Drafting Effective Corporate Governance Guidelines
Many companies have implemented corporate governance guidelines that capture the distinct procedures, practices, and culture of the management team and board of directors. In-house lawyers are often tasked with drafting, reviewing, or updating a company’s corporate governance guidelines. Although specific style considerations can cause corporate governance guidelines to vary across companies, lawyers should be aware of the common provisions appearing in these guidelines.
Photo by Hunters Race on Unsplash
Stock Exchange Requirements
Companies that are publicly listed on the New York Stock Exchange (NYSE) are required to implement corporate governance guidelines. The rules are set forth in Section 303A of the NYSE Listed Company Manual.
While the Nasdaq Stock Market does not have an equivalent requirement, most Nasdaq-listed companies have adopted corporate governance guidelines. In drafting the provisions, Nasdaq-listed companies often follow the NYSE rule requirements.
With the increased attention to corporate governance and social responsibility in recent years, the recommendations of proxy advisory firms such as ISS and Glass Lewis have carried greater influence. These proxy advisory firms provide guidance on the provisions that companies should include in their corporate governance guidelines. Through the publication of a data-driven scoring system called ISS QualityScore, ISS helps investors assess the relative corporate governance and social good commitment of different companies.
A company’s corporate governance guidelines will generally specify the optimal board size. This number is generally between 5 to 13 members, but may be adjusted from time to time by the company’s governing documents. To comply with the NYSE and Nasdaq requirement that a majority of directors are independent, these guidelines will outline the company’s procedures to verify director independence. This generally involves the board evaluating on at least an annual basis that each director satisfies the criteria for independence.
The process for selecting directors is often identified in the company’s corporate governance guidelines. The board membership criteria are set forth in broad categories including:
- Background: The company seeks board candidates from diverse professional and personal backgrounds. Unique skills, expertise, experience, and diversity characteristics are taken into consideration.
- Simultaneous service: There are limitations on the number of different company boards on which a director may sit. ISS and Glass Lewis recommend that directors should not sit on more than five total public company boards.
- Financial literacy: Directors should have a solid grasp of how to interpret financial statements and the financial performance of the company. Section 303A of the NYSE rules set forth the criteria for financial literacy.
- Character: Some markers of good personal qualities that directors should possess include integrity, thoughtful judgment, accountability for decisions, and courage to openly express viewpoints.
- Expectations: Serving on a company’s board of directors is a substantial time commitment. Directors are expected to comply with the duties and responsibilities outlined in the company’s bylaws and to avoid conflicts of interest.
Some corporate governance guidelines set term limits or explicit retirement age. For example, the guidelines might specify that no person should be nominated to the company’s board of directors once they have reached 72 years old.
The leadership structure of the board of directors, including the responsibilities of the board chair, are outlined in the corporate governance guidelines. Some companies allow any director to serve as board chair. Other companies will adopt a permanent policy that the board chair and CEO positions should always be separated or combined.
Some companies choose to have a lead director. This position often arises in situations where the board chair is not an independent director. The lead director helps to maintain the independent integrity of the board.
Board Rules and Procedures
In accordance with NYSE rules, director responsibilities and procedures are required to be addressed in the corporate governance guidelines. The board of directors are supposed to provide oversight and strategic advice to the company’s management team. They are expected to attend the annual meeting of stockholders, regularly scheduled board meetings, and committee meetings as applicable. The board of directors usually holds a minimum of six meetings per year.
Directors are often subject to certain stock ownership requirements. For example, the corporate governance guidelines may indicate that all non-management directors are required to hold the company’s shares beyond a certain minimum dollar value.
On an annual basis, the board will conduct a self-evaluation of its performance. The annual assessment results are discussed with the full board. Directors are also required to participate in continuing education programs. This continuing education is intended to enhance their knowledge of various subjects that will assist them in carrying out their director duties.
The board is organized into committees that are responsible for specific functions. Each committee has its own charter and qualifications for committee membership. NYSE requires all companies to have an audit committee, a compensation committee, and a nominating & governance committee.
Committee assignments and the appointment of committee chairs are based on experience levels and company needs. Some companies have a policy of rotating committee assignments while other companies favor continuity.