Principles of Corporate Governance 2016 - Comprehensive Notes

Foreword and Introduction

• Business Roundtable (BR) is an association of chief executive officers of leading U.S. companies aimed at promoting sound public policy and a thriving U.S. economy.
• BR CEO members lead U.S. companies with $7 trillion in annual revenues and nearly 16 million employees (approx. $16 imes 10^6$).
• BR member companies comprise nearly one-fifth of total U.S. stock market capitalization and invest $129 ext{ billion}$ annually in R&D, which is equal to about $70\%$ of U.S. private R&D spending.
• BR member companies pay more than $222 ext{ billion}$ in dividends and generate more than $495 ext{ billion}$ in sales for small and medium-sized businesses annually.
• BR companies contribute more than $8 ext{ billion}$ annually in combined charitable contributions.
• Established in 1972, BR applies CEO-level expertise to major national issues; through research and advocacy, it promotes policies to improve U.S. competitiveness, strengthen the economy, and spur job creation.
• BR provides a perspective on governance in a complex, global environment where instant communication and regulatory shifts affect public companies.
• The 2016 framing acknowledges evolving regulatory burdens, activism, and the importance of shareholder engagement and transparency in governance.
• BR invites ongoing dialogue with shareholders and other stakeholders about governance standards and long-term value creation.

Guiding Principles of Corporate Governance

BR supports the following core guiding principles:
1) The board approves strategies intended to build sustainable long-term value; selects a CEO; oversees the CEO and senior management in operating the business, including capital allocation for long-term growth; and sets the "tone at the top" for ethical conduct.
2) Management develops and implements corporate strategy and operates under board oversight, aiming for sustainable long-term value creation.
3) Management, under board/audit committee oversight, produces fair and timely financial statements and disclosures necessary for investors to assess financial soundness and risks.
4) The audit committee retains and manages the relationship with the outside auditor, oversees the annual financial statement audit and internal controls over financial reporting, and oversees risk management and compliance programs.
5) The nominating/corporate governance committee leads governance development, pursues an engaged and diverse board composition appropriate to strategy, and conducts board succession planning.
6) The compensation committee develops an executive compensation philosophy, oversees compensation policies that incentivize long-term value creation, and designs performance-based goals aligned with the strategy.
7) The board and management should engage with long-term shareholders on issues affecting long-term value creation; shareholders should disclose identifying information and assume accountability for long-term interests.
8) The board and management may consider the interests of all stakeholders (employees, customers, suppliers, communities) when it directly and meaningfully contributes to long-term value creation.

• The Principles recognize variation among companies and do not prescribe a one-size-fits-all approach; they are a guide for structures, practices, and processes aligned with a company’s needs.
• A recurring theme is shareholder responsibility and accountability as part of governance, including transparency and the balance of short-term and long-term capital allocation.

I. Key Corporate Actors

• Board of Directors: Oversees management and business strategies to achieve long-term value creation; selects, monitors, and evaluates the CEO; oversees CEO succession planning; delegates authority to the CEO and senior management; directors are diligent monitors and do not micromanage operations (crises may require greater involvement).
• Management: Led by the CEO; responsible for setting, managing, and executing the company’s strategies; strategic planning, risk management, and financial reporting under board oversight; runs operations to build long-term value; keeps the board informed about operations.
• Shareholders: Invest in the corporation, receive economic benefits, and elect directors and receive material information; expect boards and management to act as long-term stewards; may engage with management on strategy, but must recognize board responsibilities and maintain enduring commitment to long-term value for all shareholders.
• Overall governance requires a clear delineation of roles and a focus on long-term value, with an emphasis on how the board, management, and shareholders interact to achieve sustainable outcomes.

II. Key Responsibilities of the Board and Management

• The board’s framework encompasses the following core responsibilities:
  • Selecting the CEO; overseeing CEO performance and succession planning.
  • Setting the tone at the top to demonstrate integrity and legal compliance; shaping corporate culture.
  • Approving corporate strategy; monitoring implementation; evaluating progress toward long-term value creation; understanding and managing strategic risks.
  • Setting the company’s risk appetite; reviewing major risks; establishing risk oversight structures; delegating risk management responsibility to committees and senior management.
  • Ensuring integrity and clarity of financial reporting; overseeing disclosures about performance and future plans; ensuring internal controls and anti-fraud measures are effective.
  • Allocating capital to balance short-term returns with long-term value creation; oversight of annual operating plans and budgets; monitoring adaptability to changing conditions.
  • Ensuring plans for business resiliency, including continuity, cybersecurity, physical security, and crisis management.
  • Overseeing compliance program and enterprise risk management; ensuring appropriate governance processes are in place.
• CEO and Management responsibilities (under CEO direction):
  • Operate the business under board oversight to build long-term value; lead strategic planning and execution with board input.
  • Develop and present strategic plans; implement with regular progress reviews; propose changes as needed.
  • Advise on capital allocation (organic growth, M&A, divestitures, spin-offs, capital returns).
  • Identify, evaluate, and manage risks; align risk management with company risk appetite; keep the board informed of significant risks.
  • Ensure accurate and transparent financial reporting; establish and maintain internal controls; ensure disclosure controls and procedures.
  • Prepare annual operating plans and budgets; implement and monitor plans; adjust as conditions change; keep the board informed of material developments.
  • Select qualified management; establish organizational structure; implement succession planning.
  • Develop and implement business resiliency plans; crisis preparedness; coordinate with the board on high-profile crises.
• Effective governance requires ongoing alignment between board oversight and management execution, with a focus on long-term value, risk awareness, and transparent reporting.

III. Board Structure

• Board Composition
  • Size: Determine based on company size, complexity, and development stage; larger boards may offer broader skills, while smaller boards may act more cohesively.
  • Diversity: Strive for diverse backgrounds, skills, experiences, and tenures to enhance oversight and long-term value creation. Develop a framework to include women, minorities, and other diverse candidates for open seats.
  • Tenure: A mix of new and long-serving directors contributes fresh perspectives and continuity and institutional knowledge.
  • Characteristics: Directors should have integrity, strong judgment, objectivity, and the ability to represent all shareholders.
  • Experience: Directors with relevant business and leadership experience contribute to strategy insight and risk understanding.
  • Independence: A substantial majority of directors should be independent; independence should be defined and assessed, considering relationships with the company and other entities.
  • Election: Directors should be elected by a majority vote; consider a resignation policy where directors who fail to obtain a majority vote may resign for board consideration.
  • Time commitments: Serving on a public company board requires significant time; roles like committee chair, board chair, and lead director demand additional time. Directors should be prepared to commit appropriately.
• Board Leadership
  • Approaches: Companies may have CEO-chair, separate chair, or other leadership arrangements; no single structure fits all companies.
  • Lead/Presiding Director: If the CEO and chair roles are combined or the chair is not independent, appoint a lead director to chair independent sessions, manage agendas, and maintain engagement with long-term shareholders.
  • Responsibilities: Lead director chairs executive sessions; approves schedules and information sent to the board; serves as a liaison to shareholders when appropriate.
• Board Committee Structure
  • Committees enable deeper focus on key areas and should have clear written charters approved by the board.
  • Committees should meet independence and other requirements per law and exchange rules.
  • Committee structure should be periodically reviewed for refreshment and alignment with needs.

IV. Board Committees

• Audit Committee
  • Financial literacy: Members must meet minimum financial literacy standards; at least one member should be an audit committee financial expert.
  • Overboarding: Consider limiting service on other public company audit committees; exceptions may be allowed if the board deems it not to impair effectiveness.
  • Outside auditor: Responsible for selecting/retaining the outside auditor; review qualifications, independence, and audit team; directly involved in engagement partner selection; oversee audit engagement terms.
  • Audits and financial statements: Discuss significant issues in financial statements with management and the outside auditor; review earnings releases; understand critical accounting policies and judgments; ensure disclosures are accurate and understandable.
  • Internal controls: Oversee internal control over financial reporting and disclosure controls; review deficiencies and remediation steps.
  • Risk and compliance: Some risk oversight may reside with the Audit Committee; ensure the board has comprehensive risk information and address risks across the organization.
  • Compliance: Oversee the company’s compliance program and code of conduct; establish procedures for handling compliance concerns.
  • Internal audit: Oversee internal audit function; review plan scope, findings, and management responses; assess internal audit effectiveness.
• Nominating/Corporate Governance Committee
  • Director qualifications: Establish criteria for board membership; evaluate board composition and mix of skills; assess future needs.
  • Succession planning: Actively plan for board succession; identify candidates; consider shareholder nominations and proxy access where appropriate; CEO may meet candidates but final selection rests with the committee and board.
  • Background and independence: Review director backgrounds, contributions, tenure, and independence; ensure substantial majority are independent in fact and appearance; directors should report changes affecting independence.
  • Tenure limits and refreshment: Consider retirement ages or term limits; use director evaluations to maintain engagement and freshness; monitor director exits.
  • Board leadership and committee structure: Annual evaluation of board leadership; consider combining/separating CEO and chair roles; oversee committee appointments and ensure independence.
  • Board oversight and governance guidelines: Oversee board effectiveness, meeting agendas, information flows, governance guidelines, and engagement with shareholders; monitor communications with shareholders.
  • Director compensation: May oversee director pay if the compensation committee does not; ensure compensation aligns with long-term value and is approved by shareholders where required.
• Compensation Committee
  • Authority: Have authority to obtain independent compensation consultant and other advisers; ensure advisers’ independence.
  • CEO and senior management compensation: Establish performance goals, evaluate performance, and approve CEO compensation; generally approve or recommend compensation for senior management.
  • Alignment with shareholder interests: Design compensation to align management, company, and shareholder interests; include at-risk performance-based elements tied to long-term strategy.
  • Compensation costs and benefits: Understand cost structures and potential payout under various scenarios; consider protections during acquisitions, activism, or control bids.
  • Stock ownership and hedging: Establish ownership requirements for directors and executives; monitor and disclose hedging arrangements when permitted; align incentives with long-term value.
  • Risk considerations: Balance incentives to encourage growth with discouraging excessive risk-taking; adopt policies like clawbacks to mitigate risk from compensation programs.
  • Director compensation: Establish director compensation practices; ensure consistency with governance and independence.

V. Board Operations

• Agenda planning: The board’s agenda should be carefully planned, yet flexible to emergencies; collaborate with the lead director for agenda setting.
• Access to management: Foster ongoing dialogue; directors should have access to senior management outside meetings.
• Information quality: The quality and timeliness of information directly affect oversight effectiveness.
• Technology: Use board portals and technology for materials and real-time information; ensure security and retention policy compliance.
• Confidentiality: Directors must maintain confidentiality of nonpublic information obtained through board service.
• Director compensation: Determine compensation for nonemployee directors; typically a mix of cash (annual retainer) and equity; ensure plans and limitations are shareholder-approved and avoid misaligned incentives.
• Director education: Encourage ongoing education; new directors should participate in robust orientation; ongoing learning opportunities should be pursued.
• Reliance: The board may rely on management, counsel, auditors, and advisers; ensure advisers are qualified and accountable.
• Board and committee evaluations: Use annual evaluations of the full board, committees, and individual directors; report results to the board and address issues.

VI. Senior Management Development and Succession Planning

• Succession planning: One of the board’s most important functions; decide whether the full board or a committee handles planning; identify qualities needed for CEO and senior roles; discuss succession with the CEO and plan for ordinary and emergency scenarios; review annually.
• Management development: Understand talent development at junior levels to build a bench for senior roles; interact with up-and-coming managers to assess potential; monitor development programs.
• CEO evaluation: Under independent oversight, annually review the CEO’s performance and participate in evaluating senior management in appropriate circumstances; communicate results to the CEO in executive session; use findings for compensation decisions.

VII. Relationships with Shareholders and Other Stakeholders

• Shareholders and Investors

  • Shareholder outreach: Regular outreach and ongoing dialogue are essential for understanding shareholder views and helping them understand the board/management plans.
  • Know shareholders: Identify major holders and their positions on issues; management speaks for the company on most topics; directors may engage in dialogue with guidance from the chair and governance committees.
  • Board communication with shareholders: Directors may participate in dialogue with shareholders on long-term value creation and governance, coordinated with the chair/lead director; comply with applicable securities rules.
  • Annual meeting: Directors should attend the annual meeting; consider webcasting to broaden access.
  • Shareholder engagement: Maintain protocols for shareholder communications; respond promptly to issues of wide interest to long-term shareholders.
  • Shareholder proposals and proxy rules: Proxy rules require qualified shareholder proposals; avoid using proposals to push social/political agendas largely unrelated to the company’s business; the board or governance committee oversees responses; communicate the rationale for board recommendations.
  • Response to proposals: Consider issues raised by proposals with substantial support and communicate back to all shareholders.

• Employees

  • General: Treat employees fairly; provide appropriate compensation and benefits; inform employees about plan terms.
  • Misconduct: Establish channels for reporting misconduct without retaliation; encourage reporting and protect whistleblowers.
  • Communications: Communicate honestly about operations and financial performance to employees.

• Communities, the Environment and Sustainability

  • Citizenship: Strive to be good citizens; be responsible stewards of the environment; consider sustainability issues integral to long-term viability.
  • Community service: Companies should engage with communities; encourage directors, management, and employees to contribute time and resources.
  • Sustainability: Conduct business with regard to environmental, health, safety, and sustainability issues; understand which issues matter most to the business and shareholders.

• Government

  • Legal compliance: Corporations must act within the law; maintain a robust legal compliance program.
  • Political activities: If engaging in political activities, the board should oversee and consider a disclosure policy.

• Across all relationships, the overarching objective is to balance stakeholder interests with the long-term value creation for all shareholders, while maintaining ethical governance and transparency.

• Additional notes on the evolving governance landscape: shareholder empowerment must be paired with accountability; increased transparency and disclosure are foundational to credible governance; shareholder engagement is projected to remain a central governance issue; there is an ongoing shift toward more robust boardroom access and disclosure around governance choices. The Principles are designed to guide boards, management, and shareholders in adapting governance practices to changing regulatory, market, and societal expectations while focusing on long-term value creation.

Key numerical references from the 2016 BRT materials (for quick recall)

• BR CEO members lead U.S. companies with $7 imes 10^{12}$ dollars in annual revenues and nearly $16 imes 10^{6}$ employees.
• BR member companies comprise nearly one-fifth of total market capitalization and invest $129 ext{ billion}$ in research and development annually, equal to $70\%$ of U.S. private R&D spending.
• BR member companies pay more than $222 ext{ billion}$ in dividends and generate more than $495 ext{ billion}$ in sales to small and medium-sized businesses annually.
• BR member companies give more than $8 ext{ billion}$ in combined charitable contributions annually.
• The Principles emphasize long-term value creation, accountability, and responsible governance as guiding imperatives for public companies in the modern era.