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North American business leaders back corporate governance principles

A group of 13 US and Canadian fund managers, pension funds and company bosses have taken the unprecedented step of endorsing a set of corporate governance principles in a bid to quell rising unease and conflict around US governance standards.

In an open letter the business leaders, who include Jamie Dimon, chairman and chief executive of JP Morgan Chase, Larry Fink chairman and chief executive of BlackRock, veteran activist investor Warren Buffet head of Berkshire Hathaway, Mary Barra, chairman and chief executive of General Motors and Mark Machin chief executive of  the Canada Pension Plan Investment Board, indicate that while they have various opinions on corporate governance, “We share the view that constructive dialogue requires finding common ground — a starting point to foster the economic growth that benefits shareholders, employees and the economy as a whole. To that end, we have worked to find commonsense principles.”

The 8 high levels principles cover board composition and internal governance including:

  1. Separation of Chair/CEO: where the roles are combined, boards should have a strong, independent lead director.
  2. Board Independence: directors should be truly independent from the management and meet without the CEO on a regular basis.
  3. Board Diversity: boards should be diverse and have sufficient turnover to ensure refreshment.
  4. Shareholder rights: dual class voting is not considered best practice.
  5. Short Termism: quarterly earnings guidance be de-prioritised.
  6. Accounting: companies need to better explain any differences between GAAP and adjusted earnings.
  7. Top Pay: should be varied and aligned to the business model over the long-term.
  8. Engagement & Access: large institutional investors should have access to the company so they know what is happening when making investment decisions. Companies should also have access to the “decision maker” at the institutional investor.

In the covering letter to the principles the signatories note that: “More than 90 million Americans own our public companies through their investments in mutual funds, and millions more do so through their participation in corporate, public and union pension plans. These owners include veterans, retirees, teachers, nurses, firemen, and city, state and federal workers. We owe it to all of them – and to all our shareholders and investors who have entrusted us with their savings – to get this right.”

The powerful CEO group met in secret from mid-2015 to craft the principles and although there is now a web site, maintained by Sard Verbinnen, a strategic communications and proxy advisory specialist for issuers, there is no mention of any steering committee, terms of references or consultation procedures that the group might have followed to involve the stakeholders which the signatories says are impacted by governance standards.

Not all investors involved in the original discussions have signed up the principles. In June the Financial Times revealed that Fidelity would not be publicly signing up to the principles, commenting that, although the group had done “valuable” work, “Every company has its own distinct business model, culture and values, and thus, we generally do not sign on to blanket industry documents.” Wellington Asset Management has also declined to sign on.

Ken Bertsch

Ken Bertsch

The US Council of Institutional Investors (CII) has given a qualified welcome to the new principles commenting that most are in line with their own policies on corporate governance. “That such an elite group has backed a broad governance framework makes clear that corporate governance has entered the mainstream and should be a focus for all public companies,” said CII Executive Director Ken Bertsch. “The publication of these principles is a call to action for U.S. companies large and small to adopt effective corporate governance standards and practices.

However, Bertsch suggested that there was some room for improvement on shareholder rights and the principles should have gone further. “While they acknowledge the recent adoption of proxy access mechanisms by dozens of U.S. companies, they stop short of endorsing the common-sense right of long-term shareholders at all public companies to place their nominees for director on a company’s proxy card.” In addition, the CII noted that the principles do not mention the duty of boards to act on shareholder proposals that a majority of shareholders have endorsed.

What do you think?