A couple of years ago, a group of CEOs of major public companies and institutional investors, including Jamie Dimon, Warren Buffett, Larry Fink and Mary Barra, among others, developed a list of “commonsense corporate governance principles,” designed to generate a constructive dialogue about corporate governance at public companies. As discussed in a new open letter, the group believes that its principles—along with other sets of principles developed by the Investor Stewardship Group, the Business Roundtable and the World Economic Forum—have become “part of a larger dialogue about the responsibilities and need for constructive engagement of those companies, their boards and their investors.” The group views the discussion as particularly important in light of the “precipitous decline” in the number of public companies, which the group attributes, in large part, to the short-termism of public market participants. In that regard, in its letter, the group endorsed the principles developed by these other groups “as counterweights to unhealthy short-termism,” and revisited its own principles in a new updated Version 2.0. According to the press release, the signatories to Version 2.0 (including a number of well-known new signatories) have committed to apply the principles in their own businesses and call on others to join their ranks.
As was the case with the original set of commonsense principles issued in 2016 (see this PubCo post for a discussion of those original principles), Version 2.0 includes a number of the same governance ideas that, for most part, are well-reasoned and also, for the most part, noncontroversial and widely accepted, if not always followed. After all, would anyone take issue with the advice that directors “should be business savvy and shareholder oriented and have a genuine passion for their company” or that all “directors must have high integrity and the appropriate competence to represent the interests of all shareholders in achieving the long-term success of their company” or that the “board should minimize the amount of time it spends on frivolous or nonessential matters — the goal is to provide perspective and make decisions to build real value for the company and its shareholders”?
Version 2.0 does, however, continue to stake out some strong positions. For example, notwithstanding the principles’ concern about short-termism, the group continues to decry dual-class voting as “not a best practice,” and advocates that companies with dual-class voting “ordinarily should have specific sunset provisions.” Of course, a number of the most successful companies that have gone public in the last two decades have maintained these types of voting structures, notwithstanding disfavor by the proxy advisory firms and others, in many cases to head off hedge-fund activists and others with short-term agendas. Likewise, Version 2.0 continues to recommend that companies not feel obligated to provide earnings guidance, limited this time, however, to quarterly guidance.
Version 2.0 offers several additional principles, some of which could be contentious:
- “Poison pills and other anti-takeover measures can diminish board and management accountability to shareholders. Insofar as a company adopts a poison pill or other anti-takeover measure, the board ordinarily should put the item to a vote of the shareholders and clearly explain why its adoption is in the best interests of the company’s shareholders. On a periodic basis, the board should review such measures to determine whether they remain appropriate.”
- “Public companies should allow for some form of proxy access, subject to reasonable requirements that do not make proxy access unduly burdensome for significant, long-term shareholders.” According to EY, 65% of companies in the S&P 500 now have proxy access, while ISS reported that only 39% had proxy access in 2016.
- Directors should be prepared to serve for a minimum of three years. Directors should be elected annually by majority vote, and if they fail to achieve a majority, they should tender their resignations, which the board should “ordinarily accept”; if not, the rationale for the decision should be explained.
- Companies should engage early with proponents of shareholder proposals; if the proposal receives majority support, the company should consider further engagement “and either implement the proposal (or a comparable alternative) or promptly explain why doing so would not be in the best long-term interests of the company. As a best practice, the company also should consider further engagement with shareholders to discuss shareholder proposals that receive significant but less than majority support and formulate an appropriate response. And while such response may include the adoption of the proposal (or a comparable alternative), the board should be mindful of the fact that a majority of the company’s shareholders did not support the proposal.” The company should also engage early with shareholders on management proposals.
The remaining new additions relate primarily to investors, divided between asset managers (such as BlackRock, the CEO of which is a signatory) and institutional asset owners, such as pension plans and endowments:
- To the extent asset managers use recommendations of proxy advisors in decision-making, they “should disclose that they do so, and should be satisfied that the information upon which they are relying is accurate and relevant. Proxy advisors whom they use should have in place processes to avoid or mitigate conflicts of interest.” (For a discussion of the role of proxy advisory firms as a hot topic in corporate governance, see this PubCo post.)
- Asset managers should disclose their own policies for addressing potential conflicts of interest in their own proxy voting and shareholder engagement activities.
- Portfolio managers should be compensated based on performance over an appropriate term (ordinarily, three- to five-year periods, in addition to a one-year period), given the strategy and investment horizon for the portfolio.
- Through their interactions with companies and asset managers, asset owners should use their positions to promote sound, long-term-oriented governance.
- When investing through asset managers, asset owners should promote a long-term orientation by using benchmarks and performance reports consistent with their strategies and investment time horizons, dialogues concerning governance issues and performance evaluations based on both investment returns and governance.
