corporate governance

New Governance Principles Call For Better Corporate Reporting

A new set of guidelines established by 13 prominent executives and financial leaders marks a significant step toward a unified effort to improve corporate governance.

On July 21, a group of major asset managers, publicly listed companies, a pension fund, and an investment firm published the Commonsense Corporate Governance Principles, reports Bloomberg. The compendium offers a set of guidelines to improve corporate governance and promote further conversation around the often contentious subject.

A primary concern of the principles is the connection between board management and broader economic prosperity — importantly, the authors advocate for creating strategies that foster long-term growth, rather than short-term shareholder value. They cover everything from the composition of the board and its responsibilities to shareholder rights and public reporting.

Effective Management

In an open letter accompanying the principles, the authors — a group that includes Mary Barra of General Motors, Warren Buffet, and Jamie Dimon of JPMorgan, among others — acknowledge that only 5,000 of the total 28 million American businesses are publicly listed, yet they “account for a third of the nation’s private sector jobs.” The effective management of those companies is absolutely critical for the “long-term prosperity” of the millions of Americans that invest in and depend on them.

To that end, the principles encourage “competency-based director selection,” explains the New York Times, and suggest that “no board should be beholden to the CEO or management.” Boards should regularly meet without the CEO, the authors suggest, and find and elect “a strong leader who is independent of management.” Similarly, boards should be comprised of members with diverse and complementary experiences and backgrounds

Financial Reporting

The guidelines take a firm stance on quarterly reporting, advocating for total transparency. They even suggest that companies may wish to do away with earnings guidance, which can ultimately do “more harm than good” — it’s up to the company to determine if such guidance is beneficial to shareholders. Critically, the guidance should be “realistic and avoid inflated projections” in order to pivot away from short-term decisions meant to beat performance benchmarks and towards long-term goals that create shareholder value.

These goals need to be “disclosed and explained in a specific and measurable way” so shareholders understand how a company’s decisions align with its long-term strategic view. The authors point out that improved transparency through “a common accounting standard” is key, and recommend that if a company opts not to use Generally Accepted Accounting Principles (GAAP), “they never should do so in such a way as to obscure GAAP-reported results.”

Engaging Shareholders

To effectively execute a strategy promoting long-term growth, companies need to more actively engage their shareholders, insist the authors. “So the company’s institutional investors…should have access to the company, its management and, in some circumstances, the board.” This necessarily requires greater communication between a board and shareholders, and companies should not shy away from less traditional channels.

Mobile devices have created an incredibly promising avenue for reaching shareholders, so developing a proactive mobile strategy is key, as is investigating the potential of mobile apps. Social media, too, can no longer be ignored as corporate governance continues to evolve and improve.