While primarily governed by state law, certain aspects of corporations are governed by federal law. ICLG - Corporate Governance Laws and Regulations - USA Chapter covers common issues in corporate governance laws and regulations, including management bodies, shareholders &, other stakeholders, transparency &, reporting and corporate social responsibility. Companies are governed by a variety of legal regimes related to corporate governance matters. These consist of state law and federal statutory rules and regulations of various government agencies, including regulations promulgated by the U.S.
UU. Securities and Exchange Commission (the “SEC”) and self-regulatory organizations, such as stock exchanges, that impose requirements on companies whose securities are listed and traded on such exchanges. In addition to these sources of law, the U.S. The corporate governance regime derives principles from a variety of non-legal sources.
Certain federal statutes and regulations provide for simplified or reduced disclosure requirements for smaller public companies, and several pending pieces of legislation may further modify these federal statutes. Particular areas of corporate practice are also governed by specialized federal statutes that may have government implications (for example, regulations promulgated by the Federal Reserve and other federal and state agencies with respect to banks and other financial institutions, and by other similar agencies). regulators with respect to communications, transportation and other regulated fields). Trading rules are issued by the New York Stock Exchange (“NYSE”) and the NASDAQ, the two predominant U.S.
Companies must comply with these rules, many of which relate to corporate governance matters, as a condition of listing on the stock exchange. The listing rules address a variety of corporate governance issues, including director independence, composition of various board committees, requirements for submitting certain matters to a shareholder vote beyond the requirements of state law and the company's organizational documents, the regulation of dual-class share structures and other special voting rights, topics that will be covered by the corporate governance guidelines and their publication, and certain requirements related to disclosure on the corporation's public website. These rules are enforced through the threat of public reprimand from exchanges, temporary suspension of trade for recidivism and permanent removal from the list for companies that do not meet the requirements on a perennial or atrocious basis. Other stock exchanges are in the process of emerging and may have their own governance related listing rules that go beyond or differ from the NYSE and NASDAQ frameworks.
For example, a new stock exchange, the Long-Term Stock Exchange, has begun considering trading (especially cross-quotes) with a number of corporate governance requirements that differ significantly from those of the NYSE and NASDAQ, including those related to sustainability, the issuance of Financial Guidance and ESG Factors Matter. Non-legal sources, such as industry and third party best practice guidelines, recommendations, shareholder proxy advisory firms such as Institutional Shareholder Services (“ISS”) and Glass Lewis, proposals submitted by shareholders, and changing views of the investor community Institutional institutions provide sources of pressure and government expectations. The views of the investor community have become particularly influential as the shareholder base of most of the U.S. Publicly traded companies consist of an overwhelming majority of institutional shareholders, including index funds, mutual funds, hedge funds and pension funds.
As a result, major institutional investors are increasingly developing their own independent views on preferred governance practices and are engaging with companies on these issues. Due to the U.S. federal system. The law, different sources of law are not always harmonized, and corporations are often subject to different obligations to federal and state governments, regulators at each level of government, and demands from other relevant bodies, such as the applicable stock exchange.
This mosaic of rules and regulations, and the mechanisms by which they are implemented and enforced, create an environment of frequent change and evolution. In the U.S. Companies, together with society at large, are actively grappling with how best to collectively address the COVID-19 pandemic, social inequalities and unrest, climate change, biodiversity loss, diversity imperatives, equity and inclusion, and ways to “build back better in the coming stages of the pandemic and beyond”. have only sharpened the importance of these issues and revealed what is at stake.
In addition, many of the corporate governance issues facing boards today illustrate that corporate governance is inherently complex and nuanced, and less susceptible to benchmarking and quantification, which was an important factor in the widespread adoption of the “best practices” of corporate governance. The prevailing views on what constitutes effective governance have been transformed from a relatively binary mindset and ticking the boxes to addressing issues such as how to prioritize and balance the interests of all groups to advance the sustainable and long-term success of the corporation as a whole, how develop a full board of directors and an effective board culture, how to effectively oversee the company's risk management (including risks related to ESG factors), and how to forge relationships with shareholders and stakeholders that significantly improve the company's credibility. The role of the board in overseeing corporate strategy and resilience, building reputation and trust in the corporation, and effectively partnering with management as an advisor and strategic advisor continues to evolve. While some argue that short-termism is not a concern, additional academic and empirical evidence is being published showing the damage to GDP, domestic productivity and competitiveness, innovation, investor returns, wages and employment resulting from short-termism in the U.S.
In the absence of evidence that private sector solutions to resist short-termism are gaining ground, legislation that promotes long-term investment and regulation that requires long-term stewardship is expected to be considered. Congress, SEC, state governments, stock exchanges, academics, the Business Roundtable and other organizations interested in our corporate business system are reevaluating their positions on corporate governance and its impact on the economy and society. In addition, Delaware law, as a general matter, requires that shareholders be treated equally (for example,. As a result of this basic principle of Delaware law, all shareholders, whether minority or majority shareholders, have a number of equal rights with respect to their shares, per share, where applicable.
However, differentiated economic and voting rights can be granted to different classes of shares. Shareholders have the right to attend meetings to vote, but more commonly they vote by “power of attorney”. Shareholders also have the right, subject to applicable law and to comply with disclosure and presentation requirements where appropriate, to communicate with other shareholders privately or publicly regarding matters that will be considered at a meeting and may, through their votes, support, oppose or refrain from matters . Shareholder meetings are often held in person, although companies are increasingly experimenting with virtual shareholder meetings that take place completely online.
Each meeting has a “record date” set by the board, and only people who hold shares on or after that date have the right to vote. Advance notice of the meeting must be given to shareholders within the specified time frames, and such notice should set out the issues to be considered at the meeting. When the items are subject to shareholder voting, the company must provide shareholders with comprehensive proxy statements containing the recommendation of the meeting, information on proposals to be considered, disclosure of the interests of directors and officers that may differ from the general interests of shareholders and other mandatory items. Shareholder meetings are held in accordance with the company's bylaws and bylaws, including as to who chairs the meeting.
Depending on the topic at hand, the specific voting requirement for the shareholder share may be a majority of the shares outstanding, the majority of the shares present and entitled to vote, the majority of the shares voted, or a plurality of shares voted. In certain cases involving related party transactions subject to a shareholder vote, the standard is voluntarily tightened to count only the votes of unaffiliated or disinterested shareholders, but this is generally not required by law, and related party transactions are often issues of review of the meeting and approval instead of being the subject of a shareholder vote. Actions taken at a meeting will not be effective in the absence of a sufficient quorum of actions represented at the meeting. The specific quorum requirement is generally specified in the company's bylaws.
By the nature of the corporate form, shareholders are not responsible for the acts or omissions of the corporation and, in general, owe no duty to other shareholders or the corporation. This lack of fiduciary obligations on the part of shareholders to other shareholders has recently become a point of controversy, however, now that shareholders exert extraordinary influence over the decisions of boards of directors and management teams, and regularly exert substantial pressure about them, even in situations where the interests and priorities of a given investor may not align with the interests of other shareholders. Management concepts, perhaps eventually supported by potential liability or other enforcement mechanism, are in the early stages of emergence to address concerns that shareholders may be exercising power without liability. While specific requirements often seen in Europe and other jurisdictions related to the protection of minority shareholders, such as mandatory bid bid obligations, are generally not integrated into the U.S.
Rules and regulations, some attention should be paid to minority shareholders when there is a majority shareholder. Companies with a majority shareholder (and such majority shareholder) are generally subject to increased legal scrutiny and disclosure requirements with respect to transactions between such companies and their majority shareholders. Corporate shareholders generally acquire fiduciary duties only if they control the corporation, which is rarely the case in most U.S. Publicly traded companies in which shares are widely dispersed and are in themselves a high bar, which generally require ownership of more than most common shares or otherwise demonstrate “dominance” of the corporation through the actual exercise of direction over corporate conduct and, in the a limited subset of the cases in which such a fiduciary obligation may apply at the shareholder level, are generally limited to preventing a majority shareholder from taking advantage of his position as such to derive profits from the corporation at the expense of minority shareholders or to transfer control to a known “looter”.
Shareholders can also request that the SEC or other regulatory and enforcement bodies initiate investigation and enforcement actions against companies and their personnel for violations of applicable law. Certain state laws and provisions in a company's organizational documents may impose restrictions (or special approval requirements) on covered transactions between a company and significant shareholders. For example, Section 203 of the DGCL restricts the ability of a shareholder who owns 15% or more of the outstanding shares of a company to participate in certain business combination transactions with the company, unless certain requirements are met or an exception applies. Under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (HSR Act) and the relevant regulations below, a shareholder's acquisition of voting securities that exceed specified thresholds generally requires prior notification to the Federal Trade Commission and the U.S.
Department of Justice and Authorization from Regulatory Authorities. These requirements related to the HSR Act are currently under review with respect to positions held by shareholders. In addition, investments and acquisitions by non-U.S. Individuals may also be regulated and restricted by applicable laws, such as when national security concerns are relevant through the auspices of the Committee on Foreign Investment in the United States (CFIUS) and implementing statutes and regulations, as well as in regulated industries where they are held in account for special considerations request, such as aircraft, financial services and media.
In addition, in terms of limitations on the acquisition of shareholdings in public companies, a critically important tool to enable boards of directors to meet their fiduciary obligations in the face of the threat of hostile acquisitions and significant accumulations under current legislation remains the shareholder rights plan. or “poison pill”. The shareholder rights plan involves a special “rights” dividend for each of the corporation's shareholders. In the event that a shareholder accumulates equity ownership above a predetermined threshold, often 10 to 15%, without board approval, the rights of all other shareholders “activate and become the right to purchase shares in the corporation at a price substantially lower than the current market value.
Alternatively, most rights plans stipulate that the board of directors may instead choose to exchange one share of common stock for each shareholder right other than the hostile bidder or the activist shareholder. Either way, the result of this conversion or exchange is that the ownership position of the triggering shareholder is substantially diluted. The rights plan is the only structural acquisition defense that allows a junta to resist a hostile takeover attempt, and it has also been deployed in numerous activism situations. While it does not provide complete immunity from a takeover bid, it allows the board to control the process and provides the corporation with an advantage in negotiating a higher acquisition price and the power to reject undervalued or otherwise inappropriate offers.
It is also implemented exclusively by the board of directors and does not require shareholder approval, so it can be implemented in a very short time. Whether or not to implement a rights plan in a given situation requires significant judgment, including taking into account investor reaction and the potential of ISS “hold” recommendations if a rights plan has a term of more than one year and is not subject to shareholder ratification. As a result, and because a rights plan can be adopted quickly, most companies adopt a rights plan only after a threat appears, and before that time, the plan stays “on the shelf.”. Keeping a rights plan on the shelf offers almost all the protection of an active rights plan without any risk of an adverse ISS recommendation, but it can leave a corporation vulnerable to “stealth” acquisitions, in which an activist shareholder buys just under 5% of the company's shares and then buys as much as possible on the open market within the next 10 days.
Because Regulation 13D under the Stock Exchange Act gives shareholders 10 days after acquiring more than 5% of a company's shares to publicly disclose their ownership interest, this technique can result in the acquisition of a substantial portion of a company's capital before it is disclosed. Similarly, Rule 13D does not cover all forms of derivatives. While all interests must be disclosed after a shareholder crosses the 5% threshold, only some derivative interests are counted towards that threshold; typically, only those that are liquidated “in kind” (for corporation shares rather than for derivatives counterparty cash), and only those that can exercise within the next 60 days. However, since an activist can accumulate his or her position in a corporation, without public disclosure, the board of directors may not have any warning about the activist's behavior and, therefore, there is some risk that a company may not be able to adopt a rights plan in time to avoid significant buildup of shares.
in unfriendly and opportunistic hands. As noted in question 3,4, submissions of transactions in the company's securities under Section 16 must be made by directors, officers and 10 per cent of shareholders, and an annual proxy statement of the company is required to specify the effective ownership in the company's equity securities of the directors of the company. civil servants and 5% of shareholders. Investors who do not have a “passive intention” and exceed the 5% threshold should publicly report their ownership positions and intention in an Exhibit 13D.
This disclosure should also address the identity and background of the shareholder (including members of any reporting group), the source of funding, including a discussion of the shareholder's plans or proposals with respect to the company on a wide variety of issues (including extraordinary transactions, acquisitions and dispositions, or changes in the company's board of directors, dividend policy, corporate structure, or business) and establishes various agreements, relationships, or understandings with respect to the company's values and includes certain elements such as archived evidence. Substantial changes to these disclosures should also be publicly reported. Antitrust rules, the acquisition of equity securities that exceed specified thresholds generally requires prior approval from regulatory authorities. Such approval, in turn, would require that the target company be notified of the intention to exceed this amount, effectively providing for the target the shareholder's intention not to be a “passive investor” who would qualify for certain exemptions from such notification.
It remains to be seen if these rules will be modified to provide more flexibility for shareholders to build non-passive positions without triggering competition-related disclosures. While such submissions may be confidential to third parties, the target will be notified of possible activity. Proxy Advisory Firms Have a Huge Influence on the Outcome of Shareholder Activism Campaigns. The SEC has recently implemented rules designed to improve the accuracy and transparency of proxy voting advice provided by proxy advisory firms to investors, including increased disclosure around material conflicts of interest in proxy voting advice, providing a opportunity for a review and comment period through which companies and other requesting parties could identify errors in the proxy voting council and codify that proxy counsel voting recommendations are considered proxy requests and are therefore subject to the anti-fraud provisions of the Rule 14a-9 that prohibit any false material or misleading statement.
However, the SEC subsequently decided to pause the application of these rules with regard to proxy advisory firms in litigation and pending further review by the SEC of those rules and their possible drafting. Before the start of the pandemic, activists had set new records, targeting large numbers of companies, deploying more capital and gaining more board seats than ever before. Campaigns by well-known activist hedge funds had increased in recent years, and more than 100 hedge funds were known for participating in activism, and several mutual funds and other institutional investors had also begun to implement the same type of tactics and campaigns as funds dedicated to activists. In addition to the “traditional activist shareholder,” debt default activism has recently appeared on the scene.
In these situations, debt investors buy a company's debt on the theory that the company is already in arrears and then actively seek to enforce that default so that they can make a profit. Such an activist's playbook begins with the investor identifying a financing transaction, even one made years earlier, that can claim that he failed to comply with a pact in the issuer's debt documents. The investor then accumulates both a short position in the company's debt (in some cases through a default swap that is collected in the event of default) and a long position in the debt sufficient to assert a default and possibly even a blocking position. In general, the activist's long-term exposure is lower than his short position, so the investor is “net short”.
Legislators and regulators have largely stayed out of the fight against shareholder activism. The SEC has sought to play an equitable role, ensuring that both parties provide full and fair disclosure and are not misleading in their requests for power of attorney. Even when the legislature incited it (and encouraged in the Dodd Frank Act) to curb abuses by activists of the early warning disclosure system Regulation 13D, the SEC has historically refused to act, but preferred to maintain the current “balance of power.”. This may change under the current Management, which is contemplating a number of possible changes that may affect shareholder activism.
The frequency and impact of hedge fund activism has led some legislators to propose federal legislation, but to date these changes have not yet been adopted. Concerns about attacks by opportunistic activists and takeover bids from companies that have been weakened by the pandemic may have an impact on future legislation. See also questions 2, 6 and 2, 7.Companies are managed under the direction of a single-level unitary board of directors, elected by shareholders and subject to fiduciary obligations, and with full control over the company's business and affairs. Directors must be natural persons under state law, but they do not need to be shareholders (although directors generally have capital in the company).
The basic responsibility of the meeting is to exercise its business judgment and act in a manner that is reasonably considered to be in the best interest of the company and its shareholders. Boards often delegate day-to-day management to the CEO and other senior managers, all of whom serve at the pleasure of the board. External directors are generally referred to as non-managerial directors and independent directors when they qualify as such under applicable rules. Boards will also determine their own committee structures (including committees managed by the exchange, such as the nominating and governance committee, the compensation committee, and the audit committee) and board leadership structures (for example, regarding the identity of the chairman of the board and whether the chairman is a person other than the CEO).
Directors owe the corporation and its shareholders fiduciary duties, such as the duty of care and the duty of loyalty. The duty of care encompasses the obligation to act with knowledge of the facts after due consideration and appropriate deliberation. The duty of loyalty encompasses the obligation to act in the best interest of the corporation and shareholders, as opposed to the personal interests of directors. Corollary duties, such as duties of good faith and duties of openness and disclosure to shareholders when presenting matters for shareholder action, also often apply, and there is a legal framework for considering the director's supervisory obligations.
The board generally has the right to consider long-term and short-term interests and establish the appropriate time frame for achieving corporate objectives. Under the law, courts often do not challenge the board's business decisions when applying the “business judgment” rule, which involves a rebuttable presumption that directors are performing their duties in good faith, in an informed manner and in a manner that directors reasonably believe is in the best interests of the corporation and its shareholders. While still rare in the publicly traded universe, a growing number of companies are implementing alternative for-profit corporate firms, such as the “public benefit corporation,” which would empower (and require) boards of directors to balance shareholder pecuniary interests with interests of those materially impacted by the corporate conduct and specific public benefits that the corporation has decided to promote. The members of the board of directors are elected by the shareholders, and the board has the right to modify the size of the meeting and appoint directors to fill vacancies, whether created by newly created management positions or by resignations of the incumbent directors.
State law and the corporation's bylaws will establish the extent to which directors may be removed with or without cause, whether a shareholder vote is required for removal, the standard of voting that must be met, and judicial authorities to remove directors. The board of directors, not the body of shareholders, appoints and dismisses corporate officers. The board of directors has the legal authority to determine compensation for directors and officers. In public companies, stock exchange rules require board committees to play a central role in clearing decisions.
Because of these requirements, a compensation committee independent of the board generally determines and approves CEO compensation. Compensation for executive officers who are not CEOs is also usually determined by the independent compensation committee, although stock exchange rules allow the entire board to make such determinations after receiving the recommendation of the compensation committee. Stricter independence rules apply to members of compensation committees and committee advisors. The use of an independent compensation committee also makes it easier to deduct taxes from certain compensations, although tax rules in this regard are in a period of change.
Director compensation is also within the purview of the board of directors and the company's director compensation program must be publicly disclosed. In recent years, there have been a handful of cases where the enormous compensation of directors has been examined and litigation has been brought. Insider company members (including officers, directors, and 10% of shareholders) may be required to return any profit gained from the purchase and sale (or sale and repurchase) of the Company's shares if both transactions occur within a six-month period and do not apply the applicable exemptions. To the extent that a director or officer acquires or maintains substantial capital positions, the limitations and disclosures that would generally apply to shareholders seeking to acquire or occupy positions as discussed in question 2.6 would generally also apply to the director or official.
Companies can also establish (and enforce) company-specific stock ownership guidelines on directors and officers, as well as restrictions on the hedging or pledging of securities by such persons. Stakeholder governance is fully consistent with well-established principles of corporate law and the existing fiduciary framework for directors. Directors have a fiduciary duty to promote the best interests of the corporation and, in fulfilling that duty, directors exercise their business judgment by considering and reconciling the interests of the various stakeholders and their impact on the corporation's business. In fact, the special genius of Delaware law in particular, and one of the main reasons it has become the indisputably preeminent jurisdictional option of most major U.S.
Public companies have been driven by a fundamental sense of pragmatism and their framework of fiduciary obligations has provided corporations with the space they need to address evolving business challenges, as well as shareholder expectations. Both companies and investors have rethought the ways in which they engage and have provided robust and increasingly personalized disclosures about their approaches to strategy, purpose and mission; board participation, composition and practices; board oversight of strategy and risk management; business model for long-term investments, reinvesting in the company and retraining employees, seeking research and development, innovation and other capital allocation priorities; sustainability, ESG and human capital issues; stakeholder and shareholder relations; corporate governance; and corporate culture. With respect to the composition of the board, there are no requirements for employee or labor representation (or other mandatory representation for particular constituencies) on the board of directors. In the context of M&A, there are no mandatory prior notification or consultation provisions under the U.S.
Some collective agreements (“CBA”) may contain provisions that grant union employees certain benefits, or the right to renegotiate their CBA, in the event of a change in control, but these matters are contract specific, however, are not legally required and do not provide a right of consent to a bid. As the world seeks to recover from the COVID-19 pandemic and related issues, the private sector's treatment of employees and other issues related to human capital is expected to be further analyzed. The meeting may consider the interests of non-shareholder constituencies for their impact on creating corporate and shareholder value, and many states formally allow boards to consider the interests of non-shareholder constituencies, such as employees, business partners and local communities, as well as broader groups, such as the economy as a whole. Companies and large institutional investors increasingly recognize that the long-term success of the company and its status as a lasting company requires due attention to the interests of important stakeholders, rather than focusing solely on the wishes of shareholders.
The corporate response to the COVID-19 pandemic and related issues has emphasized the health, well-being and safety of employees, customers, communities and other key groups. Before the start of the pandemic, while this is not a significant legal regulation in the U.S. Beyond compliance issues, corporate social responsibility, including addressing environmental, social and ethical issues, was increasingly recognized as an appropriate matter of business judgment for the board of directors. Modern public enterprise is expected to establish and meet high standards of social responsibility.
Related risks are expected to be addressed through robust oversight and risk management processes. Companies often voluntarily disclose performance and policies in this area. Specific disclosure requirements may apply in some of these areas and substantive laws, such as anti-bribery, anti-corruption and anti-discrimination rules or environmental mandates, may also apply. Shareholder proposals increasingly involve sustainability, environmental and social issues, including greenhouse gas emissions and renewable energy concerns; international labour standards and human rights; and issues of diversity, equality and non-discrimination, particularly regarding sexual orientation.
When such proposals receive significant support, companies will need to determine whether and how to demonstrate their responsiveness. The primary responsibility for a company's financial statements and disclosures lies with management and the independent auditor. Every company listed on the New York Stock Exchange must have an internal audit function to provide management and the audit committee with ongoing evaluations of a company's risk management processes and internal control systems. However, as part of its oversight role, the board has the ultimate responsibility for overseeing management's implementation of appropriate disclosure controls and procedures.
Under federal securities laws, directors can be held responsible for their incorrect statements or omissions of important facts in public filings. In some cases, liability is limited to circumstances in which the director acted with Scienter (real knowledge or reckless disregard), and several defenses may be available, including demonstrating proper due diligence. Violations of fiduciary duties, corollaries of candor and disclosure can also result in liability. Regulation FD generally prohibits selective disclosure of material information and requires public disclosure of selectively disclosed information to investors, subject to certain exceptions.
The accounting and auditing function of a public company involves a committee independent of the board (called the audit committee), external independent auditors, internal auditors and senior managers. Federal law and stock exchange rules require that an independent audit committee of the board (composed of financially savvy members, none of whom can accept consulting or advisory fees from the company, with an obligation to “comply or explain” if no member qualifies as an expert financial) be responsible. for the appointment, compensation, retention and oversight of the independent auditor and for the oversight of certain matters related to the internal audit function. While not mandatory, shareholders are normally asked to ratify the appointment of such an auditor.
No aspect of the role of an audit committee is more vital than its oversight of the audit process. An audit committee must have procedures in place to ensure that it is kept up to date with evolving standards and best practices in this area. The PCAOB has enacted strengthened ethics and independence rules and adopted auditing standards related to the transparency and quality of audit reports, including requirements to improve the disclosure of certain “critical audit issues”, and the effectiveness of communications between an audit committee and the auditor independent. Required government-related disclosures include information on the composition of the company's board of directors and management team; determinations of independence with respect to board and director ratings; existence of a board diversity policy; governance guidelines corporate that address qualification standards for directors, director responsibilities, director access to management and independent advisors, director compensation, director education and guidance, management succession, and evaluation of board performance (as per provided for in NYSE rules); committee structures and bylaws; the number of board meetings held and whether any directors attended less than 75% of board and committee meetings; how shareholders can communicate with the board; if the company has a code of ethics and any waivers from those codes; leadership structure and the role of the board in overseeing risks; risks arising from compensation policies that may have a significant adverse effect on the company; related party transactions; and other matters.
When items are presented to shareholders for approval, such as for the election of directors or consideration of significant transactions, such as mergers or the sale of all or substantially all corporate assets, proxy statements containing the recommendation of the meeting, information on proposals to be considered, disclosure of the interests of directors and officers that may differ from the general interests of shareholders and other mandatory elements should be submitted. Proxy statements for annual meetings where directors are elected contain extensive information on board and senior management, governance practices, director and executive compensation, auditor information, and other matters. The websites of major public companies will generally include information related to corporate governance and sustainability, including the company's organizational documents (articles of association and articles of association), key corporate governance guidelines and policies, including director independence criteria, articles of association of the committee for the Audit, Compensation and Nominating Committees and Governing Board, Codes of Business Conduct, Representational Statements and Annual Reports, Sustainability Reports, Section 16 submissions reporting on the operations of directors and officers and information relating to the company's board of directors and management teams. While stock exchange rules require or provide the option to post certain government information on the company's website, most company websites go beyond what.
Disclosures regarding ESG and sustainability issues have been primarily a function of private orders, driven largely by engagement with key institutional investors who have demanded greater transparency and more consistent disclosures in order to assess companies with regarding ESG and sustainability issues. This has led companies to take a number of approaches to reporting and transparency, with the largest U.S. Companies that generally incorporate, on a voluntary basis, disclosures consistent in whole or in part with one or more third party standards, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Working Group on Climate-Related Financial Disclosures (TCFD), and the Framework Stakeholder Capitalism Metrics recently announced by the International Business Council of the World Economic Forum (WEF) and the four major accounting firms, while highlighting the degree to which corporate actions are aligned with the United Nations Sustainable Development Goals (the SDGs). On the stock exchange front, NASDAQ recently received SEC approval for new board diversity-related rules that would require publicly traded companies to disclose board diversity information and have, or explain why they do not have, at least two diverse directors (according to as defined by NASDAQ rules).
The extent to which ESG and sustainability-related disclosures encompass forward-thinking objectives, goals, and ambitions (such as those related to climate change and “net-zero” plans) is a rapidly emerging area of focus in the U.S. Sabastian Niles Wachtell, Lipton, Rosen 26 views. Do you want to adapt books like this? Learn more about how Pressbooks supports open practices. Strategies Planned and Implemented U.S.
Corporate governance system Purpose and direction of the company The general environment (PESTEL) Analysis of the microenvironment of the organization. Enterprise-Level Strategy Vertical Integration Strategies Strategy Analysis Framework (SAF) Index of Tools and Models Used in Today's United States Textbook. The corporate governance system is best understood as the set of fiduciary and managerial responsibilities that bind the management, shareholders and the board of directors of a company within a broader social context defined by legal, regulatory, competitive, economic, democratic, ethical and other social forces. Although shareholders own companies, they generally don't manage them.
Shareholders elect directors, who appoint managers who, in turn, direct corporations. Since managers and directors have a fiduciary obligation to act in the best interest of shareholders, this structure implies that shareholders face two separate problems, called principal-agent, with management, whose behavior will likely be related to their own well-being, and with the meeting, which can be indebted to particular interest groups, including management. Many of the mechanisms that define the current corporate governance system are designed to mitigate these potential problems and align the behavior of all parties with the broadly interpreted best interests of shareholders. The notion that the welfare of shareholders should be the primary objective of the corporation derives from the legal status of shareholders as residual claimants.
Other corporation stakeholders, such as creditors and employees, have specific claims about the corporation's cash flows. On the contrary, shareholders get the return on investment from the waste only after it has been paid to all other interested parties. Theoretically, making shareholders residual claimants creates the strongest incentive to maximize company value and generates the greatest benefits for society at large. Not all shareholders are the same and share the same objectives at one end, the interests of small (minority) investors often conflict with large shareholders (including those with a stock control block and institutional investors) at the other.
Small investors, with only a few shares, have little power to influence the corporation's board of directors. In addition, with only a small part of their personal portfolios invested in the corporation, these investors have little motivation to exercise control over the corporation. As a result, small investors tend to be passive and are only interested in obtaining favorable returns. They often don't bother to vote and simply sell their shares if they're not satisfied.
After years of poor sales and amid rumors of a possible acquisition, billionaire Daniel Loeb, shareholder of 7%, leads an initiative to replace five of the 12 members of the Campbell's Soup board through a proxy vote. Loeb faces uphill battle, investors will have chance to vote on company's future at annual meeting. Loeb will attract other investors who are also upset with the performance and management direction Campbell has taken in the past, and will offer fresh blood and a conversation about whether to sell the company. On the contrary, shareholders who hold a sufficiently large stake in the corporation can easily justify the time and expense required to actively oversee management.
They may have a controlling stock block or be institutional investors, such as mutual funds, pension plans, employee stock ownership plans. Or outside the United States, they may be banks whose participation in the corporation may not qualify as majority ownership, but is large enough to motivate active participation with management. It should be noted that the term “institutional investor” encompasses a wide variety of managed investment funds, including banks, trust funds, pension funds, mutual funds and similar “delegated” investors. Everyone has different investment objectives, portfolio management disciplines, and different investment horizons.
As a result, institutional investors represent another layer of agency problems and an opportunity for oversight. To identify the potential for an additional layer of agency problems, ask why we should expect a bank or pension fund to look after the interests of minority shareholders better than corporate management. On the one hand, institutional investors may have “purer than management” motives, mainly a favorable return on investment. On the other hand, they often make passive and indifferent monitors, partly out of preference and partly because active monitoring may be prohibited by regulations or by their own internal investment rules.
In fact, one of the main principles of the recent governance debate focuses on whether it is useful and desirable to create ways for institutional investors to take a more active role in monitoring and disciplining corporate behavior. In theory, as large owners, institutional investors have a greater incentive to monitor corporations. However, the reality is that institutions did not protect their own investors from managerial misconduct in firms such as Enron, Tyco, Global Crossing and WorldCom, even though they held important positions in these firms. The latest development in capital markets is the increase in private capital.
Private equity funds differ from other types of investment funds mainly in the larger size of their holdings in individual investee companies, their longer investment horizons and the relatively smaller number of companies in individual fund portfolios. Private equity managers tend to have a higher degree of participation in their investee companies compared to other investment professionals, such as mutual fund or hedge fund managers. As a result, these private equity managers are likely to play a greater role in influencing the corporate governance practices of their investee companies. By virtue of their longer investment horizon, direct board participation and ongoing commitment to management, private equity managers play an important role in shaping governance practices.
That role is even stronger in a majority share purchase or acquisition, in which a private equity manager exercises substantial control, not just influence, as in minority equity investments, over a company's governance. Not surprisingly, academics and regulators are closely monitoring the impact of private equity on corporate performance and governance. The existence of a corporation does not depend on who the owners or investors are at any given time. Once formed, a corporation continues to exist as a separate entity, even when shareholders die or sell their shares.
A corporation continues to exist until shareholders decide to dissolve it or merge it with another business. Companies are subject to the laws of the state of incorporation and the laws of any other state in which the corporation conducts business. Therefore, companies may be subject to the law of more than one state. All states have corporate statutes that set the ground rules for how corporations are formed and maintained.
A key question that has helped shape the current mosaic of corporate laws is: “What is or should be the role of law in regulating what is essentially a private relationship? Legal experts often take a “contract-based” or “public interest” approach to this issue. Free market advocates tend to view the corporation as a contract, a voluntary economic relationship between shareholders and management, and see little need for government regulation other than the need to provide a judicial forum for civil lawsuits alleging breach of contract. Public interest advocates, on the other hand, are concerned about the growing impact of large corporations on society and tend to have little faith in market solutions, arguing that the government should force companies to behave in ways that promote the public interest. Proponents of this view focus on how corporate behavior affects multiple stakeholders, including customers, employees, creditors, the local community and environmental protectors.
The stock market crash of 1929 led the federal government to regulate corporate governance for the first time. President Franklin Roosevelt believed that public trust in the stock market needed to be restored. Fearing that individual investors would shy away from stocks and, in doing so, reduce the pool of capital available to boost economic growth in the private sector, Congress enacted the Securities Act in 1933 and the Securities Exchange Act the following year, which established the Securities and Exchange Commission (SEC). This landmark legislation changed the balance between the roles of federal and state laws in regulating corporate behavior in the United States and caused the growth of federal regulation of corporations at the expense of states and, for the first time, exposed corporate officials to sanctions federal criminal offenses.
In 2002, as a result of disclosures of accounting and financial misconduct in the Enron and WorldCom scandals, Congress enacted the Accounting Reform and Investor Protection Act, better known as the Sarbanes-Oxley Act (and often referred to as the SOX). The integrity of our financial markets depends to a large extent on the role played by a range of “gatekeepers”, external auditors, analysts and credit rating agencies in detecting and exposing the types of questionable financial and accounting decisions that led to the collapse of Enron, WorldCom and other “reports wrong”. or accounting fraud. A key question is whether we can (or should) trust these guardians to perform their duties diligently.
It can be argued that we can and should because your business success depends on your credibility and reputation to the end users of your information, investors and creditors, and if they provide fraudulent or reckless opinions, they are subject to private lawsuits for damages. The problem with this view is that the interests of gatekeepers are often more aligned with those of corporate managers than with those of investors and shareholders. After all, guardians are often hired and paid (and fired) by the same firms that evaluate or qualify, and not by creditors or investors. Auditors are hired and paid by the firms they audit; credit rating agencies are often hired and paid by the firms that qualify; lawyers receive payment from the firms that hire them; and, as we discovered after the 2001 governance scandals, until recently compensation from analysts security (working mainly for investment banks) was closely linked to the amount of investments related to the banking business that their employers (investment banks) make with the companies their analysts evaluate.
Therefore, a contrasting view holds that most gatekeepers are inherently conflicting and cannot be expected to act in the interests of investors and shareholders. Proponents of this perspective also argue that the guardians' conflict of interest worsened during the 1990s due to increased cross-selling of consulting services by auditors and credit rating agencies and the cross-selling of investment banking services. Both issues are addressed in recent regulatory reforms; the new rules address the restoration of the “wall” between investment banks and security analysts, and require separation of auditing and consulting services for accounting firms. Strategic Management by John Morris is licensed under a Creative Commons Attribution-Noncommercial 4.0 international license, except where otherwise noted.
The following post is based on a Business Roundtable post. Business Roundtable has been recognized for decades as an authoritative voice on issues affecting U.S. commercial corporations and meaningful and effective corporate governance practices. In recent years, the external environment in which public companies operate has become increasingly complex for both companies and shareholders.
The increase in regulatory burdens imposed on public companies in recent years has increased the costs and complexity of overseeing and managing a corporation's business and has brought new challenges from operational, regulatory and compliance perspectives. Public companies have a global profile; they interact with investors, suppliers, customers and government regulators around the world and do so in an era where instant communication is the norm. In addition, in the recent past, Congress has abandoned strict adherence to the fundamental principle of materiality, a core principle of the disclosure requirements of federal securities laws. Instead, Congress has sought to use securities laws to address issues that are irrelevant to shareholder investment or voting decisions.
For example, Congress has required public companies to disclose information related to conflict minerals and payments to foreign governments for resource extraction and mine safety, information that may be relevant in a social context, but that has little relevance to the material information that a shareholder I would need. make an investment decision. The current environment has also been shaped by fundamental changes in shareholder participation, which has become a central and essential theme for public companies and their boards of directors, managers and investors in the early 21st century. Public companies have assumed unprecedented levels of proactive engagement with their major shareholders in recent years.
Many institutional investors have also increased their participation efforts, devoting significant resources to issues of governance, company outreach, developing voting policies and analyzing proposals on the ballots of companies in their portfolio. In addition, overall levels of shareholder activism remain at record levels, placing significant pressure on target companies and their boards of directors. In addition, many of the current shareholders, and not just those who normally consider themselves “activists”, have higher expectations for commitment to board and management than shareholders in previous years. These investors seek a greater voice in strategic company decision-making, capital allocation and general corporate social responsibility, areas that traditionally fell under the exclusive competence of the board of directors and management.
In addition, some shareholder-driven campaigns to change corporate strategies (through spin-offs, for example) or capital allocation strategies (through share repurchase programs) suggest that, in some cases, at least, shareholder opinion on these issues has been heard in the living room together. Some commentators consider this increase in shareholder empowerment to be appropriate, arguing that shareholders are the ultimate owners of the company. Others wonder, however, whether activists' objectives focus too much on short-term uses of corporate capital, such as share buybacks or special dividends. Short-term value-focused capital allocation strategies can be fully appropriate for a shareholder, regardless of the length of their investment horizon.
The board, however, has a very different role in considering the proper use of capital for the company and all of its shareholders. Specifically, the meeting must constantly weigh both long-term and short-term uses of capital (e.g., organic or inorganic reinvestment, shareholder returns, etc. Business Roundtable CEOs Believe Shareholder Participation Will Remain a Critical Corporate Governance Issue for U.S. Companies in the coming years.
In addition, we believe that there is a growing recognition in the corporate United States that an increase in shareholder access to the boardroom cannot come without a corresponding increase in shareholder liability. Here, as in many areas of corporate governance, transparency is a basic but essential element; for example, in this “information age,” a shareholder wishing to influence corporate behavior should be encouraged to publicly disclose the nature of their identity and ownership, even in cases where the federal government securities laws may not specifically require disclosure. We believe that this concept of shareholder responsibility and accountability will be and should become an integral part of modern thinking related to corporate governance in the coming years, and we look forward to taking a leading role in discussions related to these important issues. In light of the evolution of the landscape affecting the United States.
Public companies, Business Roundtable has updated the Corporate Governance Principles. While Business Roundtable believes that these principles represent current, practical and effective corporate governance practices, it recognizes that there are wide variations between U.S. companies, relevant regulatory regimes, ownership structures, and investors. No approach to corporate governance can be suitable for all companies, and Business Roundtable does not prescribe or endorse any particular option, leaving that to the considered judgment of boards of directors, management and shareholders.
Consequently, each company should consider these principles as a guide to developing structures, practices and processes that are appropriate in the light of its needs and circumstances. This publication aims to assist boards of directors and management of public companies in their efforts to implement appropriate and effective corporate governance practices and to serve as spokespersons for public dialogue on evolving governance standards. Although there is no one-size-fits-all approach to governance that is right for all of the U.S. In public companies, long-term value creation is the definitive measure of the success of corporate governance, and it is important for shareholders and other stakeholders to understand why a company has chosen to use particular governance structures, practices and processes to achieve that goal.
Consequently, companies must disclose not only the types of practices they employ, but also their basis for selecting those practices. Effective corporate governance requires a clear understanding of the respective roles of the board, management and shareholders; their relationships with each other; and their relationships with other corporate stakeholders. Before discussing the basic guiding principles of corporate governance, Business Roundtable believes it is important to describe the roles of these key corporate actors. Effective corporate governance requires a dedicated approach by directors, CEO and senior management to their own responsibilities and, together with the corporation's shareholders, to the shared goal of creating long-term value.
An effective system of corporate governance provides the framework within which the board and management address their key responsibilities. The CEO and management, under the direction of the CEO, are responsible for the development of the company's long-term strategic plans and for the effective execution of the company's business in accordance with those strategic plans. As part of this responsibility, management is responsible for the following functions:. Public companies employ a variety of approaches to board structure and operations within the parameters of applicable legal requirements and stock market rules.
While no structure is suitable for each company, Business Roundtable believes that the practices set out in the following sections provide an effective approach for companies to follow. Companies are often said to have obligations to stakeholders other than their shareholders, including employees, customers, suppliers, communities and environments in which they do business and government. In some circumstances, the interests of these stakeholders are considered in the context of achieving long-term value. A unitary board of directors, elected by shareholders and subject to fiduciary obligations, oversees the corporation's business and affairs.
These advisory firms exert pressure on corporations to conform to the governance standards they enact by issuing voting recommendations for the election of director to the shareholders of each publicly traded corporation, based on the corporation's compliance with the standards published by the firm ases. For several decades, the assumption has prevailed among many CEOs, directors, academics, investors, asset managers and others that the sole purpose of corporations is to maximize shareholder value. As mentioned above, a unitary board of directors, elected by shareholders and subject to fiduciary obligations, is responsible for overseeing the corporation's business and affairs, including the establishment and direction of corporate strategy. Business Roundtable CEOs believe shareholder participation will continue to be a critical corporate governance issue for U.
Larger and older corporations with a history of compliance with securities law are subject to fewer prior authorization requirements and, in certain cases, may use shortened forms of disclosure. A corporation is a legal entity made up of a group of people that its shareholders created under the authority of the laws of a state. The SEC has indicated that it continues to review the role of proxy advisory firms such as ISS and Glass Lewis in the voting process; in light of ISS's substantial influence on the evolution of corporate governance standards over the past few decades, this review may have significant implications. .