Thursday, November 06, 2008

NACD Issues Key Principles for Sound Corporate Governance

The National Association of Corporate Directors has issued a set of key corporate governance principles embodying the values of transparency, accountability, shareholder communication and access, and the proper tone at the top. The guidelines presume that companies are in compliance with Sarbanes-Oxley and listing standards and thus have a majority of independent directors and audit committees, as well as compensation and nominating committees.

As emphasized by the Sarbanes-Oxley Act and related SEC regulations, the board plays a critical role in oversight of compliance, financial reporting, and internal controls, as well as in organizing the board’s own processes. However, these functions should follow naturally from an understanding of the importance of the board’s objective judgment in its role as a fiduciary and a primary focus on corporate strategy and performance within a framework of integrity and ethics. In normal circumstances, compliance, oversight of financial reporting and controls, and governance issues should not demand the majority of board time, noted NACD, and therefore should not overwhelm the board’s agenda.

A core principle is that corporate governance structures must be transparent. Every board should explain, in proxy materials and other communications with shareholders, why the governance structures and practices it has developed are best suited to the company. Some boards may choose to disclose their own practices in relation to a set of recognized best practice recommendations, identifying those areas where their practices differ and explaining the board’s rationale for such differences.

Another key principle is designing corporate governance in a way that encourages communication with shareholders. Board communications with shareholders on these issues should involve one or more independent members of the board, usually the board chair, the lead director, or the appropriate committee chairs.

Another key principle is the establishment of voting procedures for director elections that promote accountability to shareholders by providing them a meaningful ability to elect or decline to elect directors in uncontested elections. Companies should adopt majority voting through appropriate provisions in articles of incorporation or bylaws, consistent with state law. In an uncontested election, a candidate who fails to win a majority of the votes cast should be required to tender his or her resignation, and the nominating committee should recommend to the board whether to accept or reject the resignation, depending on the circumstances.

Any board decision not to accept the resignation of a director who failed to receive a majority of the votes cast should be carefully weighed, and the explanation for such decision should be fully disclosed to shareholders. In contested elections, directors should be elected by plurality voting. In addition, shareholders should have meaningful opportunities to recommend candidates for nomination to the board. The nominating committee should disclose a process for considering shareholders’ recommendations, with particular attention to a process for obtaining the views of long-term shareholders who hold a significant number of shares.

Moreover, boards are accountable to shareholders for the governance and performance of the corporation, and must provide active oversight of its management. Accountability in the oversight of the corporation is premised on the ability of the board to be objective and distinct from management. While actual board objectivity is key, reassuring shareholders that the board is structured to lessen the likelihood of undue management influence is also important.

A broad principle of good governance is setting a tone for a corporate culture of integrity, ethics, and a sense of the corporation’s role and responsibility in society. In turn, the correct tone at the top is a foundation on which long-term relationships are built with customers, suppliers, employees, regulators, and investors. The board assures that an appropriate corporate culture is developed by communicating to senior management the seriousness with which the board views the matter, defining the parameters of the desired culture, reviewing efforts of management to inculcate the agreed culture, and continually assessing the integrity and ethics of senior management.