Group of 13 companies to set baseline for conversation on improving governance
To ensure its independence, every board should meet regularly without the CEO present and engage directly with executives below the CEO level. And in order to make better decisions, boards need to recruit directors with complementary and diverse skills, backgrounds and experiences, and strive to balance experience and tenure with the fresh thinking and perspective of newer board members.
Those are two of the central points made in the Commonsense Corporate Governance Principles, adopted and published on July 21 by a group comprising major asset managers, publicly listed companies, a pension fund and an activist investment firm. The group includes BlackRock, T Rowe Price, Berkshire Hathaway and JPMorgan Chase.
An open letter issued to accompany the principles notes that of the 28 mn businesses in the US, only 5,000 are publicly listed yet these are responsible for one third of all private sector employment and half of all business capital spending in the US. ‘To ensure their continued strength to maintain our global competitiveness and to provide opportunities for all Americans, we think it essential that our public companies take a long-term approach to the management and governance of their business (the sort of approach you’d take if you owned 100 percent of a company),’ the letter reads in part.
The Council of Institutional Investors (CII) applauded the group’s commitment to independent boards and shareholder equality (one vote per share) and dubbed it ‘a call to action for US companies, large and small, to adopt effective corporate governance standards and practices.’
But Ken Bertsch, CII’s executive director, says ‘the principles should have gone further on shareholder rights’ by fully endorsing long-term shareholders’ right to place their director nominees on a company’s proxy card instead of just acknowledging that dozens of companies have recently adopted proxy access. The CII has also criticized the principles for failing to affirm that it is a board’s duty to take action on shareholder proposals that have been endorsed by a majority of shareholders.
There has been criticism from other quarters for failure to send a stronger message about board tenure and the need for firmer retirement policies to make room for greater age, gender and ethnic diversity in boardrooms. One attorney calls it a ‘missed opportunity’ to provide more specific guidance to help directors make sensitive decisions on retirement, as reported by Reuters.
The creation of these principles began as a dialogue between JPMorgan Chase CEO and chairman Jamie Dimon and Berkshire Hathaway CEO Warren Buffett about a year ago. ‘The idea was to get different viewpoints so we can come up with a set of principles that can be flexible and really work,’ says Margaret Popper, a spokesperson for the group. ‘The problem is if you put something out there from one perspective, it’s too easy to take pot shots at it. ‘
In addition to Buffett and Dimon, the signatories to the principles include asset managers Larry Fink at BlackRock, Bill McNabb at Vanguard and Ronald O’Hanley at State Street Global Advisors, CEOs Jeff Immelt at GE, Mary Barra at General Motors and Lowell McAdam at Verizon, and activist investor Jeff Ubben of ValueAct Capital.
‘The point was to say that companies held up as examples of good corporate governance help the conversation and this is another part of that conversation,’ Popper says. ‘This is trying to say, We’re seeing all this great activity and lots of important discussion about this. Can we try to coalesce this and set some baseline from which we can continue to develop it?’
While some governance experts have recently said they doubt proxy access will ever actually be invoked to nominate alternate director candidates in board elections, Amy Borrus, CII’s deputy director, says she thinks that’s wrong because if it doesn’t get used, it will be seen as a hollow threat. ‘I think it will be used sparingly, rarely and probably not right away,’ she says. ‘I wouldn’t be surprised if it’s not used next year. Proxy access is still making inroads, even at the largest companies. I know that active investors are talking about the need to make sure it gets used widely.’
Investors should be pleased to see that the principles include a call for the use of non-Gaap measures to be sensible and for them not to be used to obscure Gaap results, Borrus adds. ‘In this regard, it is important to note that all compensation, including equity compensation, is plainly a cost of doing business and should be reflected in any non-Gaap measurement of earnings in precisely the same manner it is reflected in Gaap earnings,’ the principles state.
‘The use of non-Gaap numbers has been growing and it’s been a concern, and this suggests this will support the message the SEC is trying to drive home to companies to clean up their financial reporting,’ Borrus says. The SEC’s tougher stance on the use of non-Gaap measures applies to earnings reports, starting from the second quarter of 2016, as well as annual proxy statements.
