NYSE Corporate Governance Report Highlights Business Strategy

NYSE Commission Report on Corporate Governance Principles

The New York Stock Exchange (NYSE) Commission Report on Corporate Governance Principles contains ten principles for better corporate governance.  The principles address the common interests of the board of directors, management, and shareholders regarding the underlying purpose of corporate governance.

One principle underscores the central role of business strategy in governing the corporation:

Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation.

I could not agree more.  For years, I have said that boards tend to underplay the strategy aspect of their service.  Yet, directors have great potential to enhance value for shareholders through strategy.

The Relationship Between The Board Of Directors And Management Regarding Strategy

The question that immediately emerges from the above principle is: What should the relationship be between the board and management with respect to business strategy?

Beginning with the board, the NYSE Commission elaborates its view through two additional principles from the report:

The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation.

Although not providing specific guidance, this principle speaks to the board's role in strategy.  To build shareholder value over the long-term, the board must involve itself in the company's business strategy, whether either strategy review or strategy execution.  Focusing solely on risk oversight and risk management is not enough to sustainably grow shareholder value.

Turning to management, what should be the role of management in corporate governance?  The Commission opines:

Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior.

This suggestion flows from the teachings of strategic management.  Not being involved in the day-to-day management of the corporation, the board cannot shoulder this responsibility.  Although the responsibility may fall on management, where the board fit in?  At a minimum, the board should make sure that management is acting with integrity and ethics.  The board can establish and review performance metrics and standards of ethical behavior.  To have legitimacy in this endeavor, the board itself must assess this own performance and act with integrity and ethics.  Consistent with the Commission's principle of transparency, the board should provide full disclosure regarding board members' activities, shareholdings, and potential conflicts of interest.

Conclusion

It is important to remember that the report contains principles, not mandates or even guidelines, for NYSE-listed companies.  As I told Agenda, a Financial Times service targeted toward corporate directors (subscription required to read to the entire article):

At a minimum the report “serves as a good reminder for boards and even management...  These are principles and the NYSE isn’t saying go out and do this, they’re just saying, ‘Hey this is what we’ve come up with and we’d like you to think about this.’”

While the Commission is to be applauded for encouraging boards and management to work together on integrating strategy into corporate governance, the report could have offered more suggestions about how to make this integration a reality.  Do you have suggestions for how to achieve this integration of strategy and corporate governance?

Douglas Y. Park

Twitter: @DougYPark

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