A handful of the most powerful names in business and finance have joined up to try and improve the way American corporations are governed, putting a collective stake in the ground for what they see as "commonsense" standards for corporate governance at a time when activist investors have ramped up the pressure on corporate boardrooms.
In an open letter and nine-page document of governance principles released Thursday, the group of 13 CEOs and heads of major investment firms -- which included names like JPMorgan Chase CEO Jamie Dimon, Berkshire Hathaway CEO Warren Buffett and General Motors CEO Mary Barra -- outlined their effort to find common ground on how U.S. public companies should be run. "Corporate governance in recent years has often been an area of intense debate among investors, corporate leaders and other stakeholders," the group wrote on its web site. "Yet, too often, that debate has generated more heat than light."
Among the more notable recommendations: The group said in the guidelines that "dual class" share structures, which are often found in founder-led companies and give select stockholders outsize voting power, are "not a best practice." It called for director compensation to be made up of a "substantial" portion of company stock, suggesting 50 percent or more, to keep goals of directors in line with those of investors. It made a statement in support of board diversity, and said companies should maintain "clawback provisions," which allow them to recoup compensation given to executives in the event of earnings restatements.
It also said companies "should not feel obligated to provide earnings guidance – and should determine whether providing such guidance for shareholders does more harm than good," warning against the game of trying to beat expectations provided to Wall Street: "Making short-term decisions to beat guidance (or any performance benchmark) is likely to be value destructive in the long run."
Governance experts and institutional investors have applauded the effort, albeit with some caveats. Ken Bertsch, executive director of the Council of Institutional Investors, which represents pension funds and endowments, said in a statement that the principles are "a call to action for U.S. companies large and small" and praised the group's support for shareholder-friendly provisions such as electing directors by majority vote.
Charles Elson, director of a corporate governance center at the University of Delaware, said "it's nice to see CEOs of these companies supporting the core principles that have been advocated for a while." He believes the force of such powerful figures putting their names behind these standards will make it harder for companies to argue against them.
And Nell Minow, vice chairman of governance consulting firm ValueEdge Advisors, said "I think it shifts the burden of proof onto any corporation that doesn't comply," noting she was "delighted the signatories are such influential people."
Indeed they are. The high-powered group also includes the CEOs of Verizon and General Electric, the head of the Canadian public pension fund, an activist investor, and heads of money management firms that represent trillions of dollars in investments, such as BlackRock CEO Larry Fink, Vanguard CEO F. William McNabb III, and T. Rowe Price Chairman Brian Rogers.
According to a report in the New York Times, they began meeting in secret last summer to hash out ways to resolve the trust gap between shareholders and management and wrestle with the maze of good-governance rules, and the idea for the project came from a phone conversation between Dimon and Buffett. An email to the contact address listed on the group's web site was not immediately returned.
"We did not convene a group of this size to be exclusive but, rather, so we could sit around a room and have a mature conversation about this important topic," the business leaders wrote in an open letter published to its web site. "Indeed, even among our small group, we don’t agree on absolutely everything. But we do agree that, taken as a whole, these principles are conducive to good corporate governance, healthy public companies and the continued strength of our public markets."
Governance experts and investors also didn't agree on everything in the report. Elson said he would have liked to see the group call for splitting the CEO's and chairman's role. Yet with several CEOs in the mix who hold both titles, it's perhaps not surprising that they didn't.
The Council of Institutional Investors, meanwhile, said the group should have gone further on issues such as proxy access. "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," CII's Bertsch said in the statement.
And while Minow questioned how the principles might ultimately be enforced, she thought they were an "important step" in the right direction. "Overall, I think this is great. They’re a little late to the party, but I like that they’ve arrived."
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