Big time CEOs Propose New Principles of Corporate Governance.

 

Thirteen CEOs major U.S. business and finance corporations (including JPMorgan Chase, Berkshire Hathaway, General Motors, T. Rowe Price and Vanguard) have developed what they call “Commonsense Corporate governance Principles  to make  corporate governance more responsible. Here are key provisions set out in an open letter signed by all 13 CEOs:

1. Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level.

2. Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;

3. Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities;

4. Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;

5. A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (“GAAP”) to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and

6.  Effective governance requires constructive engagement between a company and its shareholders. So the company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision makers on those issues.

 

While these standards have no binding effect, it is likely that they will be cited by attorneys and others as reasonable standards of care and therefore can have great influence.

 

You can read the Open Letter, the nine-page Commonsense Principles of Corporate Governance, media coverage and commentary, and further information at http://www.governanceprinciples.org/

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