by James Hyatt

A blue-ribbon Commission on Corporate Governance set up a year ago by the New York Stock Exchange declared that amid a turbulent market and regulatory climate and “notwithstanding certain governance failures over the last decade, the current governance system generally works well.”

Board RoomIn its final report, the Commission said “… failures of corporate governance were not the sole reason for the financial crisis of 2008, and … most of the thousands of public companies in this country are well governed, with hard-working and ethical boards and shareholders…”

The group shied away from taking a stand on hot-button issues such as proxy access, financial regulatory reform and an expanded federal role in corporate governance.  “The Commission found it difficult to reach consensus on many of these specific issues,” the report said.

The Commission did add its voice to many in the business community that would like to see the Securities and Exchange Commission address issues posed by proxy advisory firms which often influence the debate and the outcome of corporate governance issues, particularly when it comes to annual meetings.

The SEC has invited public comment on how advisory firms should be regulated, and the Commission report asserts “such firms should be held to appropriate standards of transparency and accountability.”

“At a minimum, such firms should be required to disclose the policies and methodologies that the firms use to formulate specific  voting recommendations, as well as all material conflicts of interest, and to hold themselves to a high degree of care, accuracy and fairness in dealing with both shareholders and companies by adhering to strict codes of conduct.  The advisory services should also be required to disclose the company’s response to its analysis and conclusions.”

The report stressed the importance of making “long-term sustainable growth in shareholder value” a key corporate objective, and urged companies to “establish relationships with a core base of long-term oriented investors.”  Shareholders, it said, “have the right and responsibility to hold a board accountable for its performance in achieving long-term sustainable growth in shareholder value.”

In a veiled jab at the growing influence of proxy advisory firms, the report said hiring such firms by institutional investors “does not relieve institutions from discharging their responsibility to vote constructively, thoughtfully and in alignment with the interests of their clients.”

In the current climate, the report said, “… there is a risk that the number of new governance mandates and ‘best practice’ recommendations over the last decade can lead even the best boards to adopt a ‘check the box’ mentality when trying to adopt and comply with certain corporate governance requirements.”

The report noted that at many companies, the CEO is the only non-independent director on the board, but said having more directors “who possess in-depth knowledge of the company and its industry could be helpful for the board.”

Without much specificity, the report said the SEC should “consider whether there are more effective and efficient ways for individual investors to participate” in the proxy voting process.  And it urged a cautious approach by regulators in adopting new governance requirements. “Being a director is not a full-time job,” and new mandates risk limiting the time directors can spend on other tasks.

The Commission urged that shareholders “attempt to engage in constructive communication with the corporation before submitting proposals or proxy access nominations or engaging in public campaigns which tend to be adversarial in nature.”