Tag Archive: NACD Key Agreed Principles

The Power of Principles

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Peter R. Gleason

An old boardroom adage is that directors must be “proactive,” rather than “reactive.” But what does this mean? When disruptive events occur, boards need to respond to them—so isn’t this reaction? I believe that board action must be based on principles, which I define (with Merriam-Webster) as a “moral rule or belief that helps us know what is right and wrong and that influences our actions.”  A board’s response is reactive if directors focus mainly on an event; it is proactive if it stems from their values.

Principles Matter

Principles can make a positive difference in the destinies of enterprises that embrace them. That is why NACD is in the principles business, so to speak. Every year since our first Blue Ribbon Commission gathered to discuss executive compensation a quarter century ago, we have been asserting general concepts that have had a measurable impact on boards. As this past research blog explains, many of our Blue Ribbon Commission reports and the principles they advocate have had a measurable influence on board practices. We know this by comparing the recommendations of our reports, and subsequent changes in practices as measured by our surveys.

And the good news is that a principles-based approach to governance can improve corporate financial performance. While many governance researchers have tried and failed to show a correlation between specific governance practices and financial performance, performance does seem correlated to an overall principles-based approach. Following the introduction in various countries around the world of principles-based governance (e.g., comply or explain stock listing standards), there have been improvements in financial performance. Studies in many jurisdictions, including AustriaCanadaKenyaNew Zealand, demonstrate the evidence.

Principles can also forge consensus. When you boil things down to basic principles, the three main actors on the governance stage—management, shareholders, and directors (the three sides of the so-called governance triangle)—think remarkably alike. Governance pioneer Ira M. Millstein noted this ten years ago in an NACD board discussion. When Ira speaks, boards listen. He was the original author of the first governance guidelines at General Motors Co., and, with Holly Gregory, a drafter of the original OECD Principles of Corporate Governance, another powerful guide to board work.

The NACD board responded to Ira’s idea by urging us to undertake what became the original Key Agreed Principles, which presented all known areas of agreement in principles published by the Business Roundtable, the Council of Institutional Investors, the International Corporate Governance Network, and NACD. NACD principles at the time numbered in the hundreds; they resided in the many Blue Ribbon Commission reports we had published on various governance subjects.

Other Notable Principles Documents

Since then, the Key Agreed Principles document has remained relevant to many boards.  We have seen these Key Agreed Principles affect positive change in many areas, and we have seen other groups seek a principles-based approach to their activities.

In 2015, the Global Network of Director Institutes (GNDI), a group cofounded by NACD, developed and released Guiding Principles of Good Governance intended to be useful for the some 100,000 directors around the globe who belong to the institutes comprising GNDI. Another notable example is the set of “Commonsense Principles”document released in 2016 by a group of major company CEOs and leading institutional investors. In 2017, the Investor Stewardship Group released Principles: Stewardship Framework for Institutional Investors.

In the future, in consideration of the new blueprints from these other groups, as well as developments at NACD itself, we will release a new edition of the Key Agreed Principles. To do so, we will once again compare the principles currently advocated by the original signatories.

Why Principles?

Why keep the Principles document going? I believe that when directors apply sets of principles, rather than a hodgepodge of arbitrary rules, they can engage their minds and wills for action. Some principles in corporate governance prove so true that they operate as powerfully as first principles in science, determining outcomes. It may well have been principles that created our very nation. After all, Thomas Paine noted that “An army of principles can penetrate where an army of soldiers cannot.”

With good principles at hand, boards are always ready to respond to the next crisis, and to prevail with strength and wisdom. We trust that the power of principles will continue to animate corporate governance—and improve firm performance—in the years to come.

NACD Insight & Analysis: Delaware Courts Reconfirm Poison Pills

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The poison pill is back in the news.

Formally known as a shareholder-rights plan, business news has been flush with reports of companies adopting the provision. Well-known companies—such as Barnes & Noble, Airgas and most recently Family Dollar Stores, Inc.—have recently implemented shareholder-rights plans in the face of takeover bids. While poison pills are often controversial and their use is strictly limited in Canada, Australia and the U.K., the Delaware Chancery Court recently upheld their use in the U.S., a decision reinforced by the Delaware Supreme Court. In the new environment of increased investor participation, directors may choose to revisit the implications of the poison pill.

The poison pill was created by Martin Lipton, a noted mergers and acquisitions lawyer with the business law firm of Wachtell, Lipton, Rosen, and Katz in the early 1980s. A response to activist investors gaining control of companies through either the proxy statement or share purchases, the poison pill earned its name from its impact—impairing both the company and the bidder. Following specific trigger events, such as a large equity acquisition by an entity, the shareholder-rights plan gives shareholders the right to buy additional stock at a discounted price. In the commonly used “flip-in” style, all shareholders, except the acquirer, can purchase additional discounted stock. The flood of equity purchases thus dilutes the purchasing power of the acquirer, but also devalues the current value of company stock.

Popular through the 1990s, many shareholder-rights plans were dismantled in the 2000s, likely the result of decreased M&A activity and shareholder pressure. When used in combination with a staggered board, these provisions can form an effective method of board entrenchment, a point of contention with shareholders. NACD’s Key Agreed Principle VIII: Protection Against Board Entrenchment, recommends that “governance structures and practices should encourage the board to refresh itself.” Many also view the decline of poison pills as the result of proxy advisory services’ recommendations. For instance, Institutional Shareholder Services recommended a “no” vote for companies that renewed an expiring pill that was not put to a shareholder vote within one year.

Why, then, the resurgence in use of poison pills? Many companies saw their market value decline as a result of the recent economic crisis, creating more opportunities for hostile takeovers. Now in the midst of a recovery, M&A activity has picked up as well. Directors have a fiduciary duty to provide the greatest possible shareholder value in a transaction. In the case that directors feel they are receiving an inadequate bid, a poison pill can provide the board with time to deliberate and negotiate a better offer for shareholders. In the case of Airgas, the Delaware Supreme Court upheld the use of a shareholder-rights plan as “a reasonable response to a threat posed by an inadequate offer.”

 

NACD Insight & Analysis for September 10, 2010

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As noted this week in national news headlines, the SEC has seen an uptick in fraud tips since the passing of the Dodd-Frank financial legislation. Previously, informants were rewarded with a maximum of 10 percent of sanctions. The new financial laws, however, raise this potential bounty to as much as 30 percent of the penalties paid to the SEC. The article notes that the new whistleblower reward program has the potential to create inefficiencies by inciting employees to report fraud directly to the government, rather than using the established channels within the organization.

To establish a healthy and productive corporate environment, directors must exemplify and encourage an ethical culture. According to the NACD Key Agreed Principles, “the tone of corporate culture is a key determinant of corporate success.” Governance practices that promote integrity and ethics are a feature of successful, sustainable organizations.

Signs* of a positive corporate culture include leaders who:

  • Provide employees access to information that is relevant to the strategic direction and performance of the company
  • Keep their promises and commitments
  • Make decisions openly
  • Accept responsibility for wrongdoing, and
  • Reward performance that supports transparency

*Findings from the Ethics Resource Center’s National Business Ethics Survey 2009, p. 22