Best practices aren’t static. They shift, evolve, bend, flex and stretch. What was essential a decade ago is outdated now and what wasn’t even a concern for the last generation is absolutely imperative for this one.
With that in mind, we take a look at what is being touted as an “updated snapshot of what is expected from the board of directors of a major public company,” both from a legal perspective and a best practices perspective, as posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation by Martin Lipton, founding member of Wachtell, Lipton, Rosen & Katz.
1. Establish a tone that will define the entire corporate culture of the organization. That corporate culture should be one that espouses:
- ethical standards,
- principles of fair dealing,
- full compliance with legal requirements and
- ethically sound strategic goals.
2. Set high standards for the company when it comes to social responsibility and monitor compliance with those standards.
3. Oversee government, community and other constituent relations.
4. Review corporate governance guidelines regularly and update them and alter them as necessary to promote the best possible board functioning. Do this for committee charters, as well.
Relationship with Company Executives
5. Choose the CEO and monitor his or her performance. If that performance isn’t up to the company’s standards, or the CEO becomes unavailable for some other reason, have a succession plan in place.
6. Maintain close working ties with both the CEO and management. Encourage entrepreneurship, calculated and well-thought-out risk taking and investment for the long-term success of the company.
7. Set executive compensation so that the company is able to recruit the most talented executives while avoiding accusations of excessive compensation. Also, keep in mind say-on-pay votes.
8. Steer the company through the often choppy waters that arise from the dramatic changes in economic, social and political conditions, both domestic and internationally.
9. Approve the company’s annual operating plan and long-term strategy. Monitor performance of that plan and provide advice to management as a strategic partner.
10. Be proactive and plan ahead for crises. This is especially important for crises where the tenure of the CEO is in question due to major disasters like a product failure or socio-political issue.
11. Determine how much reasonable risk the company is willing to take on. This includes, but is not limited to: financial risk, general safety, cyber security, political risk and risk to the company’s reputation. Oversee the risk management tools and procedures and monitor those risks. Foster a culture of risk awareness throughout the company and be cognizant of those risks during any decision making.
12. Ensure the company has in place standards for legal and regulatory requirement compliance. Monitor said compliance and respond appropriately if there are any issues with those requirements.
13. Take control when there is a proposed transaction that creates a conflict of interest — whether real or perceived — between shareholders and management. These can include takeovers and attacks by activist investors.
14. Strive to understand shareholder perspectives and create long term relationships with as many shareholders as you can, which includes accommodating their requests for meetings when appropriate.
15. Listen to and evaluate demands from corporate governance activists. Make changes that will improve corporate governance, but fight those that will not be constructive. Shore up defences against attacks by activist investors by reviewing the company business strategy with management to minimize vulnerability.
16. Realize that shareholder litigation aimed at the company may, indeed, happen. But, the board is to have the company’s best interest in mind at all times and should not let such litigation prevent it from making decisions that put the company first. This includes decisions about acquisitions, material transactions, merger proposals and takeover bids.
17. Recruit and retain qualified directors who can commit to the time and effort it takes to hold the position and give it the attention it deserves.
18. Be mindful of the need for freshness and diversity on the board, including age, length of service, independence and gender.
19. Provide appropriate compensation for board directors, keeping in mind the amount of time and energy that board positions require.
20. Evaluate each board member’s performance and the performance of all the committee’s annually.
21. Make sure board members remain amicable toward each other and that all the various committees they sit on each receive the appropriate attention from directors.
Meeting these demands will mean major public companies need to:
- have a sufficient number of directors to sit on standing and special committees;
- have a board that meets expectations for diversity;
- have directors who are knowledgeable of and have experience with the company’s business;
- have directors who can devote the proper amount of time to prepare for and attend board and committee meeting;
- provide the board with ongoing education both from internal and external experts
- maintain an amicable relationship between the company’s senior executives and board members that enhances the board’s role not only as a strategic partner, but also as a monitor.
By following these simple corporate governance guidelines, public companies can put themselves into a position to succeed and help steer their companies in the right direction.