accounting experience or has worked in financial services, accounting or as a controller or chief financial officer;
• whether the candidate has worked for, or served on the board of, another public company;
• whether the candidate meets relevant independence standards or has no relationship with the company's management;
• the candidate's reputation;
• whether the candidate has compensation, risk management, human resources, human capital management, information technology or other relevant expertise; and
• diversity (as discussed in question 4.4).

Companies must discuss in their proxy statements the specific skills, qualifications and experience of each director and director nominee that caused the board and the nominating committee to determine that each such person should be a director.

4.6 How are board members removed?

Directors are elected to serve until they are voted out, die or choose not to run for re-election. State law and the corporation's articles of incorporation and bylaws set out the methods for removal, and whether removal must be for cause or can be without cause. Generally, directors can be removed by the corporation's shareholders or pursuant to judicial proceedings. The holders of a majority of the shares that are entitled to vote at an election of directors can remove a director or the entire board with or without cause, although removal of directors where the board is staggered may be subject to different rules. Vacancies can generally be filled by a majority of the directors then in office, even if there are fewer directors than the quorum. A company's certificate of incorporation and bylaws may also permit shareholders to fill vacancies.

4.7 Do any tenure restrictions or recommendations apply to individual directors?

In general, no. However, some companies impose term limits for their board members to cap the number of years that an individual can serve as director, based on the idea that long-serving board members may not be independent. Companies may also impose age restrictions that create a mandatory retirement age, usually 75. Several large companies limit their directors to serving on the boards of no more than three to five other companies.

4.8 What best practice is recommended when composing the board and appointing board members?

In composing the board and appointing board members, companies should appoint directors who reflect:

• the strategic priorities and challenges of the business;
• the relevant areas of risk; and
• the diversity of stakeholders.

Delaware corporate law requires that a board be comprised of at least one natural person and does not specify an upper limit on board size. ISS has stated that:

• a size of between nine and 12 directors is ‘ideal'; and
• a company must have no less than six and no more than 15 directors.

Companies should also consider:

• staggering board terms;
• implementing term limits (perhaps 12 years); and
• setting a maximum retirement age.

Companies should also avoid overboarding and limit their directors to serving on the boards of no more than three to five other companies.

In addition, board candidates should:

• have worked for, served on the board of, or have other relevant experience in the same industry as the company;
• have financial and accounting;
• have a ‘solid' reputation;
• have compensation, risk management, human resources, human capital management, information technology or other relevant expertise; and
• have high emotional intelligence.

Companies should ensure that:

• their boards are diverse beyond relevant state law or Nasdaq standards; and
• they have a number of independent directors consistent with SEC and national securities exchange rules.

5 The board: role and responsibilities

5.1 What are the primary roles and responsibilities of the board?

Under Delaware law, the board has full control over the company's business and affairs. The board's basic responsibility is to exercise its business judgement and act in a manner reasonably believed to be in the best interests of the company and its shareholders.

Boards both advise and oversee management, and its responsibilities can include the following:

• choosing and monitoring the performance of the senior company management;
• monitoring corporate performance and providing advice to management;
• evaluating and approving the company's annual operating plan, long-term strategy and major corporate actions;
• determining executive and director compensation;
• handling board development and director succession matters;
• reviewing and updating the company's corporate governance practices;
• managing any proposed transaction involving a conflict of interest with management;
• monitoring compliance and establishing an appropriate ‘tone at the top'; and
• supporting long-term relationships with shareholders and stakeholders.

5.2 How does the board exercise those roles and responsibilities?

Typically, boards delegate day-to-day management to senior management, all of whom serve at the pleasure of the board. Boards will also determine their own committee structures (subject to Securities and Exchange Commission (SEC) rules and national securities exchange listing requirements) and board leadership structures, such as whether the board chair is a different person from the company CEO. Under Delaware common law, courts will typically not second-guess business decisions of the board where the ‘business judgement rule' applies, which involves a rebuttable presumption that directors are discharging their duties:

• in good faith;
• on an informed basis; and
• in a manner that the directors reasonably believe to be in the best interests of the corporation and its shareholders.

The company's articles of incorporation and bylaws specify the time and place of regular meetings of the board. Boards may convene more frequently through special meetings of the board, as provided in the company's articles of incorporation and bylaws. Board business may also be conducted through duly constituted committees, which will also meet and act as needed and in accordance with notice and quorum requirements and committee charters. Boards may generally act by written consent in lieu of a meeting if such consent is unanimous; although some states allow for written consents to be approved by a majority of directors.

5.3 What specific role does the board play in relation to: (a) Strategic planning? (b) Risk management? (c) Major and related-party transactions? and (d) Conflicts of interest?

The board plays a primary role in strategic planning, risk management, major and related-party transactions, and conflicts of interest, because under Delaware law, the board has full control over the company's business and affairs.

New York Stock Exchange (NYSE) listing rules require boards to oversee management development and succession, including determining the strategic direction of the company in the short term and the long term. This oversight must be addressed in a company's corporate governance guidelines as required by relevant NYSE listing rules.

Board must review and approve corporate actions, including major transactions.

The duty of loyalty requires directors to disclose any conflicts of interest; and a board should recuse conflicted directors from board discussions and decision-making relating to the conflict. Such a self-dealing transaction is not voidable if it is:

• approved by informed and disinterested directors;
• approved by informed shareholders; or
• fair to the company as of the time it is authorised, approved or ratified by directors or shareholders.

5.4 Are the roles of individual board members restricted? Is this common in practice?

In general, the roles of individual board members are not restricted. However, individual board members of public companies who serve on the audit, nominating or compensation committees must be independent pursuant to relevant NYSE or Nasdaq listing rules. The board may determine its own leadership structure subject to its articles of incorporation and bylaws. SEC rules require disclosure of whether and why the board has chosen to combine or separate the board chair and CEO roles. Where the positions are combined, the company must disclose:

• whether and why the company has a lead independent director; and
• the specific role that the lead independent director plays in the leadership of the company.

Pursuant to Section 8 of the Clayton Antitrust Act of 1914, no one can simultaneously serve as an officer or a director of competing corporations if the corporations are engaged in commerce and have capital, surplus and profits above certain thresholds.

5.5 What are the legal duties of individual board members? To whom are these duties owed?

Directors owe two core fiduciary duties to the company and its shareholders:

• the duty of care, which requires that directors be fully and adequately informed and act with care when making decisions and acting for the company; and
• the duty of loyalty, which requires that directors act and make decisions in the best interests of the company, not in their own personal interest.

Some state corporate common law refers to additional fiduciary duties, as follows:

• the duty of good faith – that is, a requirement that directors act:
• • honestly and sincerely;
  • in the best interest of the company; and
  • in a manner that is not knowingly unlawful or contrary to public policy;
• the duty of disclosure – that is, the obligation of directors to disclose fully and fairly all material information within their control when shareholder action is sought; and
• the duty of oversight – that is, the responsibility of directors to ensure that reasonable information and reporting systems are implemented and maintained to provide the board and senior management with timely, accurate information to support informed decisions, and so that directors can reach informed judgements concerning the company's performance.

Under Delaware law these latter three duties are treated as obligations that stem from the core fiduciary duties of care and loyalty.

5.6 To what civil and criminal liabilities are individual board members primarily potentially subject?

Although directors can be subject to liability for their actions and inactions, broad protections such as the business judgement rule can limit exposure. The business judgement rule presumes that the directors and officers acted:

• on an informed basis;
• in good faith; and
• in the best interests of the company.

If a plaintiff does not overcome this presumption, a court will not investigate the merits of the underlying board decision.

Directors can be criminally liable under state and federal laws for actions that constitute theft, fraud or bribery, such as violations of the Foreign Corrupt Practices Act. Directors can face civil and criminal liability for violations of state and federal securities laws, such as:

• material misrepresentations and material omissions in relevant documents;
• insider trading; and
• market manipulation.

Under certain circumstances, and depending on the director's knowledge and intent, directors can be held personally liable for violations of environmental and health and safety laws, including the Comprehensive Environmental Response Compensation and Liability Act. Directors can also be subject to liability for federal and state antitrust law violations, including criminal prosecution, civil suits, and derivative actions by shareholders.

In some states, directors can be held personally liable for unpaid employee wages and other violations of wage and hour laws, such as under California's A Fair Day's Pay Act.

6 Shareholders

6.1 What rights do shareholders enjoy with regard to the company in which they have invested?

A company's board of directors, elected by the shareholders and subject to fiduciary duties, manages the company's business affairs. However, shareholders have decision-making rights on key matters including:

• director elections and removals;
• amendments to the articles of incorporation or bylaws;
• merger;
• sale of all or substantially all of the company's assets;
• dissolution;
• advisory votes on executive compensation; and
• advisory or binding votes on shareholder proposals.

Under New York Stock Exchange (NYSE) and Nasdaq rules, shareholder approval may be required for issuances involving:

• parties related to the company;
• a change in control of the company; or
• 20% or more of the common stock or voting power of the company.

In addition, NYSE and Nasdaq listing rules require companies to obtain shareholder approval of equity plans applicable to directors.

Shareholders, especially institutional investors, will engage with company directors to provide input on company matters.

Most state corporate statutes require companies to hold an annual shareholders' meeting to be held at a date, time and place determined in accordance with the company's articles of incorporation or bylaws. NYSE listing rules require companies to hold an annual shareholders' meeting during each fiscal year; Nasdaq rules requires each company to hold an annual shareholders' meeting no later than one year after the end of the company's prior fiscal year. Under Delaware law, director elections and ‘any other proper business' may be transacted at such annual shareholders' meeting.

Companies must submit a resolution for stockholders to approve the compensation of executives as disclosed in the proxy statement under Item 402 of Regulation S-K at least once every three years. However, the say on pay vote is not binding on a company.

6.2 How do shareholders exercise these rights? Do they have a right to call shareholders' meetings and, if so, in what circumstances?

Shareholders typically exercise their rights through voting, either in person or by proxy, at the company's annual general meeting. Under Delaware law, shareholders can call special meetings if authorised by, and subject to, its articles of incorporation or bylaws.

Shareholder vote requirements for the approval of corporate actions are usually provided in the company's articles of incorporation or bylaws. Under Delaware law, a majority shareholder vote is required to:

• amend the articles of incorporation;
• approve a merger or sale of assets; and
• effect a dissolution of the company.

Companies, in their formation documents, may set a higher approval percentage requirement than the default statutory standards.

Shareholders can also act by written consent in lieu of a meeting at some companies, if allowed by the company's articles of incorporation or bylaws. In addition, shareholders may:

• inspect the books and records of the company;
• wage a proxy contest to change board composition;
• engage directly with the board and company management;
• file a derivative action;
• file a direct action; and
• apply public or private pressure on the board.

Under Rule 14a-8 of the Securities Exchange Act, public companies must include proposals submitted by qualified shareholders in their proxy materials. ‘Qualified shareholders' are those that have continuously held at least $2,000 in market value or 1% of the company's securities that are entitled to vote for at least one year by the date they submit the proposal, and that hold those securities until the meeting date. In practice, this means that institutional investors are almost always qualified to make proposals in company proxy materials.

Shareholders may also ask the Securities and Exchange Commission or other regulatory bodies to initiate an investigation of the company and/or its personnel for violations of relevant law or regulation.

6.3 What influence can shareholders exert on the appointment and operations of the board?

Under Delaware corporate law, shareholders generally have the right to elect directors at the annual shareholders' meeting. Only the NYSE requires listed companies to have a nominating committee comprised entirely of independent directors, subject to certain exemptions.

Shareholders can also nominate director candidates either before or at a shareholders' meeting if certain conditions are met – including, without limitation, compliance with company bylaws and proxy rules.

In addition, shareholders (especially institutional investors) may exert public or private pressure on a company as to board appointments and operations.

6.4 What are the legal duties/responsibilities and potential liabilities, if any, of shareholders?

Shareholders are not liable for the acts or omissions of the company and owe no fiduciary duties to the company or to other shareholders.

6.5 To what civil and criminal liabilities might individual shareholders be subject?

Shareholders are not liable for the acts or omissions of the company and owe no fiduciary duties to the company or to other shareholders. However, courts can ‘pierce the corporate veil' to impose personal liability on the shareholders in exceptional circumstances, such as where the corporate form is being used as a sham to perpetrate a fraud or to avoid liability.

Shareholders, as individuals, can be liable under state and federal laws for:

• actions that constitute theft, fraud or bribery, such as violations of the Foreign Corrupt Practices Act; and
• violations of state and federal securities laws, such as:
• • material misrepresentations and material omissions in relevant documents;
  • insider trading; and
  • market manipulation.

6.6 Are there rules governing the issuance of further securities in a company? Do rights of pre-emption exist and, if so, how do they operate? Can they be circumvented? If so, how and to what extent?

Shareholders generally do not have a pre-emptive right in case of issuance of new shares, unless expressly provided in the company's articles of incorporation or bylaws. Contractual pre-emptive rights can be awarded during venture capital financing transactions. In both cases, those pre-emptive rights terminate as of the completion of the company's initial public offering.

Under NYSE and Nasdaq rules, shareholder approval may be required for issuances involving:

• parties related to the company;
• a change in control of the company; or
• 20% or more of the common stock or voting power of the company.

6.7 Are there any rules on the public disclosure of levels of shareholding and/or stake building?

Shareholders or groups of shareholders that are not ‘passive' and own or acquire beneficial ownership of more than 5% of a company's registered securities must make a Schedule 13D filing with the SEC. Shareholders that are interested in influencing the company or are officers and directors must file the Schedule 13D within 10 days of crossing the 5% threshold, as well as within 10 days of subsequent changes in ownership of more than 1%. Schedule 13D discloses a shareholder's ownership and investment purpose/control intent. Shareholders can increase their ownership beyond 5% in the 10 days between crossing the 5% threshold and the date on which the Schedule 13D is filed with the SEC.

‘Passive' investors that own between 5% and 20% of a company's stock may file, along with other exempt investors, a Schedule 13G after year end. The Schedule 13G is shorter and less burdensome than the Schedule 13D.

Section 13F of the Securities Exchange Act requires institutional investment managers with more than $100 million in assets under management to disclose their ownership exchange-traded stock and other instruments as of the end of each quarter within 45 days after the end of the relevant quarter.

Directors, officers and 10% shareholders must file a Securities Exchange Act Section 16 form reporting their beneficial ownership of company registered securities. Covered persons must file:

• a Form 3 at the time the company registers the securities or within 10 days of such person becoming subject to Section 16 rules;
• a Form 4 within two days of any change in beneficial ownership; and
• a Form 5 within 45 days of the end of the company's fiscal year.

7 Shareholder activism

7.1 What role do institutional investors and other activist shareholders play in shaping corporate governance in your jurisdiction?

Institutional investors and activist shareholders play a significant and increasing role in shaping corporate governance in the United States, by developing codes of conduct and by waging campaigns to effect corporate governance changes.

Institutional investors can be an effective check to the tendency of certain other short-term stockholders to put their own interests first, and have the necessary expertise and knowledge in running organisations. Because of the size of their holdings, institutional investors are more effective than minority shareholders or small shareholders in effecting changes in corporate governance.

As stated in question 1.2, institutional investors have developed ‘soft' codes of corporate governance, including:

• the effective corporate governance standards and strong shareholder rights standards advocated by the Council of Institutional Investors;
• the Commonsense Governance Principles 2.0, issued by a group of more than 24 CEOs of prominent companies and institutional investors; and
• the Institutional Shareholder Services (ISS) group of companies' review of a company's corporate governance standards through its Governance QualityScore ratings system.

The California Public Employees' Retirement System is a large institutional investor that advocates for strong corporate governance in those companies in which it invests.

Activist campaigns, by institutional investors and individual investors, use both the Securities Exchange Act Rule 14a-8 proposal mechanism and other proxy mechanisms during proxy season to impact a company's corporate governance. This mechanism:

• allows shareholders (often institutional investors) to submit proposals for a shareholder vote; and
• requires a company to include a shareholder proposal in its proxy materials if certain requirements are met.

7.2 Is there any legislation or code of practice which applies to institutional shareholders? If so, what issues does it primarily address and how is it policed/enforced?

Institutional shareholders are subject to relevant state law and Securities and Exchange Commission (SEC) rules and regulations. Voting recommendations and related materials provided by proxy advisory firms are ‘solicitations' subject to the Securities Exchange Act's antifraud rules. In addition:

• Rule 14a‑9 of the Securities Exchange Act prohibits any proxy solicitation from containing false or misleading statements with respect to any material fact at the time and in the light of the circumstances under which the statements are made; and
• As stated in question 6.7, institutional shareholders that are not ‘passive' and own or acquire beneficial ownership of more than 5% of a company's registered securities must make a Schedule 13D filing with the SEC.

The SEC can initiate an investigation, a civil action or a criminal action in connection with any breach of its rules or regulations.

State law, including Delaware law, requires that companies treat all shareholders equally, which seemingly precludes companies from giving preferential treatment to institutional investors.

Institutional investors, as shareholders, generally owe no fiduciary duties to the company or to other shareholders. However, if an institutional investor is defined as a ‘controlling shareholder', it can owe fiduciary duties of fair dealing (ie, dealing honestly, fairly and in good faith) to the company and minority shareholders.

7.3 How do activist shareholders typically seek to exert influence on corporations in your jurisdiction?

Activist shareholders can exert influence on corporations in several ways, including the following:

• for institutional investors, using their votes to leverage corporate governance changes;
• directly interacting with company boards and management;
• using the Securities Exchange Act Rule 14a-8 proposal mechanism and other proxy mechanisms;
• making strategic use of media channels in order to publicise their demands and prompt greater pressure from other shareholder; and
• threaten to file, or filing, lawsuits.

Some activist investors make minority investments in companies with the intention of engaging with management rather than acquiring control. In early 2020, KKR acquired a minority stake in entertainment and dining chain Dave & Busters for the purpose of engaging constructively with Dave & Busters' management team. In May 2020, Dave & Busters agreed to add a KKR executive to its board.

Activist investors also use public relations campaigns that criticise a company's board and management team, and demand board seats or other corporate governance changes. In 2020, Vanguard issued its first-ever company-specific report, offering analysis on its decision to vote against a Boeing director and in support of a shareholder proposal at the company. It is not uncommon for activist investors to launch proxy contests that either prevail or result in an investor-favourable settlement.

Activist investors use an acquisition strategy through private investments in public equity and the formation of special purpose acquisition companies. These investors will make corporate governance changes after the closing of the relevant transaction.

7.4 Which areas of governance are shareholders currently focused on?

Broadly speaking, activist investors focus on board change, operational improvements and management change. More specifically, these shareholders are focused on corporate governance issues such as the following:

• board composition, including the skills and experience of directors and nominees, board refreshment and director succession planning, and director overboarding;
• the diversity of the board of directors;
• the number of independent directors;
• sustainability, environmental and social issues, including climate change, greenhouse gas emissions and renewable-energy concerns;
• human capital management, discussions and disclosure about corporate culture, gender pay gaps, safety incidents, and employee turnover;
• COVID-19 issues, such as:
• • health and safety;
  • operational and risk oversight;
  • business continuity; and
  • board and management resilience;
• international labour standards and human rights;
• diversity, equality and non-discrimination issues, particularly with respect to sexual orientation;
• executive compensation and ‘say on pay' matters; and
• effective, complete and transparent audits.

7.5 Have there been any high-profile instances of shareholder activism in recent years?

In May 2021, activist fund Engine No. 1 won three of 12 board seats at Exxon Mobil's annual meeting, despite the board's recommendation to vote against that fund's candidates. In addition, two shareholder proposals were approved. The first calls for an annual report on company lobbying generally, while the second requests a report describing how the company's lobbying efforts align with the goal of limiting global warming. The board had recommended a vote against both proposals.

By April 2021, at least 12 public companies had been sued by their own shareholders, which are accusing directors and officers of failure to diversify their boards and C-suites and comply with anti-discrimination laws. The suits also typically allege that the companies falsely touted their commitment to diversity. The claims are cast as derivative suits, in which a shareholder seeks to bring claims on behalf of the corporation. One suit, against Facebook, was dismissed for failing to make a pre-suit demand or demonstrate that demand was excused as futile. Nonetheless, these cases highlight the need for boards to consider sound diversity and inclusion policies.

On 26 January, asset manager BlackRock announced that it will ask "companies to disclose a plan for how their business model will be compatible with a net zero economy — that is, one where global warming is limited to well below 2ºC"; and to disclose how those plans are "incorporated into … long-term strategy and reviewed by your board of directors".

7.6 Is shareholder activism increasing or decreasing in your jurisdiction? If so, how and why?

For a number of reasons, shareholder activism is increasing in the United States, with higher levels of activism in 2021 than in 2020 or 2019. Activist funds have a significant level of assets under management, encouraging continued activism. The number of funds that could be defined as ‘activist' has also been increasing. Environmental, social and governance (ESG) concerns have given rise to an increasing number of campaigns by 14a-8 activists, both individuals and institutional shareholders, and support for ESG-driven proxy contests and withhold campaigns.

The Dodd-Frank Act has increased understanding of corporate governance and, more specifically, the board's oversight role. The Dodd-Frank Act instituted a ‘say on pay' shareholder vote process that is discussed in question 9.1. This process has emboldened investors when it comes to executive compensation.

ESG concerns have moved from discrete proposals by a small number of ‘socially conscious' organisations to mainstream discourse, corporate disclosures, legislation and regulations. Institutional investors and business leaders have stated that they will be focused on:

• a company's ‘purpose';
• how the company treats all its stakeholders; and
• similar concepts.

The proliferation and use of special purpose acquisition companies has provided activist shareholders with another avenue to impact a company's corporate governance.

Digital technologies have broadened investors' access to company information and have enabled shareholders to communicate with one another at the click of a mouse.

8 Other stakeholders

8.1 What role do stakeholders such as employees, pensioners, creditors, customers, and suppliers play in shaping corporate governance in your jurisdiction? What influence can they exert on a company?

There is an increasing recognition in the United States that a company's responsibility is to promote the long-term value of the company for the benefit of all stakeholders, not just shareholders. Under state law, the interests of non-shareholder stakeholders may be considered by the board for their impact on creating corporate and shareholder value.

At the time of writing this Q&A, there are no requirements for employee or pensioner representation on a company's board of directors. However, there is increasing shareholder activism to designate at least one seat on a board for an employee representative.

Delaware common law provides that if a company becomes insolvent, directors continue to owe fiduciary duties to the company, but not directly to creditors. However, creditors of an insolvent company have standing to assert derivative (but not direct) claims against directors for breach of fiduciary duties.

Non-shareholder stakeholders can influence corporate governance through public or private pressure. Customers are increasing their focus issues such as climate change, diversity, political activity and gender pay equity, as well as the impact of environmental, social and governance issues on a company's financial performance. This focus can manifest itself in public relations campaigns, including boycotts.

Pursuant to California's Transparency in Supply Chains Act, companies doing business in that state must disclose measures they take to eliminate slavery and human trafficking in their supply chains. Such information must be provided by suppliers.

9 Executive performance and compensation

9.1 How is executive compensation regulated in your jurisdiction?

The Dodd-Frank Act, the New York Stock Exchange (NYSE) listing rules and the Nasdaq listing rules require each company to have a compensation committee comprised of independent directors that is responsible for matters relating to executive compensation.

Under ‘say on pay' rules, companies must submit a resolution for stockholders to approve the compensation of executives as disclosed in the proxy statement under Item 402 of Regulation S-K at least once every three years. However, the say on pay vote is not binding on a company. Companies must disclose in their proxy statements whether, and if so how, they considered the results of the most recent say on pay vote. In addition, the Dodd-Frank Act requires companies to include, at least once every six years, a separate resolution for stockholders to vote on how frequently the say on pay vote should be held.

The Dodd-Frank Act requires public companies to adopt a clawback policy whereby executive officers and/or other employees must reimburse the company for cash and stock bonuses paid to them that had been based on financial statements that needed to be restated.

The NYSE and Nasdaq listing rules require shareholder approval of all executive equity compensation plans or arrangements and any material revisions to those plans, subject to certain exceptions.

As discussed at question 9.3, certain public disclosure requirements attach to executive pay.

9.2 How is executive compensation determined? Do shareholders play a role in this regard?

As stated in question 9.1, executive compensation is determined by a compensation committee comprised of independent directors. The issues to be considered by the compensation committee typically include:

• the composition of total compensation;
• what form of equity award is most suitable for the company;
• the specific terms of the equity awards;
• what types of incentive compensation best tie pay to performance; and
• the offering of perquisites.

Also as stated in question 9.1, companies must submit a resolution for stockholders to approve the compensation of executives as disclosed in the proxy statement under Item 402 of Regulation S-K at least once every three years, although this vote is non-binding.

The NYSE and Nasdaq listing rules require shareholder approval of all executive equity compensation plans or arrangements and any material revisions to those plans, subject to certain exceptions.

Institutional investors such as Institutional Shareholder Services (ISS) police executive compensation issues. ISS will recommend voting against a company's say on pay if the company maintains significant problematic pay practices, as determined by ISS. ISS will also recommend voting against members of the compensation committee and potentially the full board if the company has recently practised or approved problematic pay practices.

9.3 Do any disclosure requirements apply in relation to executive compensation?

Pursuant to the Securities Exchange Act's disclosure rules and Regulation S-K, companies must disclose executive compensation, as well as the criteria used in setting it, in the "Compensation Discussion and Analysis" (CD&A) section of the company's annual proxy statement. This statement must provide certain content and must be filed with the agency and sent to every shareholder. The summary compensation tables accompany the CD&A and provide executive compensation information in a set tabular format. There are several required tables – most notably the summary compensation table, which provides an accounting value of total executive compensation for a company's CEO, CFO and the next three highest-paid executives.

The CD&A must answer the following questions about the company's compensation for its named executive officers:

• What are the objectives of the company's compensation programmes?
• What is the compensation programme designed to reward?
• What is each element of compensation?
• Why does the company choose to pay each element?
• How does the company determine the amount (and, where applicable, the formula) for each element?
• How do each element and the company's decisions regarding that element fit into the company's overall compensation objectives and affect decisions regarding other elements?
• Did the company consider the results of the most recent shareholder advisory vote on executive compensation in determining compensation policies and decisions? If so, to what extent?
• How did that consideration affect the company's executive compensation decisions and policies?

9.4 Have any measures to address the gender pay gap been introduced in your jurisdiction?

Although the gender pay gap in executive pay has narrowed, it still persists. The Equal Pay Act of 1963 protects against wage discrimination based on sex and includes executive compensation.

As stated in question 9.2, Item 402 of Regulation S-K requires disclosure of executive pay in a company's annual proxy statement. In theory, this should put pressure on companies to close the gender pay gap.

Institutional investors can engage with company management, and use public and private pressure, to take action to narrow the gender pay gap. These investors can also recommend votes against compensation committee members, or an entire board, if they fail to narrow the gender pay gap. Activist shareholders also use proxy mechanisms to put gender pay gap-related proposals before a company's annual meeting of shareholders.

9.5 How is executive performance monitored and managed?

The board (including the compensation committee) is responsible for monitoring and managing executive performance, although institutional investors and advisory services have significant influence in this area.

Section 953(a) of the Dodd-Frank Act requires the Securities and Exchange Commission (SEC) to adopt rules requiring public companies to disclose in their annual meeting proxy statements the relationship between executive compensation ‘actually paid' and company financial performance. However, the SEC has yet to finalise a proposed rule that would add Item 402(v) to Regulation S-K and require proxy statements or information.

If ISS identifies what it considers to be ‘problematic pay practices', it will recommend voting against the company's say on pay proposal, and could also recommend voting against members of the compensation committee and potentially the full board. Such practices include:

• multi-year guaranteed awards that are not subject to rigorous performance conditions;
• incentives that may motivate excessive risk-taking or present a windfall risk; and
• pay decisions that circumvent pay-for-performance.

Glass Lewis provides say on pay voting recommendations on a case-by-case basis after implementing both:

• a qualitative assessment of the structure of a company's compensation program and its proxy disclosure concerning such programme; and
• a quantitative assessment through its proprietary ‘pay for performance' grade.

9.6 What best practices should be considered with regard to executive performance and compensation?

Executive compensation should align with company performance. The variable component of executive compensation, contingent on the achievement of certain organisational or individual goals, should be significantly larger than base salary. A review of Russell 3000 companies discussed in the Harvard Business Review shows that on average, 82% of an executive's compensation is variable, with the rest as base salary.

More variable compensation should be deferred and paid over a future period rather than being paid out in the year it is awarded. Short-term variable compensation generally takes the form of cash; long-term compensation is generally delivered in equity, through instruments such as stock options, restricted stock and performance shares. As stated in the Harvard Business Review, on average, 28% of senior executives' variable compensation is paid the year it is awarded (or immediately thereafter), and 72% is paid in future years.

Companies should tilt the executive compensation mix towards equity instead of cash, to incentivise executives to think like owners. In addition, when setting compensation, companies should give additional weight to organisational performance rather than individual performance.

Companies may consider engaging with, rather than fighting, activist investors on matters of executive compensation. Not only would engagement be less expensive to the company, but the result of such engagement could improve executive compensation policies.

Companies must comply with relevant statutes, SEC rules and listing standards on executive compensation decisions and disclosure.

10 Disclosure and transparency

10.1 What primary reporting obligations relating to corporate governance apply in your jurisdiction?

Securities and Exchange Commission (SEC) disclosure requirements trigger disclosure of corporate governance matters, including the following:

• Regulation S-K Item 101: Business description disclosure;
• Regulation S-K Item 303: Material known events and uncertainties disclosure included in management's discussion and analysis of financial conditions and results of operations;
• Regulation S-K Item 407(a): Director independence;
• Regulation S-K Item 407(d): Audit committee;
• Regulation S-K Item 503(c): Risk factor disclosure;
• SEC Releases 33-9106; 34-61469; FR-82 (8 February 2010): Guidance regarding climate change disclosure; and
• Securities Exchange Act Rule 13p-1: Conflict minerals disclosure.

California law requires companies doing business in that state to disclose the measures they take to eliminate slavery and human trafficking in their supply chains.

In proxy statements, companies must disclose those items that will be brought before the shareholders for their approval and the recommendation of the board. Proxy statements for the annual meetings at which directors are elected contain extensive information about:

• the board and senior management;
• governance practices;
• director and executive compensation;
• auditor information; and
• other matters.

Section 16 filings report trades by directors and officers and information concerning the company's board of directors and management teams.

Under New York Stock Exchange (NYSE) rules, the CEO must promptly notify the NYSE in writing if any executive officer becomes aware of any non-compliance with NYSE corporate governance standards. Nasdaq requires the CEO of each company to promptly notify it if any executive officer becomes aware of any non-compliance with Nasdaq's corporate governance standards.

10.2 What role does the board play in this regard?

The board has primary responsibility for ensuring that the company timely and properly discloses relevant corporate governance issues. Disclosures about compensation matters will originate with the compensation committee; nominating-related disclosures will come from the nominating committee; and audit disclosures will come from the audit committee. The formation and effective operation of the nomination, audit and compensation committees, as required by law, regulation or listing standard, are obligations imposed on the board itself.

Directors owe a duty of care to the company and its shareholders, which requires that the board adopt and adhere to reasonable corporate governance standards.

The board of directors:

• reviews drafts of periodic filings such as the Form 10-K;
• approves the Form 10-K; and
• authorises its filing.

A majority of directors must sign the Form 10-K and bear potential liability for any inaccurate, misleading or omitted information. Directors can also face liability under Rule 13b2-2 of the Securities Exchange Act 1934 if they make a materially false statement to an accountant in connection with an audit or the preparation of an SEC filing.

The audit committee reviews and approves the financial statements and related notes, and recommends to the full board of directors that the financial statements be included in Form 10-K. The audit committee must report on these actions in the company's annual proxy statement.

10.3 What role do accountants and auditors play in this regard?

A public company's annual financial statements must be audited by a registered independent accounting firm. While company management is generally responsible for preparing the financial statements, the auditor is responsible for expressing an opinion indicating that:

• reasonable assurance has been obtained that the financial statements as a whole are free from material misstatement, whether due to fraud or error; and
• they are fairly presented in accordance with the relevant accounting standards.

Auditors can issue a modified audit opinion if they disagree with management about the financial statements. They can also add additional paragraphs to an audit opinion to draw attention to specific significant matters, including where a material aspect of the financial statement is subject to uncertainty.

Item 8 of Part II of Form 10-K, requires companies to include the auditor's opinion relating to the company's financial statements. Form 10-Q requires the filing of quarterly unaudited financial statements; in practice, companies generally will not file their Form 10-Q until the accountants have signed off on the financial disclosure. Pursuant to Section 404 of the Sarbanes-Oxley Act, companies must include in annual reports on Form 10-K a statement that the independent auditor has issued an attestation report on management's assessment of the company's internal control over financial reporting.

10.4 What best practice should be considered in relation to reporting and disclosure?

Most importantly, corporate governance reporting and disclosure processes must comply with relevant law, regulation and stock exchange rules. In addition to the matters discussed in questions 10.1 to 10.3, a company may set up a ‘hotline' for the anonymous disclosure to it of any corporate governance failings.

Companies should consider reporting on corporate governance issues voluntarily. According to an EY report, 69% of the Fortune 100 included voluntary proxy statement disclosures highlighting a commitment to sustainability. According to the US Chamber of Commerce, 86% of S&P 500 companies issued an annual ESG report. The US Chamber of Commerce has released a set of best practices to guide companies in making voluntary disclosure about environmental, social and governance topics.

Companies should be aware that institutional investors such as BlackRock have warned that they will vote against directors at companies that do not make sufficient progress on implementing sustainable business practices and improving their climate change and sustainability-related disclosures. This should prompt companies to engage with such institutional investors on corporate governance reporting and disclosure.

11 Audit and auditors

11.1 What rules relate to the appointment, tenure and removal of auditors?

Pursuant to Section 301 of the Sarbanes-Oxley Act (SOX), a public company's audit committee is directly responsible for the appointment, compensation and oversight of the independent auditors. The audit committee has authority:

• to approve all audit engagement terms and fees; and
• to terminate the engagement.

Companies typically seek shareholder ratification of independent auditor appointments. As provided in Section 203 of SOX, lead audit partners must rotate every five years, but audit firm rotation is not required.

Any firm auditing a public company's financial statements must be registered with the Public Company Accounting Oversight Board (PCAOB). It must also meet independence requirements provided in the federal securities laws, such as Securities Exchange Act Regulation S-X and relevant PCAOB rules.

Securities Exchange Act Regulation S-X provides that an auditor's independence is impaired if the auditor is not, or a reasonable investor with knowledge of all the facts and circumstances would conclude that the auditor is not, capable of exercising objective and impartial judgement on all issues encompassed within the audit engagement. An audit committee must consider all of the relationships between the auditor and the company, the company's management and directors – not just those relationships related to reports filed with the Securities and Exchange Commission. The audit committee should consider whether a relationship with or service provided by an auditor:

• creates a mutual or conflicting interest with the audit client;
• places it in the position of auditing its own work;
• results in it acting as management or an employee of the audit client; or
• places it in a position of being an advocate for the audit client.

11.2 Are there any rules or recommendations that limit the scope of services as regards the provision of non-audit services by an auditor?

Rule 2-01 of Regulation S-X prohibits auditors from providing certain non-audit services to their clients and their client's affiliates, including:

• bookkeeping and other services related to the accounting records or financial statements of the client;
• financial information systems design and implementation;
• internal audit outsourcing services;
• management functions or human resources;
• legal services; and
• expert services unrelated to the audit.

A company's audit committee must also determine whether any other service provided by the auditors can impair the firm's independence.

Subject to certain limited exceptions, the audit committee must pre-approve all permitted services provided by the independent auditor (eg, tax services, comfort letters, statutory audits).

Certain relationships between audit firms and the companies that they audit are not permitted, such as the following:

• relationships with certain individuals who were formerly employed by the auditor in a financial reporting oversight role – in such case, a one-year cooling off period is required before the company can hire the relevant individual;
• engagements that remunerate an independent auditor on a contingency fee or a commission basis;
• any direct or material indirect business relationships with the company, its officers, directors or significant shareholders; and
• certain financial relationships between the company and the independent auditor.

11.3 Are there any rules or recommendations which cap the remuneration of an auditor as regards payment for the provision of non-audit services?

Rule 2-01 of Regulation S-X prohibits auditors from providing certain non-audit services to their clients and their clients' affiliates. In addition, the audit committee must pre-approve all permitted services provided by the independent auditor (eg, tax services, comfort letters, statutory audits).

Further, certain relationships between audit firms and the companies that they audit are not permitted, such as the following:

• relationships with certain individuals who were formerly employed by the auditor in a financial reporting oversight role – in such case, a one-year cooling off period is required before the company can hire the relevant individual;
• engagements that remunerate an independent auditor on a contingency fee or a commission basis;
• any direct or material indirect business relationships with the company, its officers, directors or significant shareholders; and
• certain financial relationships between the company and the independent auditor.

Rule 2-1(c)(8) of Regulation S-X provides that an accountant is not independent of an audit client if, at any point during the audit and professional engagement period, any audit partner earns or receives compensation based on the audit partner procuring engagements with that audit client to provide any products or services other than the audit services. By not being independent, such accountant will be disqualified from providing audit services.

12 Trends and predictions

12.1 How would you describe the current corporate governance landscape and prevailing trends in your jurisdiction?

The current corporate governance landscape and prevailing trends in the United States are focusing on issues such as the impact of COVID-19, diversity, climate change and sustainability. Companies are increasingly disclosing environmental, social and governance (ESG) related information in sustainability reports and/or disclosures filed with the SEC. Investors are also increasing their focus on ESG issues and the impact of ESG issues on companies' financial performance.

Company boards and management continue to grapple with the corporate governance issues implicated by the COVID-19 pandemic, such as:

• health and safety;
• operational and risk oversight;
• business continuity;
• board and management resilience; and
• shareholder relations and activism.

As stated at question 4.4, certain key institutional investors vote against, and recommend that others vote against, board members at companies with inadequate board diversity.

As stated at question 8.1, there is a growing movement to recognise that companies serve a public good in providing goods and services, and a broad range of stakeholder interests should be considered in corporate decision making.

Boards and key institutional investors are increasingly scrutinising board composition, skills and experience, refreshment and director succession planning. Further, director overboarding continues to be a focus of shareholder activists, proxy advisory firms and several major institutional investors.

12.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The Securities and Exchange Commission (SEC) is expected to propose comprehensive rulemakings that would address disclosure concerning:

• climate change;
• human capital management;
• board diversity;
• cybersecurity governance; and
• certain other matters that relate to ESG-related topics.

The SEC is also considering rule amendments that would:

• impose significant additional disclosure and procedural requirements on proxy advisers before they can rely on exemptions from the information and filing requirements of the federal proxy rules; and
• amend the eligibility requirements for submitting and resubmitting shareholder proposals under Securities Exchange Act Rule 14a-8.

As stated in question 4.4, Nasdaq recently received SEC approval for its new board diversity-related rules that would require listed companies to:

• provide disclosure concerning the diversity of the board; and
• have, or explain why they do not have, at least two diverse directors as defined by the Nasdaq rules.

Shareholder activism is expected to increase for the rest of 2021 and into 2022, with an expected focus on matters such as climate change. The Biden administration's re-joining of the Paris Climate Agreement has reinforced corporate responsibility for managing climate change as a long-term, material financial risk. Investors and companies such as Unilever are starting to support a new investor ‘say on sustainability' vote.

Institutional investors continue to increase their expectations around board oversight of human capital management and corporate culture. Demand for disclosure of information on gender pay gap, safety incidents and employee turnover has increased.

13 Tips and traps

13.1 What are your top tips for effective corporate governance in your jurisdiction and what potential sticking points would you highlight?

The top-line tip is that a company's corporate governance standards and processes should comply with relevant law, regulation and listing rules, if not exceed such requirements. Companies should also:

• appoint directors with the skills and experience that reflect the company's strategic priorities and challenges;
• appoint and maintain diverse and inclusive boards;
• recognise that a broad range of stakeholder interests should be considered in corporate decision making;
• create a mechanism to engage proactively institutional investors and activist shareholders on corporate governance matters;
• make voluntary disclosures about climate change, sustainability and other environmental, social and governance-related topics;
• disclose human capital management, including the company's human capital resources and any human capital measures or objectives that management focuses on in managing the business;
• expect increasing scrutiny on board oversight and disclosure around cybersecurity risk; and
• expect increasing scrutiny on executive compensation issues.

In addition to ‘hard' legal requirements around corporate governance, companies should consult the body of ‘best practices' literature, including:

• the Business Roundtable's Principles of Corporate Governance; and
• the Commonsense Principles of Corporate Governance 2.0.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.