Good corporate governance practices are essential for companies of any size. Companies are afforded flexibility to implement corporate governance structures that fit their business objectives and goals. However, companies must satisfy the corporate governance rules promulgated by state law, the applicable stock exchange, and the Securities and Exchange Commission (SEC). They must also abide by any corporate governance standards set forth in their certificate of incorporation or bylaws.

Company Organizational and Governance Documents

A company’s certificate of incorporation will typically indicate which corporate governance decisions require shareholder approval and which do not. Corporate actions such as electing new directors and adopting employee benefit plans generally require shareholder approval. The company’s bylaws define how the company is run and its organizational structure. The company’s corporate governance guidelines and other policies may provide further details on topics such as meetings of independent directors, conflicts of interest, approval of certain related party transactions, and the board of director’s communication policy.

State laws may guide the inclusion of certain provisions in the company’s organizational documents. Under the Delaware General Corporation Law, for example, each director of a company must be a natural person. However, many state laws provide flexibility for companies to structure their corporate governance affairs as they deem appropriate.

Stock Exchange Requirements

Both major U.S. stock exchanges, the New York Stock Exchange (NYSE) and Nasdaq, have corporate governance standards that companies with equity securities listed on their exchange must adhere to. Both stock exchanges require listed companies to have an audit committee and a compensation committee composed solely of independent directors. These board committees must have adopted a committee charter governing their activities and responsibilities. Both NYSE and Nasdaq also mandate that companies adopt corporate governance guidelines and a code of business ethics.

Both exchanges require shareholder approval of certain corporate actions. For instance, a company that seeks to undertake a transaction involving the issuance of 20% or more of its outstanding common stock must obtain shareholder approval prior to the share issuance. Shareholder approval is also required prior to a share issuance that will result in a change of control of the company.

A number of phase-in exceptions are provided by both NYSE and Nasdaq for companies that recently became public companies or that recently ceased to be controlled companies. Companies falling into these two categories have one year to have a majority independent board of directors.

SEC Requirements

The SEC provides a variety of corporate governance disclosure requirements for public companies. In particular, the SEC has many disclosure requirements with respect to board composition set forth in Regulation S-K. For example, they require that all the members of the audit committee be independent directors and that they each are financially literate.

Item 407 of Regulation S-K contains specific disclosure requirements on topics such as director independence, board meetings, board committees, annual meeting attendance, and shareholder communications. For example, under Item 407(f) of Regulation S-K, public companies must disclose in certain SEC filings their process for enabling shareholders to send communications to the board of directors. If a shareholder communications process has not been implemented, the company must explain how the board of directors concluded that this was appropriate.