Corporate Heavyweights Back Governance Practices

Seeking to affect how U.S. public companies are run, a coalition of leaders endorsed practices such as avoiding dual-class shares and replacing ineffective directors

Wall Street Journal
By Joann S. Lublin
21 July 2016

A powerful coalition of chief executives and big asset managers endorsed a raft of corporate-governance practices such as avoiding dual-class shares and replacing ineffective directors, seeking to affect how U.S. public companies are run.

The governance principles, expected to be disclosed early Thursday, were backed by the heads of Berkshire Hathaway Inc., J.P. Morgan Chase & Co., General Electric Co., General Motors Co. and Verizon Communications Inc. Asset managers including some of the world’s biggest— BlackRock Inc., Vanguard Group Inc. and State Street Global Advisors—as well as one shareholder activist, ValueAct Capital Management Ltd., were part of the coalition.

“These principles are not intended to be for or against activists, proxy advisors or special-interest groups,” the group said in a letter from the dozen participating firms. “Good governance must be more than just a catch-phrase or fad.’’

The rise of activist shareholders in recent years has sparked debate across markets and boardrooms about the role investors should have in public companies and how boards should operate. Activist investors have targeted some of the biggest U.S. companies—including some of the backers of the governance principles, such as GE and GM.

One veteran activist shareholder who isn’t part of the coalition praised the latest governance push. “These principles are music to our ears,” said Nelson Peltz, a founding partner of Trian Fund Management LP, whose investments include GE. “Sound corporate governance can lead to better long-term growth and performance at public companies.”

The statement of principles emerged from a series of meetings begun last summer by J.P. Morgan CEO James Dimon, with help from Warren Buffett at Berkshire Hathaway. GE’s Jeffrey Immelt, GM’s Mary Barra and Verizon’s Lowell McAdam got involved later, a J.P. Morgan spokesman said.

The goal “is to drive best governance practices through companies of all sizes, not just the biggest—where they are more common today,’’ said Glenn H. Booraem, fund treasurer at Vanguard, who handles governance issues for U.S. equities. Gaining support from leaders of large businesses “brings additional weight behind these ideas,’’ he said.

The coalition of companies and investors steered clear of certain hot-button issues, such as splitting the roles of chairman and CEO. (The principles suggested that independent directors decide whether to combine those top two jobs.)

They also took no stance on director term limits, a rarity among U.S. companies. But they took aim at some practices that might stir controversy, such as dual-class voting.

Dual-class shares are more common in companies controlled by founders, such as Mr. Buffett’s Berkshire Hathaway. But investors have long complained that dual-class shares—which generally grant one class super-voting power—limit the ability of most shareholders to enact change. Google Inc.’s 2004 initial public offering sparked a trend of dual-class technology companies.

Mr. Buffett couldn’t immediately be reached for comment. ( News Corp, owner of The Wall Street Journal, and sister company 21st Century Fox both have dual-class shares.)

The coalition’s list of “Commonsense Principles of Corporate Governance” also urged boards to “have the fortitude to replace ineffective directors.’’ There is infrequent turnover among directors at S&P 500 corporations, where the median director was 63 years old as of Oct. 31, according to a Wall Street Journal analysis. The research found that at 24% of the companies, a majority of the board had been in place for at least 10 years.

There should be a continuing board-refreshment process that includes robust, regular evaluations of board members to ensure their skill sets “remain sufficiently current and broad in dealing with fast-changing business dynamics,” the group said.

The group also recommended that boards consider periodic rotation of committee chairmen and the lead independent director. The notion of replacing committee leaders every few years “is an emerging practice,’’ Mr. Booraem said.

Broad support for such governance changes could have a ripple effect, said Charles Elson, who heads the Center for Corporate Governance at the University of Delaware’s business school and serves on the board of HealthSouth Corp. and Bob Evans Farms Inc.

At smaller companies, Mr. Elson said, “it will be harder for CEOs to oppose these principles when significant company CEOs and investors like them.”