Friday, September 24, 2010

NYSE Commission on Corporate Governance: Sense in the face of the nonsensical

As the financial markets blew up, and the wealth divide of the US opened up further, cries to change the way companies are run have grown louder and more capricious. Corporate governance has become the fig leaf a board can hide behind. Proxy advisory firms gain more Mob-like power , boards become driven by fear (consider the recent fear-based actions of the HP board) and fewer high quality execs want to serve on public boards (one of the reasons boards get so clubby - hang out with people you know and trust and it feels less risky).

Step in the NYSE to the rescue. A year ago the NYSE sponsored a Commission on Corporate Governance and yesterday they outlined their Key Governance Principles. It's a pragmatic, sensible document (thank goodness!) that finds the balance between the needs of the shareholders and the needs of boards and management to be able to manage.

Interesting to note - the commission was lead by the indomitable Larry Sonsini of WSGR and of the 27 members the majority are lawyers - typically in the general counsel role. There are no members who you would normally think of as "management" - like CEO, GM etc. but given the topic I guess the lawyers can take the floor.

Here are the 10 core principles - and my interpretation. I sit on two public boards and so welcome some sense being injected into the corporate governance discussion...

The 10 core principles outlined by the NYSE Commission on Governance are as follows:

The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation;
Stating the obvious - thankfully - and some people need reminding (HP anyone?)

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;
Yes, management runs the company NOT the board. Something I am acutely aware of as a CEO, and very sensitive to as a board member. Only the CEO knows everything needed to integrate a final decision.

Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation;
Filling out forms and surveys, and reviewing a committee charter once a year is not governance. That's mailing it in. Governance works when management cares about it as much as the head of the company's Governance committee - not always the case.

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;
ie. Activist hedge funds interested in only a quick flip don't help. Likewise don't follow ISS scores blindly, talk to the company before you vote.

While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through collaboration and market-based reforms;
The agencies have a black eye after the sub-prime disaster - and more regulation is not likely to help. It's no substitute for sensible, thinking people at the top on both sides.

A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis;
Translation - transparency cuts both ways guys

The Commission supports the NYSE’s listing requirements generally providing for a majority of independent directors, but also believes that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board;
Founders and key technologists are absolutely invaluable in strategy discussion. Really, really important (especially in complex companies like one I sit on - Rambus). Blind slavery to all independent directors (except the CEO) is not smart in technology.

The Commission recognizes the influence that proxy advisory firms have on the markets, and believes that it is important that such firms be held to appropriate standards of transparency and accountability;
Did you know that ISS will provide a recommendation on a public company and advise funds whether to vote for managements recommendations - but the company has to buy a piece of software from ISS for $20,000 in order to run the "model" that will tell them how ISS will calculate their score so they can fix it?

The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process;
Make it easier guys and more people will vote. You need the votes of the shareholders to know what they really think - after all in the end they own the company.

The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out.
Sensible. Try before you mandate. These are complex systems and the interaction between the moving parts is not always obvious.

Overall - I love it! Nice job.

Ed: You can see a video of Larry describing the commission's process and outcomes here.


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