Views on improving the integrity of global capital markets
12 August 2016

Are Commonsense Principles of Corporate Governance Any Good? Yes, They Are

Recently, we got a final look at the Commonsense Principles of Corporate Governance (the Principles), an effort headed by Jamie Dimon of JPMorgan Chase to offer a set of governance principles for US companies. We first heard about this project in February when we learned that Dimon had recruited Warren Buffett and Larry Fink of Blackrock as well as big name investors, such as Vanguard, State Street Global Advisors, and the CPP Investment Board.

Some in the governance community have been skeptical about JPMorgan and Dimon heading up this project because in recent years, shareholders have battled with the JPMorgan board about the separation of the chairman and CEO roles.

But you know what? The Principles are pretty good. There are things here and there that could use improvement, but these Principles will serve as a good baseline for all US companies to follow.

The main principles cover the following areas:

  1. Board of Directors
  2. Board of Directors’ Responsibilities
  3. Shareholder Rights
  4. Public Reporting
  5. Board Leadership
  6. Management Succession Planning
  7. Compensation Management
  8. Asset Managers’ Role in Corporate Governance

Highlights and the Influence of CFA Institute

Among the items worth highlighting are a call for boards to engage with shareowners when appropriate, a call for reasonable minimum thresholds for calling a special meeting or acting by written consent, calling out dual class shares as a poor governance practice, and ensuring that firms have a strong succession plan.

One of the most interesting inclusions in the Principles is that the group decided to take on the problem of “short-termism” in multiple places, but primarily in the Public Reporting principles. The principle states that “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.” CFA Institute has spoken out about the issue of short-termism for more than a decade, and it is gratifying to see our recommendation of forgoing earnings guidance, which we first spoke about in 2006, be included in the proposed best governance practices of blue chip US companies.

We also see similar language from our report on visionary boards showing up in many of the best practice recommendations on such topics as remuneration, engagement, risk, and board culture.

A Few Critiques

There is room for improvement in the Principles. The section on shareowner engagement could go into more detail on best practices to help guide smaller firms struggling with this issue, and there could be more material that amplifies best practices in executive compensation disclosure.

That said, we believe this document can serve as a good baseline to help the engagement process between shareowners and the companies in which they invest. The Principles espouse a standard that all US companies should set as a target. Some larger US companies already hit these marks and, in fact, go well beyond these best practices. But if all US companies used the Principles as a starting point and aspired for something even better — well, that would be a positive sea change in US corporate governance.

Let’s see what happens.

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About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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