Governance Galore

The TakeAway: New York Stock Exchange proposes ten corporate governance principles for management, boards, and shareholders—and suggests the need for regulating proxy advisory services.

What comprises good corporate governance and investor stewardship?  These questions continue to pop up as regulators, stock exchanges, pension funds, academics, lawyers, and others respond to changing governance regimes, pressures for meaningful accountability and engagement, and the emerging role of interactive technology.  For example, last Thursday the Commission on Corporate Governance sponsored by the New York Stock Exchange (NYSE) published its report on corporate governance after a yearlong review process.  In the UK, a group of eleven pension funds with combined assets of roughly $283 billion declared their support for the Stewardship Code that the Financial Reporting Council (FRC) recently unveiled.  In addition, controversy over Symantec’s decision to hold a virtual annual meeting raised questions about the risks of virtual meetings, which might insulate managers from shareholder queries.  These different pieces fit into a larger fiduciary puzzle, but in the end, good corporate governance – like morality and citizenship – cannot be mandated.  It’s cultivated at each company, kept in check by laws and rules, and nourished by the values of a representative democracy.

Today, we’ll consider the NYSE recommendations and return to the related topics of stewardship and virtual presence during the week.

The Commission on Corporate Governance – appointed in September 2009 – comprised 27 members from law firms, corporations, pension funds, academe, and investor groups.  While adhering to traditional “maximization of shareholder wealth” orthodoxy, the recommendations also promote broader shareholder engagement.  Its ten governance guidelines catalog the duties and relationships of three key corporate actors:  management, board, and shareholders.  Among them:

• The board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation.

• Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior.

• Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a dialogue with companies thoughtful manner;

Good corporate governance should be embedded into a company’s strategy, and not just viewed as a compliance matter.  Problems should be resolved through collaboration and “market-based reforms”, with disclosure policies and practices in place for both companies and investors, according to Commission’s recommendations.

While endorsing NYSE listing requirements that generally provide for a majority of independent directors, the Commission urged inclusion of additional non-independent board directors to foster “an appropriate range and mix of expertise, diversity, and knowledge”.

The challenge of proxy voting, the role of proxy advisory services, and the need for greater individual investor participation received special attention.  The Commission stated its belief that proxy advisory firms “be held to appropriate standards of transparency and accountability”.   It called upon the Securities and Exchange Commission to conduct a study of “the role of proxy advisory firms, to determine their potential impact on, among other things, corporate governance and behavior, and consider whether or not further regulation of these firms is appropriate”.  It also proposed that the SEC work with the NYSE and other exchanges “to ease the burden of proxy voting and communication while encouraging greater participation by individual investors in the proxy voting process”— through “more effective and efficient ways”.  This represents the latest chapter in a long-standing debate over the monopolistic role wielded by certain proxy advisory firms and potential conflicts of interest.

Finally, the Commission recommended that the NYSE and the SEC solicit a “wide range of views” and periodically assess the impact of recent corporate governance reforms on “sustainable, long term corporate growth and sustained profitability”, while observing, “in many ways it is still too early to determine the full impact or effectiveness of these changes”.