A group composed of 20 public company CEOs and leaders of institutional investors has released Commonsense Corporate Governance Principles 2.0, an updated set of corporate governance principles that are intended to provide “a basic framework for sound, long-term oriented governance.” The group includes such luminaries as Warren Buffett, the Chairman and CEO of Berkshire Hathaway, Jamie Dimon, the CEO of JPMorgan Chase, Mary Barra, the CEO of General Motors, and Ginni Rometty, the CEO of IBM. The new released document updates the group’s original principles first published in 2016. The principles as updated include some interesting guidelines for publicly traded companies and for their investors, in a number of key areas.

 

The group’s October 18, 2018 press release can be found here. An Open Letter from the signatories to the updated principles can be found here. The updated principles themselves can be found here.

 

By their endorsement of the principles, the signatories are indicating their commitment to use the standards in the principles to “inform the corporate governance practices within their own organizations.” The principles themselves are meant “to benefit the millions of Americans who work for and invest in America’s public companies, create economic growth, and sustain the health of America’s corporate markets.”

 

In their Open Letter, the signatories noted the “precipitous decline” in the number of public companies in the U.S., a development the signatories say that some have suggested is due to “public market participants’ short-term oriented focus” which discourages companies with a longer-term view from going public. The principles are presented as “counterweights” to “unhealthy short-termism.”

 

The principles address a number of key governance topics, include board composition, leadership, structure, compensation, and responsibilities; shareholder rights (including, for example, proxy access); public reporting; management compensation and succession planning; and investors’ role in corporate governance.

 

The changes added in the updated version of the principles just released primarily related to three areas: board service and elections; proxy process; and asset manager and asset owner corporate governance responsibilities.

 

With respect to board service and elections, the new principles adopt a standard stating that “a director ordinarily should refrain from joining a board on which he or she is not committed to serving for at least three years.” The update also incorporates a standard stating that “if a company chooses to hold elections on a staggered basis or otherwise elect directors less frequently than annually, the board should explain clearly (ordinarily in the company’s proxy statement) its rationale for doing so.”

 

With respect to proxy process, the updated principles state that “public companies should allow for some form of proxy access, subject to reasonable requirements that do not make proxy access burdensome for significant, long-term shareholders.” The principles also emphasize that companies and shareholders are encouraged to engage early on important proxy proposals. Poison pills and other anti-takeover defenses should be put to a shareholder vote and re-evaluated by the board on a periodic basis.

 

A number of the updates in the revised principles relate to the governance responsibilities of asset managers. The updated principles specify that asset managers should disclose if they rely on proxy advisers to inform their decision making, and that asset managers should disclose their conflict of interest policies in their proxy voting and shareholder engagement activities.

 

Finally, the updates specify that asset owners (such as pension plans and endowments) should “use their position to advance sound and long-term oriented corporate governance” in their interactions with both companies and asset managers, and that asset managers should use benchmarks and performance reports consistent with their investment time horizon to affect governance outcomes with asset manager and to evaluate the asset managers’ performance on both investment returns and governance.

 

The updates principles have been endorsed by a number of industry and governance organizations, including The Conference Board and Business Roundtable.

 

The updated principles contain a number of important (although arguably also common sense) guidelines for the various participants in the corporate governance process, particularly for board members. The guidelines pertaining to board responsibilities address a number of important key board function issues, including in particular that importance of the board to set the agenda, help set strategy and to question management with a goal of “creation of shareholder value” with “a focus on the long-term.”

 

The principles taken as a whole contain a number of interesting insights and observations, such as, for example: dual class voting “is not a best practice”; poison pills and other anti-takeover measures “can diminish board and management accountability to management”; and, if the board decides to combine the chair and CEO roles, it is “critical that the board has in place a strong designated lead independent director and governance structure.

 

A recurring theme that weaves throughout the various guidelines is an emphasis on the importance of long-term strategies, goals, and performance. For example, in the section of the principles relating to public reporting, the guidelines state that a company should “frame its required quarterly reporting in the broader context of its articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or not) on long-term goals.” The guidelines go on to say that “long-term goals should be disclosed and explained in a specific and measureable way” and that “a company should take a long-term strategic view, as though the company were private.”

 

The updated principles are relatively short and compact, clearly by design, so in that sense it might be unfair to point out that there are topics the principles do not address. The principles also do not, again clearly by design, address substantive issues. Just the same, I do think it is fair to point out a number of things the guidelines do not address:

  • The board’s responsibilities for cybersecurity issues;
  • The board’s role with respect to ESG (environment, social and governance issues) and sustainability;
  • The board’s responsibilities to constituencies other than shareholders (for example, employees and the communities in which the company is based).

I suspect one response from the signatories on the principles’ omission of these topics is that these topics are really beyond the scope of the relatively bare-bones principles. Another response might be that questions around corporate responsibilities for these kinds of things (particularly on ESG issues and to constituencies beyond the shareholders) are matters of some debate and even controversy in the business world and in academia, and for that reason it was better for the principles to stay away from those topics.

 

Another response to the omission from the principles of these other topics could be that the principles were intended to address a separate problem which is the “unhealthy short-termism.” With that goal in mind the principles, it could be argued, were specifically designed to encourage long-tong term thinking, not to address other social issues.

 

I will say that one way that it is interesting that the principles do not address ESG issues is that the signatories to the document include Larry Fink of BlackRock has been an outspoken proponent of the need for companies to address ESG issues. Fink’s January 2018 letter to CEOs on the importance for companies to engage on social issues was something of a shot heard around the world on the topic. Nevertheless, these considerations did not make their way into the principles.

 

UCLA Law Professor Stephen Bainbridge had an interesting take on the principles as originally issued back in 2016; he said on his blog that the principles are a “mixed bag,” consisting “Some feel good platitudes. Some commonsense. And some pure bunkum.” Bainbridge said last week that the same critique appears to apply to the updated principles, as well.

 

One final note. There is nothing new about the principles’ concerns about the evils of short-termism. As I have previously noted on this blog, the scourge of short-term thinking has been something of a punching bag for some time now.  The more interesting question, as I discussed here, is whether short-term thinking gives rise to D&O liability issues.

 

Management Liability Webinar: On Wednesday November 14, 2018, Howden Germany and the Mayer Brown law firm will be conducting a free webinar on the topic of “Corporate Compliance, Executive Liability and D&O Insurance in Germany.” The webinar, which will be in English, will take place from 9:00 am Eastern Time to 9:30 am Eastern Time. For the list of speakers and for more information about the webinar, please refer here.