Market Giants Agree on ‘Commonsense’ Corporate Governance Principles

A select group of high profile CEOs of US public companies, asset managers and pension funds have created a set of ‘commonsense’ corporate governance principles to foster economic growth and benefit shareholders.


The group, including Berkshire Hathaway Executive Chairman Warren Buffet, BlackRock CEO Larry Fink, Vanguard Executive Chairman Bill McNabb as well as GE, Verizon, GM, and JPMorgan Chase CEOs Jeffrey Immelt, Lowell McAdam, Mary Barra and Jamie Dimon, believe that while corporate governance has been intensely debated of late, the “debate has generated more heat than light”, with little agreement on what exactly corporate governance actually means.

The hope is that the principles will form a common ground to promote further conversation, resulting in public companies taking “a long-term approach to the management and governance of their business (the sort of approach you’d take if you owned 100% of a company)”.

Significant points from the principles are summarised under the following headings. The open letter from the group and their complete set of principles can be found here.

Board Composition

The group appeared concerned about the potential for Boards to become beholden to the CEO or management. The principles stressed the need for Directors to be “strong and steadfast” and “independent of mind”, be “business savvy, shareholder oriented and have a genuine passion for their company”.

Other principles included that: The Board should be as small as practicable; the majority of the Board should be independent as defined by the New Your Stock Exchange rules or similar standards; a subset of Directors should have professional experience directly related to the company’s business; Directors should be drawn from a rigorously diverse pool; and consideration should be given to Directors’ service on other Boards as well as external commitments.

The principles did not specify limitations on tenure, merely noting that Boards should explain their approach to tenure limits and that Board refreshment should always be considered to ensure perspectives and skills remain current and broad. One succinct yet powerful statement was “The Board should have the fortitude to replace ineffective Directors.”

Board Agenda

One of the most important jobs of the Board was making sure the company has the right CEO, according to the group. Accordingly, the consideration of CEO and executive performance and succession was one of the items the group believed should be taking up most of the Board’s time.

Others included:

  • “A robust, forward-looking discussion of the business” and “creation of shareholder value, with a focus on the long term”.
  • Major strategic issues such as mergers, acquisitions and capital commitments and consideration of operational and financial plans, quantitative and qualitative key performance indicators and assessments of organic and inorganic growth.
  • Significant risks.
  • Determining and assessing standards of performance and maintaining the company’s culture and values.
  • Corporate responsibility matters.
  • Shareholder proposals.
  • The best approach to executive remuneration.
  • Informing and educating Directors, via outside experts and advisors where necessary.
  • Financial statements, including consideration of whether they would be prepared or disclosed differently if the external auditor were solely responsible for their preparation.


It was interesting that the principles contained the same sentence regarding Director and executive remuneration: “Companies should consider paying a substantial portion (e.g., for some companies as much as 50% or more) of Director/[senior management] compensation in stock, performance stock, units or similar equity-like instruments.”

In Australia, although it is considered desirable that Directors have skin in the game, too much skin in the game can jeopardise a Director’s independence, and the ASX Corporate Governance Principles and Recommendations state that “it is generally acceptable for non-executive directors to receive securities as part of their remuneration to align their interests with the interests of other security holders. However, non-executive directors generally should not receive options with performance hurdles attached or performance rights as part of their remuneration as it may lead to bias in their decision-making and compromise their objectivity.”

The US Principles also recommend that companies consider requiring Directors to retain a significant portion of their equity-based remuneration for the duration of their tenure to “further Directors’ alignment with the long term performance of the company.”

On executive remuneration, the group recommended that even as they evolve, remuneration plans should maintain continuity over multiple years. It also suggested that remuneration not be entirely formula-based.

“Companies should retain discretion (appropriately disclosed) to consider qualitative factors such as integrity, work ethic, effectiveness, openness, etc. Those matters are essential to a company’s long-term health,” the principles state.


The group believed financial markets had become “too obsessed with quarterly earnings forecasts”, stating that companies should not feel obligated to provide guidance and that they should frame their required quarterly reporting in the broader context of their strategy. They also echoed widely-held concerns about the use of non-GAAP (Generally Accepted Accounting Principles) results, stating that while it might be acceptable to use non-GAAP results in certain circumstances these results should not obscure the GAAP results.

Asset Managers

The principles did not only focus on the corporate governance obligations of public companies, but also those of asset managers. The principles in this section appeared focused on ensuring a two-way conversation where both parties receive Board/senior level access and endeavour to the best of their ability to understand the others’ point of view.
The principles stated that “asset managers should devote sufficient time and resources to evaluate matters presented for shareholder vote in the context of long term value creation. Asset managers should actively engage, as appropriate, based on the issues, with the management and/or Board of the company, both to convey the asset manager’s point of view and to understand the company’s perspective.”

The group also requested that governance activities receive appropriate senior level oversight by the asset manager and that asset managers raise critical issues to companies as early as possible in a “constructive and proactive” way. The proxy voting process and voting guidelines should be made public and there should be clear engagement protocols and procedures.

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