Corporate Governance Policies that Public Companies Should Know About

Publicly traded companies adopt a variety of corporate governance policies in order to comply with U.S. federal securities laws and stock exchange rules. Comprehensive corporate governance policies also encourage accountability and transparency, which helps keep a company operating efficiently.

Both major U.S. stock exchanges, the New York Stock Exchange (NYSE) and Nasdaq, require publicly listed companies to post a copy of the company’s corporate governance guidelines and code of business conduct on their website. Public companies often also adopt a related party transactions policy, a securities trading policy, and a Regulation FD policy, although stock exchange rules do not require these policies to be posted on a company’s website.

Corporate Governance Guidelines

The company’s corporate governance guidelines address topics such as director qualification standards, director responsibilities, board membership, and executive succession planning. While market practice can vary, the guidelines generally work hand in hand with the nominating and governance committee charter.

Code of Business Conduct and Ethics

A company’s code of conduct addresses standards for ethical conduct and enforcement procedures. Publicly listed companies are required to adopt a code of business conduct and ethics for directors, officers, and employees. Any waivers of the code of conduct granted to directors or executive officers must be promptly disclosed by the company.

Related Party Transactions Policy

A company’s related party transactions policy sets forth the standards for reviewing, approving, and disclosing transactions or arrangements between the company and related parties.

Under Item 404(a) of Regulation S-K, transactions between the company and a related party involving an amount that exceeds $120,000 must be disclosed. Related parties are generally defined to include the company’s directors, executive officers, and persons that beneficially own at least 5% of the company’s voting stock. Additionally, any immediate family members of such individuals are generally considered related persons.

Such a policy can be useful for providing procedures for handling actual or potential conflicts of interest. The audit committee is typically tasked with implementing and overseeing compliance with the company’s related party transactions policy. The audit committee usually has an obligation to annually review any previously approved related party transactions that remains ongoing.

Securities Trading Policy

A company’s securities trading policy applies to directors, officers, and employees who have access to material nonpublic information (MNPI) about the company. Material information is information that a reasonable investor would consider important in making an investment decision. Examples include knowledge of earnings guidance and projections, a proposed merger transaction, changes in dividend policies, changes in senior management, a threatened lawsuit, and the loss of a significant customer or supplier. Employees with access to MNPI are subject to trading blackout periods and certain pre-clearance procedures prior to trading.

During trading blackout periods, such as in the two-week period prior to the announcement of quarterly financial results, directors, officers, employees, and other company insiders are prohibited from trading. Such individuals are deemed to have access to MNPI during these blackout windows.

In addition, the securities trading policy outlines a number of transactions that are prohibited regardless of access to MNPI. Usually the company’s directors, officers, and employees are prohibited from purchasing securities on margin or pledge. They are also generally not allowed to buy or sell puts, calls, options, or other derivative securities of the company.

Companies that fail to take appropriate measures to prevent insider trading can face civil and criminal penalties under U.S. federal securities laws. A well-drafted securities trading policy can help deter illicit behavior and prevent violations of insider trading rules.

Regulation FD Policy

Regulation Fair Disclosure, or Regulation FD, is intended to regulate the selective disclosure of material nonpublic information by public companies. Selective disclosure occurs when the company relays MNPI to financial professionals or a select group of stockholders. If a company selectively disclose MNPI, it must promptly make a public disclosure of such information in order to more broadly disseminate the information. Common methods of public disclosure methods include issuing a press release and filing a Form 8-K.

A company’s Regulation FD policy will typically designate a small group of “authorized spokespersons” on behalf of the company that are allowed to communicate with securities market professionals. Such individuals generally include the CEO, CFO, head of investor relations, and general counsel.

The Regulation FD policy will also specify a quiet period during which the company will not comment on its financial or business outlook. The quiet period generally commences a couple weeks prior to the release of quarterly earnings.