Commission on Corporate Governance
report released late last month received a lot of press on its governance principle on the regulation of proxy advisory firms. But there’s a bigger message in the 44-page Sept. 23 report
that lists 10 principles focusing on the three major parties: directors, management and shareholders.
“The report will give them [directors] the opportunity to see what governance reform is all about,” Larry Sonsini, c
hair of Wilson Sonsini Goodrich & Rosati and the NYSE Commission on Corporate Governance, said during a Sept. 23 This Week in the Boardroom Webcast
from Corporate Board Member. “It makes them realize it’s not a check-the-box mentality. The theme is accountability, transparency and responsibility. That should impact all the constituencies.”
In addition to its principles, the report made some interesting findings worth noting:
- The board’s fundamental objective is to build long-term sustainable growth in shareholder value, and policies that encourage excessive risk-taking for the sake of short-term stock price increases are inconsistent with sound corporate governance.
- Corporate management has a critical role in corporate governance, as management has the primary responsibility for creating an environment in which a culture of performance with integrity can flourish.
- While independence is an important attribute for board members, the NYSE’s Listing Standards do not limit a board to just one non-independent director, and boards should seek an appropriate balance between independent and non-independent directors to ensure a proper mix of expertise, diversity and knowledge.
- While legislation and agency rule-making are important to establish the basic tenets of corporate governance, the commission believes that over-reliance on legislation and agency rule-making may not be in the best interests of all parties involved. Instead, the commission believes market-based governance solutions should be used whenever possible.
“A very important part of this document is that it has, most likely for the first time, separated out
management as a source for rights, responsibilities and duties for corporate governance,” Stephen Lamb, a partner with Paul Weiss and a member of the commission’s shareholder subcommittee, said during the Webcast. “And that’s important because everyone knows management has the ability to control the flow of information to the board.”
The 10 principles outlined in the report focus on such issues as long-term sustainable growth, ethical behavior of management, shareholder rights and responsibilities, market reforms and rulemaking, and independent directors, to name a few. To see the complete list, click here
When you pore over the report, there are some nuggets included among these principles that are worth breaking out. For instance, under Principle 3 about shareholder rights is the following language, “consistent with this principle, institutional investors should establish and disclose their corporate governance guidelines and general voting policies.”
Under Principle 8 about the influence of proxy advisory firms, the commission writes, “the SEC should engage in 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.”
Under Principle 9 regarding more participation of individual investors in the proxy voting process, the commission writes, “the SEC should establish a committee of market participants and outside experts…to consider its recent concept release on improving the proxy process.”
Meanwhile, those companies trading on the Nasdaq OMX market are still waiting for the final report on its Corporate Governance Best Practices. A preliminary document
was put out for comment in August 2009 with a comment deadline of Oct. 30, 2009, but hasn’t been heard from since.
A New York Stock Exchange Euronext