Common-Sense Capitalism
In their Corporate Governance column, David A. Katz and Laura A. McIntosh write: Recent developments in corporate governance indicate a welcome emphasis on common sense principles.
July 26, 2017 at 02:04 PM
6 minute read
Recent developments in corporate governance indicate a welcome emphasis on common sense principles. Over the past year, leaders of prominent companies and institutional investment funds have proposed principles and a framework intended to guide U.S. corporate governance toward practices that promote the sustainable creation of long-term value. The shared goal of these two separate projects—the Investor Stewardship Group's “Corporate Stewardship and Governance Principles,” released in 2017, and “Commonsense Principles of Corporate Governance,” an open letter released in 2016—is to bolster companies' ability to generate prosperity for American investors. Prioritizing practicality over prescription should improve the quality and effectiveness of corporate governance, to the benefit of all market participants.
Stewardship and Governance Principles
The Investor Stewardship Group—a collective of U.S.-based institutional investors and global asset managers—launched an initiative in January 2017 to establish a framework for standards of stewardship and corporate governance to promote long-term value creation in American business. The ISG represents $17 trillion in assets under management and is led by the participating firms' senior corporate governance practitioners. The framework, set to become effective in January 2018, contains six principles for investor stewardship and six principles for corporate governance. While the framework has no legal force, it is modeled on the “comply or explain” governance frameworks that exist in the United Kingdom and elsewhere and is intended to stand as an unofficial national code of fundamental governance principles. The framework is not intended to be prescriptive and is expected to be revised periodically as consensus around stewardship and governance evolves. Since it lacks any enforcement or self-policing mechanism, the principles will only become meaningful through widespread adoption by market participants.
The stewardship principles highlight two positive trends in corporate governance. The first is that business leaders are uniting to promote cooperation and improve communication among companies, large investors, and shareholders. The second is that institutional shareholders may be reclaiming much of the authority they ceded to proxy advisory firms in recent decades. One of the stewardship principles is that institutional investors are responsible for proxy voting decisions and should monitor the activities and policies of proxy advisors, and another is that institutional investors should address and resolve differences with companies in a constructive and pragmatic manner. These principles are designed to increase accountability, improve communication, and create a sense of shared responsibility between investors and companies. If successful, they will go a long way toward reducing the heretofore outsized influence of proxy advisors in the corporate governance sphere. Pending legislation in Congress that would regulate proxy advisory firms may accelerate this development. Without undue pressure from proxy advisors to conform to one-size-fits-all governance practices, and with the support of their institutional investors, companies should benefit from greater flexibility to implement the practices that are most effective in their particular circumstances.
The corporate governance principles set forth by the ISG cover topics such as director independence and leadership and board responsiveness to shareholders. They also address board accountability, shareholder voting rights, and management incentive structures and are elaborated with fairly detailed guidance on each point. While the principles do advocate some policy positions, such as proportional voting and proxy access, these specifics are less important than the overarching themes of accountability, transparency, and effectiveness. Under this framework, a company with a compelling record of furthering the key governance principles, albeit through different governance practices, should find support among its investors.
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