Every year, most public companies undertake some form of review of their governance policies and practices. Some boards check the box with an annual evaluation of board and committee performance and charters that does little more than satisfy NYSE listing requirements. These companies want to be certain that their governance documents comply with any changes in applicable legal requirements, but stop short of considering evolving shareholder and stakeholder preferences. Others are much more expansive, combining a review of evolving governance expectations, a thorough appraisal of governance documents and in-depth assessments of board, committee and director performance. The thorough review goes well beyond a review of documents to consider whether, in the real world, governance processes are operating effectively.
While there are important legal issues that need to be evaluated as part of a governance review, the process should be broader than just compliance and risk mitigation. When done well, these reviews help optimize how a company functions at its highest level and build trust with shareholders and other important stakeholders.
As many companies prepare for their own annual governance reviews, here are four keys to effective processes for public companies to consider:
1. Know Your Stakeholders
Many clients will begin a governance review by asking us to determine if there have been any changes in proxy advisory policy that should lead to changes in company policy. While proxy advisors are an important and influential constituency, companies must cast their nets wider and also track the voting and engagement guidelines for their major shareholders to determine if any changes to governance policies are worthy of consideration.
For example, in recent years, major shareholders have changed their overboarding standards, requested companies devote more time to corporate culture and requested more voluntary sustainability reporting. Companies should consider these requests and, when appropriate, make policy changes that often require minor amendments to several governance documents and policies.
2. Read the Room
Major shareholders are not always on the front lines of governance changes. Tracking the broader market for emerging trends can help a company stay ahead of issues, which is why we always recommend companies review the proxy season for emerging trends each year.
Companies reviewing the 2020 proxy season would notice that the average level of director support has been trending down; digging further, they would see that investors are more willing to withhold support when a company is out of step with their preferences on a growing number of issues. They would also see high levels of support for shareholder rights proposals, such as written consent rights or for special meeting rights with modest thresholds. This knowledge can start a conversation about the pros and cons of different governance policies, and better equip company leaders to respond to shareholder questions about these subjects.
3. Regularly Review Key Documents
As part of the annual committee evaluation process, most companies review the committee charters each year. Do not stop there. There are many other important governance documents that should be reviewed regularly. While company-specific circumstances may affect the ideal frequency of review for any particular document, every few years a company should review each of the following:
◊ Articles of Incorporation ◊ Bylaws ◊ Committee Charters
◊ Corporate Governance Guidelines
◊ Board and Committee Calendars
◊ Clawback / Recoupment Policy
◊ Codes of Business Conduct / Ethics
◊ D&O Questionnaire
◊ Independence Standards
◊ Insider Trading Policy ◊Disclosure (Reg FD) Policy
◊ Management Disclosure Committee Charter
◊ Internal Audit Charter
◊ Delegation and Reservation of Authorities Policies
◊ Related Party Transactions Policy
For most of these documents most of the time, tweaks will be minor. Occasionally, though, the review will prompt a company to amend a document to conform to new requirements, to memorialize any changes to current practice (e.g., a committee newly responsible for oversight of a given area) or to fix any issues that have arisen since the document was last evaluated. The regular review will also provide the company an opportunity to incorporate any changes prompted by new stakeholder demands or evolving standards of good governance discussed earlier.
4. Discuss What Is and Is Not Working
For most companies, the annual corporate governance review should go beyond the review of governance documents to consider how governance is functioning “in the real world.” Those leading a governance review must have discussions with board members and others to confirm that the company is following the procedures mandated by the documents and to get a more complete perspective on what is and is not working.
Board member experience and perspective can be invaluable when updating some of the governance documents, particularly the charters, governance guidelines and board and committee calendars. The perspectives of senior executives who work with the board on governance issues and the lawyers who are called to interpret and apply some of these governance policies are also important to consider. Input from officers who support the finance, human resources, compensation, sustainability, strategy, risk management and other important functions may also be valuable.
In our experience, it is best when the annual board and committee evaluation occurs as part of the governance review, and not separate from it.