Principles of Corporate Governance

By Mark Michael, Grow Board Member

Corporate governance is challenging to measure accurately. Another way of identifying good governance can be based on a set of principles that companies may practice. Many experts and stakeholders have weighed in on such key principles of good corporate governance. Perspectives may differ; for example, from the point of view of a corporate executive or board member, a corporate attorney or an independent auditor. However, there are significant similarities and both the U.S. and U.K. capital markets and legal system share in a common approach. Here are some examples from thought leaders from the world of accounting, law and corporate boardrooms.

With admirable brevity, an article was recently published in the U.K. by the Institute of Chartered Accountants Worldwide entitled: “What are the overarching principles of corporate governance?” [1]

• Leadership — an effective board should steer the company to meet its business purpose in both the short and long term
• Capability — the board should have an appropriate mix of skills, experience and independence to enable its members to discharge their duties and responsibilities effectively
• Accountability — the board should communicate to the company’s shareholders and other stakeholders at regular intervals a fair, balanced and understandable assessment of how the company is achieving its business purpose and meeting its other responsibilities
• Sustainability — the board should guide the business to create value and allocate it fairly and sustainably to reinvestment and distributions to stakeholders, including shareholders, directors, employees and customers
• Integrity — the board should lead the company to conduct its business in a fair and transparent manner that can withstand scrutiny by stakeholders

A longer-form treatment of this same topic by the Business Roundtable appeared in the U.S. [2]. The Business Roundtable approach expressed support for seven core, guiding principles:

1. Approval of long-term strategy, allocation of capital, assessing and managing risks, and setting “tone at the top” for ethical conduct
2. Board oversight of business operations to produce sustainable long-term value creation
3. Transparency resulting from board oversight of financial statements and disclosures
4. Integrity of audit, internal controls over financial reporting, risk management and compliance
5. Nominating and governance committee leadership in shaping engaged and diverse board, with composition appropriate to the company’s needs and strategy, including succession planning
6. Compensation committee development and implementation of compensation philosophies for senior management to incentivize creation of long-term value
7. Board and management engagement with long-term shareholders on relevant issues affecting the company’s long-term value creation

Martin Lipton

One of the leading corporate governance attorneys — Martin Lipton, senior partner at Wachtell Lipton Rosen & Katz — regularly writes on the same topics. In July 2016, Mr. Lipton published an open letter to clients regarding an emerging new paradigm of corporate governance under the topic “Commonsense Corporate Governance Principles.” These principles came from a group of institutional investors and corporate leaders [3]. At a high level, this group emphasized the importance of six principles, including:

1. Board independence
2. Board composition and diversity
3. Independent board leadership
4. Financial disclosure and guidance that is beneficial to shareholders
5. Adherence to Generally Accepted Accounting Principles
6. Constructive engagement between a company and its shareholders

Mr. Lipton was most interested in discussing some of the group’s suggestions:

• All directors should represent all shareholders in achieving a company’s long-term success.
• Boards should regularly discuss long-term value creation, “including investments that may not pay off in the short run.
• Companies should frame quarterly reporting in the broader context of articulated strategy and reflect progress against long-term goals.
• Companies should evaluate whether earnings guidance does more harm than good.
• Asset managers should devote sufficient time and resources to matters presented for shareholder vote in the context of long-term value creation.
• Asset managers should actively engage with companies, both to convey the asset manager’s perspective and to understand the company’s perspective.
• Asset managers should have access to companies, their management and, sometimes, their directors. Companies should have access to asset managers’ ultimate decision makers.
• Asset managers should raise critical issues to companies, and vice versa, early and in a constructive and proactive way.

There is considerable similarity, if not consensus, among these various efforts to enumerate the core elements of good corporate governance. Expectations of shareholders and other stakeholders may evolve over time, and the listing requirements of stock exchanges in the major capital markets may require certain “best practices” and related disclosure obligations. The data analytics methodology of Grow will seek to identify those equity and debt securities offered by companies that conform to the paradigm and practices of good governance.

1.http://www.icaew.com/~/media/corporate/files/technical/corporate%20governance/dialogue%20in%20corporate%20governance/icaew%20tl%20q2%20web.ashx

2. https://businessroundtable.org/sites/default/files/Principles-of-Corporate-Governance-2016.pdf

3. http://www.governanceprinciples.org/