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Board Governance | Best Practice ■■ Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level ■■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance the wisdom and judgement that accompany experience and tenure with the need for fresh thinking and perspectives of new board members ■■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined, and if the board decides on a combined role, it is essential that the board has a strong lead independent director with clearly defined authorities and responsibilities ■■ Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance and should do so only if they believe that providing such guidance is beneficial to shareholders ■■ A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (GAAP) to explain and clarify their results, they should never do so in a way that obscures GAAP-reported results. In particular, since stock- or options-based compensation is plainly a cost of doing business, equity compensation should always be reflected in non-GAAP measurements of earnings ■■ Effective governance requires constructive engagement between a company and its shareholders. The company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision-makers on those issues

What’s changed?

The Commonsense Principles 2.0 built on the strong foundation of the 2016 Principles to reflect the evolving conversation and drive forward a more developed understanding of, and agreement on, the key tenants of corporate governance that support long-term value for all shareholders.7 48 Ethical Boardroom | Spring 2019

Additional signees at that time included: Edward Breen DowDuPont Alex Gorsky Johnson & Johnson Brian Moynihan Bank of America James Quincey Coca-Cola Ginni Rometty IBM Charlie Scharf BNY Mellon Randall Stephenson AT&T David Taylor Procter & Gamble Theresa Whitmarsh Washington State Investment Board Notably, 2.0 speaks to additional areas where boards and investors can be better positioned to drive long-term value creation. These updates and enhancements include recommendations regarding board tenure, transparency around staggered boards, proxy access, engagement on important proxy proposals and consideration of anti-takeover provisions. Finally, the updated principles call for enhanced transparency on the part of both companies and asset managers to ensure greater understanding between shareholders and the companies in which they invest. Some noteworthy additions to the Commonsense Principles made in version 2.0 include: ■■ Board members should be prepared to serve for a minimum of three years ■■ If board elections are not annual, companies should explain why ■■ Companies and shareholders are encouraged to engage early on important proxy proposals ■■ Companies should allow some form of proxy access ■■ Poison pills and other anti-takeover defences should be put to a shareholder vote and re-evaluated by the board on a periodic basis ■■ Asset managers should disclose if they rely on proxy advisors to inform their decision-making ■■ Asset managers should disclose their conflict of interest policies in their proxy voting and shareholder engagement activities ■■ Portfolio managers should be compensated based on performance over an appropriate term, given the strategy and investment time horizon for the portfolio ■■ Asset owners should promote sound, long-term oriented governance in their direct interactions with both companies and asset managers ■■ Asset owners should use benchmarks and performance reports consistent with their investment time horizon to affect governance outcomes with asset managers and evaluate the asset managers’ performance on both investment returns and governance

Importantly, the developments enumerated in the Commonsense Principles 2.0 are not meant to be a final statement on these topics. Rather, they represent the growing consensus around key issues that will drive this conversation forward.

What’s next?

Like software, the Commonsense Principles will continue to be reviewed, considered and updated to best reflect the practices, policies and structures that emerge as the governance conversation progresses. While the Commonsense Principles 2.0 reflect the status quo of late 2018, we have no doubt that they will continue to serve as a touchpoint in the conversation about how to best serve the long-term interests of public companies, shareholders and other stakeholders. As one of the world’s leading bodies studying corporate governance, the Millstein Center is eager to foster a robust, ongoing dialogue about these issues. We welcome any and all stakeholders to review the Commonsense Principles 2.0 and provide feedback about what can be done to enhance corporate governance to support the health of our economy. Because of the complex global landscape of corporate governance, the Commonsense Principles 2.0 focusses on US companies. However, the spirit of the conversation and the ideas and policies it contains are applicable around the world. We look forward to broadening this conversation to understand how these principles might benefit from international learnings and how the international governance community can be supported by adopting parts – or all – of the Commonsense Principles 2.0. Whether in the boardroom or around the kitchen table, these issues will become increasingly important in the years ahead. A sound governance framework that ensures transparency, shapes best practices and upholds the values that we as a society hold dear is indispensable to any stakeholder weighing investment decisions. The outcome impacts the health of the companies who adopt these governance standards and the millions of investors around the world who have staked their future on such investments. As stewards of this important work, we will continue to welcome and consider any and all perspectives to ensure that this conversation continues to reflect the best practices of our times. 1 2https:// 3https://www.businessroundtable. org/policy-perspectives/corporate-governance/ principles-of-corporate-governance 4https://corpgov. 5 edu/ 6 pdf 7 commonsense-principles-20

Profile for Ethical Boardroom

Ethical Boardroom Spring 2019