Corporate governance refers to the role that company boards or executive teams play in

leadership and oversight. While the specific elements of corporate governance are many, they
generally involve emphasis on creating and maintaining company direction and promoting
goodwill with shareholders and other stakeholders.

Direction
Providing overall direction for the business, its leaders and employees is a major part of
corporate governance. Making strategic decisions and discussing current and future concerns
of the company are tactics of this element. Company mission and vision statements stem
from the governance role of business. These statements provide a sense of purpose and
illustrate primary motives for the company's business activities.

Oversight
The corporate governance role also provides some level of leadership oversight in companies.
In publicly owned companies, for instance, company boards monitor and evaluate decisions
and actions of CEOs and other executive officers. This ensures that leaders act in the best
interest of shareholders and other stakeholders. In smaller businesses, executive teams
normally assume this role of preventing too much power falling to one person. Without a
governing board, though, this is more of a challenge.

Stakeholder Relations
Corporate governance encompasses a business's accountability to each of its stakeholder
groups. Traditionally, this role has largely centered on investor relations and communication
of company decisions. Investors can often find contact information for board members on
company websites. In the early 21st century, there is more emphasis on balancing investor
interests with concern for other stakeholders, such as customers, employees and business
partners. Governance web pages often indicate specific things companies do to meet
expectations of each.

Corporate Citizenship
Another major evolution in the early 21st century is increased focus on corporate citizenship.
Companies commonly include a corporate citizenship statement on corporate governance or
investor relationships web pages. Such statements communicate the business's intent to act
with social and environmental responsibility. Philanthropy and other charitable contributions
are among common things noted within corporate citizenship statements. In general,
governance includes an awareness that companies should balance profit-generating activities
with responsible policies and practices.

Fairness

Fairness refers to equal treatment, for example, all shareholders should receive equal
consideration for whatever shareholdings they hold. In the UK this is protected by the
Companies Act 2006 (CA 06). However, some companies prefer to have a shareholder
agreement, which can include more extensive and effective minority protection.
In addition to shareholders, there should also be fairness in the treatment of all stakeholders
including employees, communities and public officials. The fairer the entity appears to
stakeholders, the more likely it is that it can survive the pressure of interested parties.

Accountability

Corporate accountability refers to the obligation and responsibility to give an explanation or

reason for the company’s actions and conduct.

In brief:

• The board should present a balanced and understandable assessment of the company’s
position and prospects;
• The board is responsible for determining the nature and extent of the significant risks
it is willing to take;
• The board should maintain sound risk management and internal control systems;
• The board should establish formal and transparent arrangements for corporate
reporting and risk management and for maintaining an appropriate relationship with
the company’s auditor, and
• The board should communicate with stakeholders at regular intervals, a fair, balanced
and understandable assessment of how the company is achieving its business purpose.

Responsibility

The Board of Directors are given authority to act on behalf of the company. They should
therefore accept full responsibility for the powers that it is given and the authority that it
exercises. The Board of Directors are responsible for overseeing the management of the
business, affairs of the company, appointing the chief executive and monitoring the
performance of the company. In doing so, it is required to act in the best interests of the
company.

Accountability goes hand in hand with responsibility. The Board of Directors should be made
accountable to the shareholders for the way in which the company has carried out its
responsibilities.

Transparency

A principle of good governance is that stakeholders should be informed about the company’s
activities, what it plans to do in the future and any risks involved in its business strategies.

Transparency means openness, a willingness by the company to provide clear information to

shareholders and other stakeholders. For example, transparency refers to the openness and
willingness to disclose financial performance figures which are truthful and accurate.

Disclosure of material matters concerning the organisation’s performance and activities

should be timely and accurate to ensure that all investors have access to clear, factual
information which accurately reflects the financial, social and environmental position of the
organisation. Organisations should clarify and make publicly known the roles and
responsibilities of the board and management to provide shareholders with a level of
accountability.
Transparency ensures that stakeholders can have confidence in the decision-making and
management processes of a company.

Keeping that definition in mind, here are the essential elements for effective corporate
governance:

1. Director independence and performance

The Board of Directors plays a key role in company oversight, including:

• driving long-term strategic vision, and

• appointing and overseeing the Chief Executive Officer.

The most effective boards have a majority of independent directors who are able to supervise
company management and independent committees for the benefit of shareholders. These
directors should attend the meetings and be prepared to discuss key issues. They also should
be evaluated based on how long they have served on a particular board. Long-tenured
directors can become too entrenched in a company to be considered truly independent.

The practice of “overboarding” by board members should also be a concern. This refers to
situations where directors hold too many seats on the boards of other publicly-traded
companies or nonprofit organizations to be effective. As a result, these directors may be
unable to attend meetings, prepare questions, discuss key issues, or adequately serve the
shareholders who elected them.

Typically, the roles of the Chairperson of the Board and the CEO for a company should be
filled separately. But in some cases, it may be appropriate to have the roles combined if there
is an independent leadership position on the board such as a Lead Director to provide a
counterbalance. Otherwise, the combined CEO/Chair may unduly influence the Board to
make rules that create a conflict of interest. An example of this type of conflict would be
allowing a CEO to structure a loan with inappropriate or self-serving terms.

In reviewing board candidates, shareholders should also evaluate the performance of directors
who have held seats on boards of companies that experienced significant accounting or
ethical scandals. Perhaps those directors should have identified the issues more proactively
and taken a different course of action?

2. A focus on diversity
Studies have shown that companies with more diversified boards are more risk averse, have
less volatile stock returns, and are more likely to pay dividends. So, it can be argued that
diversity by gender, age, and minority representation should be a key goal for the
composition of every company’s board and senior management ranks.

But, in fact, a 2016 report from the Alliance for Board Diversity and Deloitte consulting
found that women and minorities held just 30.8% of Fortune 500 company board seats. The
report also found that Caucasian men were much more likely to serve as board chairs, lead
directors, or chairs of key board committees.

Many investors are now pushing for more board diversity, and companies are beginning to
take heed. BlackRock recently declared diversity to be a corporate governance priority and
both State Street Advisors and the State of Massachusetts Pension Fund now consider a
board’s diversity when voting proxies.

3. Regular compensation review and management

Another essential element of corporate governance is the review and management of

compensation at both the board and executive management levels.

Director compensation has been increasing in recent years as the hours devoted to board
positions have been growing. According to a 2016 Pay Governance review, the median
compensation received by directors at S&P 500 companies was $265,487. And while the role
that board members play should not be diminished, it’s also true this is a part-time position
and many directors are employed full time elsewhere. In addition, when compensation is too
high, there may be concerns that directors will not adequately question the actions of senior
management for fear of losing their board fees.

The scope and method of management compensation should be considered as well, with
proxy statements a good source of information about executive compensation plans.
Institutional Shareholder Services (ISS), a proxy voting recommendation service, has
established these five compensation guidelines as part of their proxy voting principles:

1. Pay should be aligned with performance, with an emphasis on the long term.
2. Avoid “paying for failure,” by avoiding guaranteed compensation and excessive
severance packages.
3. Create an independent compensation committee for effective oversight.
4. Ensure transparent and comprehensive compensation disclosures.
5. Manage payments made to nonexecutive directors. Overpaid nonexecutive directors
may not make independent judgments on managers’ compensation and performance.

4. Auditor independence and transparency

A review of audit practices and company accounting can also signal problems to come.
Auditors should be independent (with no financial interest in a company) with the majority of
their revenues derived from audit activities, not consultation services. Accounting issues
should be handled in a transparent manner, with complete, detailed information and reports
always available to the board and measures put in place to prevent recurrence of any
questionable findings.

5. Shareholder rights and takeover provisions

Investors should consider shareholder rights as a key element of good governance as well.
For example:

• Do all shareholders hold equal voting rights or is one share class advantaged over the
other?

Multiple shares/classes do not necessarily indicate poor governance, but they are a factor to
consider. In the information technology sector, for example, it is common for company
founders and insiders to hold shares that have greater voting rights than outside investors.

• Do shareholders have access to place proposals on proxy ballots or nominate

directors?

A company’s record of dealing with shareholder proposals that receive a majority of votes
may also be an indicator of how a company deals with its shareholders.

• What actions can a board take without shareholder approval, such as amending
company bylaws?
• Are there plans in place, such as poison pills, that can make it difficult for a
company to be acquired? How is management rewarded in the event of a
takeover?

Takeover provisions should be reviewed and shareholders should have adequate rights to vote
on these provisions.

6. Proxy voting and shareholder influence

Increasingly, investors are using proxy voting as a means to influence a board’s corporate
oversight as well as its commitment to improving its governance on issues such as climate
change, income inequality, and shareholder proxy access.

Shareholders must have the ability to use their votes to send a message to the board by
withholding votes for the directors in cases where the company has delayed taking action on
winning shareholder proposals, failed to deal with a director’s poor performance, or did not
improve board accountability and oversight.

Letter writing campaigns also can be successful in lobbying for change in a company’s
corporate governance and, in some cases, have taken the place of putting proposals on
shareholder ballots. Pension funds and asset managers, for example, may join forces to
successfully use letter writing to bring about new voting measures, including majority voting,
repealing classified boards, and removing supermajority voting provisions.