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Long-Term, Principles-Based Governance: A New Paradigm

    Client Alerts
  • February 01, 2017

Last August, I wrote about the Commonsense Principles of Corporate Governance recently advocated by a group of executives at thirteen major companies and investor institutions for the purpose of providing “a basic framework for sound, long-term-oriented governance.” (See this Doug’s Note.) At the time, they reminded me of the U.K.’s long-standing emphasis on principles-based governance, as set forth, for example, in the U.K. Corporate Governance Code applicable to companies with a Premium listing on the London Stock Exchange and addressing such categories as Leadership, Effectiveness, Accountability, Remuneration and Relations with Shareholders. Likewise, the U.K. Stewardship Code sets forth seven basic principles of conduct to be followed by institutional investors and asset managers to “protect and enhance the value that accrues to the ultimate beneficiary.”

Now comes The New Paradigm with the following intriguing subtitle: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth. This thoughtful 22-page document is interesting not only because it follows so closely on the heels of the Commonsense Principles (which it cites several times) and expressly draws on the U.K.’s and Europe’s experiences with principles-based governance, but also because it is authored by Martin Lipton (and others) and presented last fall at the International Business Council of the World Economic Forum. Mr. Lipton is, of course, a pre-eminent legal authority on corporate governance, while the World Economic Forum is, according to its website, an independent non-profit established in 1971 and headquartered in Geneva, Switzerland that “strives in all its efforts to demonstrate entrepreneurship in the global public interest while upholding the highest standards of governance” with “moral and intellectual integrity.”

The New Paradigm.

The New Paradigm is based on the principle that “short-termism and attacks by short-term financial activists significantly impede long-term economic prosperity” by eroding “the foundation for future innovation, ingenuity in product enhancements and…research and development” and “undercuts investments in employees, factories and equipment, expansion into new markets and the pursuit of other long-term projects that require up-front costs but have the potential for sustainable value creation and social impact.”

To overcome short-termism, Mr. Lipton proposes principles (the headings of which I quote below) and detailed sub-principles to be followed by both corporations and investors. He notes with approval that implementation relies on initiatives, commitment and follow-through by those two groups, rather than on new legislation or regulation.

The role of the corporation:

  • Develop, implement, oversee and communicate long-term-strategy;
  • Engage, communicate and foster meaningful long-term relationships with investors;
  • Oversee and partner with the CEO and management team;
  • Organize the business of the board;
  • Get the right mix of directors in the boardroom;

The role of investors:

  • Engage and communicate with corporations;
  • Support long-term strategies;
  • Help corporations correct long-term strategies or failures to execute on long-term strategies;
  • Adopt integrated long-term investment approach;
  • Integrate relevant sustainability, citizenship and ESG/CSR matters into investment strategy;
  • Disclose its policies and preferences.

These rather generic headings do not do justice to the detailed substance within The New Paradigm, which could indeed serve as a “roadmap” for companies and investors interested in adopting a long-term approach to governance and value creation. Furthermore, it is possible that, through these efforts and multiple others like it over the past few years, long-term principles-based corporate governance may be achieving critical mass. As a result, long-termism could well be the future of corporate governance, which I, for one, would welcome. I encourage you to read the full report.