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Commonsense Principles of Corporate Governance Unveiled

Some heavy hitters in the corporate world have recently backed a new effort to provide guidance on today’s leading sustainability governance issues.

The Commonsense Principles of Corporate Governance were developed by the CEOs of JPMorgan Chase, Berkshire Hathaway, General Electric, General Motors, Verizon, BlackRock and Vanguard, and unveiled in July.

As the name implies, the Principles are rooted in common sense. Their purpose is to promote conversation about corporate governance and provide a simple outline for sustainable business practices.

They are divided into eight foundational topics that address:

  • Board composition
  • Board leadership
  • Shareholder rights
  • Director responsibilities
  • Public reporting
  • Management succession planning
  • Management compensation
  • Asset managers’ role in governance

The Principles are built on two fundamental principles: businesses should be run for the long-term, and one-size-fits-all governance thinking is wrong. That’s new – and diametrically opposed to some activist investors and the corporate governance industry generally.

The Principles promote a long-term, strategic perspective, rather than continuing the relentless focus on short-term profits. They actively discourage issuing quarterly earnings reports.

According to the Commonsense Principles of Corporate Governance:

“Companies should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress (or not) on long-term goals. A company should not feel obligated to provide earnings guidance – and should determine whether providing earnings guidance for the company’s shareholders does more harm than good. If a company does provide earnings guidance, the company should be realistic and avoid inflated projections. Making short-term decisions to beat guidance (or any performance benchmark) is likely to be value destructive in the long run.”

Stay tuned for updates on emerging trends in corporate governance!

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