NYSE and Corporate Governance Principles

In September, the NYSE released the report of its Commission on Corporate Governance. I would not call it ground-breaking, at least compared to the work of the King Commission (for South Africa). However, it is worth studying if you work with or for U.S. corporations.

The report (which you can download either here or here) includes ten principles:
    • The board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation and the board is accountable to shareholders for its performance in achieving this objective;

    • Successful corporate governance depends on successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior;  

    • Shareholders have a right, responsibility and long-term economic interest to vote their shares in a thoughtful manner and voting decisions are one of the primary means of communicating with companies on issues of concern; 

    • Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation; 

    • While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through market-based governance solutions;  

    • Good corporate governance includes transparency for corporations and investors, sound disclosure policies and communication beyond disclosure through dialogue and engagement as necessary and appropriate; 

    • While the Commission supported the NYSE’s listing requirements generally providing for a majority of independent directors, it also stated that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board;  

    • The Commission recognized the influence that proxy advisory firms have on the markets, and stated the importance of such firms being held to appropriate standards of transparency and accountability;  

    • The SEC should work with exchanges to ease the burden of proxy voting and communication while encouraging greater participation by individual investors in the proxy voting process; and 

    • The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out.

If there is new ground, it is in the report’s comments on the role of management in governance (see Principle #2 above). They include the following clarification language. The highlighting is mine.

While the board’s responsibility for corporate governance has long been established, the critical role of management in establishing proper corporate governance has not been sufficiently recognized. The Commission believes that a key aspect of successful governance depends upon successful management of the company, as management has primary responsibility for creating an environment in which a culture of performance with integrity can flourish.
In recent years the debate over what constitutes “good” corporate governance has focused upon the board’s scope of authority and the proper relationship between the board and shareholders. This discussion may improperly ignore the critical role of management in corporate governance. The Commission believes that successful governance depends heavily upon honest, competent and industrious managers. Management’s role in corporate governance includes, among other things, establishing and monitoring processes and procedures for risk management and proper internal controls, as well as evaluating executive talent according to high ethical standards, having systems for open internal communication about problems without the fear of retaliation, and promoting accountability through tailored incentive compensation that encourages, among other things, disciplined and transparent risk taking. Management’s role also includes providing accurate information to the board and developing and communicating the corporation’s strategic plan to shareholders and the market. Consistent with this principle, management should understand that directors may need access to various sources of information in order to fully understand the viewpoints of all major constituencies, and may also disagree with management over strategy or decisions, and that this “constructive tension” between the board and management is a characteristic of good corporate governance so long as debate is conducted within the context of a collegial and productive discussion.

 

Questions:

1. Do you believe the NYSE has gone far enough with its governance guidance?
2. What would you add?
3. Internal audit is not mentioned. Is that a problem?
 
 

Posted on Oct 4, 2010 by Norman Marks

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  1. Norman,

    I do not believe that the NYSE has gone far enough. It is as you say below that of South Africa (King 3). It is also below Canada (Rule 58-201 and TSE 1994 Dey Report), below the UK (Combined Code 2010 and Turnbull 2-2005) and below Australia (ASX 2007)

    It is missing sections on internal audit and risk management which the other countries have in place. I like for example King 3 which includes some significant changes for internal auditing as follows:

    Internal audit plans should be risk based

    The audit committee should ensure that a combined assurance model is applied to provide a coordinated approach to all assurance activities. The objective is optimization.

    Internal audit should provide two assessments each year on effectiveness of internal controls and risk management-the first repoort to the audit committee on financial controls and the second to the board on all the risks

    The CAE should have a "standing invitation" to attend meetings of the company's executive committee. The CAE should not be a member but should be able to attend any meeting

    I think that the NYSE also needs to have something in it on sustainability.

    Regards,

    Arnold

     

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