NASDAQ Advisory Group Proposes Corporate Governance Best Practices

The NASDAQ Listing Council has proposed corporate governance best practices on a comply or explain basis. The best practices are on issues of director independence, the director election process, and shareholder interaction with directors. Widely used in European corporate governance codes, the comply or explain model requires a company to publicly discloses that it has adopted the best practice or, if it has not, explain why not. The Listing Council is an independent advisory group appointed by the NASDAQ board. A US example of comply or explain is the SEC’s requirement to disclose whether a company has a financial expert on its audit committee.

The comply or explain model offers flexibility to companies and transparency to investors and allows practices to evolve in a logical manner. In the competition for scarce investor resources, said the Council, corporations with the best practices will, over time, likely emerge as the winners. The Council envisions that any required disclosures would appear either in a company’s proxy or in its annual report filed with the SEC.

One best practice is allowing shareholders to vote annually on appointing the outside auditor. Also, the company should adopt some form of advanced resignation requirement to address the circumstance where a director fails to receive a favorable vote by a majority of the shareholders. The company should develop a process to facilitate shareholder communications with directors, with a role for independent directors to play in that process. The company should facilitate independent board leadership, with either an independent chair or an independent lead director.
An important best practice is having independent directors meet regularly in executive session, apart from management and other directors. At these meetings, the directors should discuss the tone at the top, self-evaluations by board committees, access to information, and the effectiveness of the company’s risk management strategy. Finally, the company should adopt a limit on the number of outside boards on which a director can serve.

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