New Governance Best Practices Released

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Overview


In Depth


On July 21, a diverse consortium of leading corporate executives and business leaders released the compilation, “Commonsense Principles of Corporate Governance.”

The stated goal of the consortium is to offer a set of principles on which they found common ground, in the hope that they will promote further conversation on corporate governance.

These principles address the following topics, among others: Board Composition; Director Responsibilities; Shareholder Rights; Public Reporting; Board Leadership; Management Succession Planning; and Compensation of Management. They emphasize critical issues of director engagement, independence, accountability and refreshment.

In many respects, the “Commonsense Principles” is one of the most substantive statements of corporate governance principles since the 2012 release by The Business Roundtable association, of its “Principles of Corporate Governance.”

That notwithstanding, the “Commonsense Principles” disappoint to the extent they do not address such critical governance concepts as board oversight of compliance and risk management, and assuring the proper hierarchical role of the general counsel. They also do not adopt a firm position on controversial concepts of director length of service and mandatory retirement age.

While intended primarily for public companies, a substantial majority of the “Commonsense Principles” have direct application to the corporate governance of large nonprofit organizations, such as health systems, academic medical centers, disease charities, health insurance companies and educational institutions.

Broadly speaking, “best practices” refer to behavior beyond that required by basic, accepted methodologies or minimum legal standards. As such, they are considered aspirational goals as opposed to legal requirements or mandates. Importantly, the adoption of governance “best practices” can be interpreted as a demonstration of “good faith” by the governing board, and the exercise of “good faith” is considered by courts to be an effective prophylactic against director liability.

Board governance committees are well advised to discuss the “Commonsense Principles” at an upcoming meeting.