Kerstetter: We Need A Unified Set Of Corporate Governance Principles

corporate governanceThis week, The Millstein Center at Columbia Law School hosted the Commonsense Principles of Corporate Governance 2.0, which was signed by a number of business leaders representing some of America’s largest corporations and institutional investors.

The rules are fairly basic—with a little variance from the first version of the commonsense principles, which came out two years. In an email sent to Corporate Board Member, Kristin Bresnahan, of Columbia Law School, said there were a few differences between this version and the last one. They include:

“Proxy Access.  Companies ordinarily should allow some form of proxy access that is not unduly burdensome for significant long-term shareholders.

Poison Pills.  Because poison pills and other anti-takeover defenses can dilute management and board accountability, they ordinarily should be put to a vote of the shareholders and re-evaluated by the board on a periodic basis.

Proxy Advisors.  Asset managers that rely on proxy advisors to inform their decision making should disclose that they do so and should be satisfied that the information which they are relying is accurate and relevant.

Portfolio Manager Compensation. Portfolio managers should be compensated based on performance over an appropriate term, given the strategy and investment time horizon for the portfolio — ordinarily, that will mean using benchmarks over a three to five year period (as well as a one year period) for a portion of compensation

Asset Owners (as Distinct From Asset Managers).  Asset managers such as pension plans and endowments can promote sound corporate governance in the way they deal with asset managers – by, among other things, using benchmarks and performance reports consists with the owner’s investment time horizon, and evaluating asset managers’ performance not only in terms of investment returns, but in terms of how they discharge their governance responsibilities.”

In an open letter announcing the new governance rules, the signatories recognized there were other efforts in creating a corporate governance framework—notably from the Investor Stewardship Group (ISG) called the Framework for U.S. Stewardship and Governance, a business-led effort by the Business Roundtable (BRT) called Principles of Corporate Governance. They offered hope that the varying set of corporate governance principles could “be harmonized and consolidated, and reflect the combined views of companies and investors.”

For TK Kerstetter, Corporate Board Member’s Editor-at-Large and the CEO of Boardroom Resources, multiple governance structures is unnecessary and a consolidated set of principles would be welcome. He says it would have been nice if the groups could have coordinated and consolidated these principles, especially since there are signatories included in both the Commonsense Principles of Corporate Governance 2.0 and the ISG.

Kerstetter says this kind of overlap just confuses board members, who aren’t adopting them as much as they should. He cited statistics from both CBM’s Boardroom Summit and the General Counsel Forum, which reveals half of the attendees in both setting were not familiar with either organization or either set of principles. “Neither group has done very well in educating companies on their principles,” he says.

“There’s no question if there was a better consensus [between the groups], there would be more incentives and more pressure on companies to recognize a more supportive corporate governance standard.” For his part, Kerstetter says the ISG—which represents $31 trillion in investments—would be the natural candidate to take the lead.