For the last decade, I have used the phrase “common sense” to reference the governance principles espoused by investing giants such as BlackRock and The Vanguard Group. So it comes as little surprise that these world-class asset managers are part of the driving force behind the recently released “Commonsense Principles of Corporate Governance,” which were announced in late July. Over the past couple of years, BlackRock and Vanguard gathered together with several large public company CEOs, an activist, mutual and pension fund peers, and the bigger-than-life investor, Warren Buffett, to see if they could reach a “commonsense” consensus about how to define—or some might say reaffirm—a set of corporate governance principles.
Few would argue that today’s corporate governance model has become a mishmash of ill-conceived regulation, governance guidelines and proposed best practices submitted by hundreds of authors and experts. Certainly, it took a gathering of these well-known investors and titans of business to be heard above all that noise and respected on this topic, but the real question is, Will this in any way change the status quo?
To answer this question, I believe it’s necessary to address the following issues in this column:
To address my first agenda item, I want to clarify several points. The gathering body was quick to point out that one size doesn’t fit all companies—rather that these principles were a best effort to reach consensus. The group referenced that sometimes parties disagreed, but on the whole, the tone of the principles was accepted by all. And finally, these corporate leaders cautioned that as conditions and circumstances change, so too must documents like these principles change in order to keep pace. I commend the group for giving the level of thought they did to a topic so important to the future of this country and American business. I do not take their efforts lightly, and any comments are made in an effort to make the status quo even better.
However, I would prefer to have seen the group expanded to include one of the proxy advisors and either a retired Delaware Court of Chancery judge or legal guru, which would have comprised a more diverse group of contributors. As to the size of the group they selected, their open letter used the phrase, “so we could have a mature conversation”—as if that was a valid reason for not inviting participants who might be skeptics of their quest.
The responses to these principles will be mixed. Even with this impressive group gathering, there may not be enough ongoing momentum to move the SEC or Congress into changing regulations and laws. I reached out to Institutional Shareholder Services (ISS), a leading worldwide proxy advisor, and the Council of Institutional Investors about what they thought. I was particularly curious to hear the ISS response, presuming they were not invited to join the deliberations. I wasn’t surprised at their legal response, but I give them a lot of credit for answering two tough questions with a respectful handclap supporting the effort and a notice to public companies that these Commonsense Principles establish a good floor or foundation for what ISS expects. I also reached out to Ken Bertsch, a longtime governance guru and new executive director for the Council of Institutional Investors, who provided insight into both of these challenging questions.
ISS: The principles demonstrate broad consensus among market constituents on key corporate governance concepts. Many of the recommendations concerning board accountability, transparency and qualifications are consistent with what our investor clients have been telling us for many years and are reflected in ISS’ benchmark policies. It’s encouraging to see this level of engagement—and collaboration—between investors and their portfolio companies.
Ken Bertsch: I think the principles reflect areas of broad consensus and usefully articulate strong practices in a number of areas. I was struck by multiple references to robust shareholder/company engagement, including with board members. The principles reflect the mainstreaming of a number of ideas, namely that some directors have professional experience directly related to the company’s business, unfettered director access to management even below the CEO’s direct reports, rigorous approaches to board diversity and to board evaluation, commitment to board renewal, executive sessions of outside directors at every board meeting, and high-level attention and focus on proxy voting at asset management institutions.
All that said, there are areas of disagreement and where, from my standpoint, the principles could have gone further—most notably on proxy access and shareholder rights, but also on independent board leadership (although there are some good elements on that score). But given the breadth of views of those behind the principles, and the leading role in particular of CEOs (who cannot always be expected to be attuned to agency issues at the heart of some corporate governance concerns), I thought the contribution was positive.
ISS: The principles are indicative of much of the constructive engagement that occurs between market participants. This initiative raises the bar for companies whose governance structures and practices fall short of widely accepted practice while also demonstrating tangible benefits stemming from dialogue between investors and companies.
Ken Bertsch: I am not sure. I think it depends to some extent on the follow-up of the sponsors, but also whether members of boards that have resisted shareholder engagement (and some of the other best practices identified in the principles) reconsider their view. There are interesting references to asset manager stewardship responsibilities—a subject of much discussion in other markets, but not as much in the United States.
With all the principles they proposed, there was only one small section where my suggestion is meaningful enough to ask for further clarification. It falls under the heading of “Director Effectiveness.” The first sentence reads, “Boards should have a robust process to evaluate themselves on a regular basis, led by the non-executive chair, lead independent director or appropriate committee chair.” I’d recommend the language be amended to suggest that, periodically, the evaluation process is conducted by a respected third-party to ensure the best evaluation results possible. My concern, simply put, is that other board members might be reluctant to be candid to one of their own and/or the internal facilitator may not recognize when they in fact are part of the problem. I recommend engaging a trusted outside facilitator at least every third year or when there has been major change in the company or board structure.
All in all, these kinds of announcements and declarations are exciting. As stated, I doubt that it will move the SEC or Congress to action, and I don’t expect any Wall Street gains or losses tied to these principles. Regardless, we are always curious to know how key business figures feel about the status quo, and these principles give us some better insight. What lies ahead remains to be seen, but any communication on the topic of corporate governance is a welcome deliberation.
TK Kerstetter is the CEO of Boardroom Resources LLC and is a second generation pioneer of governance thought leadership and board education. He can be reached at email@example.com