Corporate Governance

Introduction

Corporate governance refers to the system of rules, practices, and processes by which corporations are directed and controlled. The governance structure balances the interests of the corporation’s stakeholders, including shareholders, directors, officers, employees, and the broader community. In the United States, corporate governance is shaped by state corporation law, federal securities regulation, stock exchange listing standards, and evolving norms of best practice.

Board Structure

The board of directors is the central organ of corporate governance. Boards are typically classified as staggered (classified) or unclassified. In a classified board, directors serve overlapping three-year terms, making it more difficult for an acquirer to gain immediate board control. The DGCL permits classified boards unless the articles of incorporation provide otherwise.

Boards may be unitary (a single board with all directors elected by all shareholders) or dual (a supervisory board and a management board, as in Germany). The unitary board is the standard model in the United States. Within the unitary board, independent directors —those who have no material relationship with the corporation—are increasingly dominant. Stock exchange listing standards require listed companies to have a majority of independent directors and to maintain entirely independent audit, compensation, and nominating committees.

Shareholder Rights

Shareholders exercise governance rights primarily through voting. Shareholder voting rights include electing directors, approving charter and bylaw amendments, and voting on fundamental transactions such as mergers and asset sales. The SEC’s proxy rules (Regulation 14A) regulate the solicitation of shareholder votes, requiring detailed disclosure of matters submitted for shareholder approval.

Proxy access allows shareholders to nominate directors by including their nominees in the corporation’s proxy statement. SEC Rule 14a-11, adopted in 2010, would have provided broad proxy access, but it was struck down by the D.C. Circuit. Most corporations have adopted proxy access bylaws on a voluntary basis, typically requiring a 3% ownership threshold held for three years.

Say-on-Pay

Say-on-pay is the requirement that shareholders vote on executive compensation packages. Under Section 951 of the Dodd-Frank Act, publicly traded companies must hold a non-binding shareholder vote on executive compensation at least once every three years. Say-on-pay votes are advisory and do not bind the board, but negative votes have prompted companies to revise compensation practices.

The say-on-pay requirement has increased board accountability for compensation decisions and has led to greater alignment between executive pay and corporate performance. Institutional shareholders, including proxy advisory firms such as ISS and Glass Lewis, typically evaluate compensation programs and issue voting recommendations.

Institutional Investors and Proxy Advisors

Institutional investors —pension funds, mutual funds, and hedge funds—hold a majority of shares in most publicly traded companies. Their voting power has transformed corporate governance, as these investors often coordinate voting strategies and engage with management on governance issues. The Stewardship Code movement, though less developed in the US than in the UK, has encouraged institutional investors to monitor their portfolio companies actively.

Proxy advisory firms provide research and voting recommendations to institutional investors. ISS and Glass Lewis are the dominant firms, and their recommendations significantly affect voting outcomes. The SEC has issued guidance on proxy advisory firms’ obligations under the proxy rules, addressing concerns about conflicts of interest and accuracy.

Board Committees

Most board work is conducted through committees. The audit committee oversees financial reporting, internal controls, and the independent auditor. Listing standards require audit committees to be composed entirely of independent directors and to include at least one financial expert.

The compensation committee sets executive compensation and administers equity incentive plans. The nominating and corporate governance committee identifies director candidates and recommends governance policies. Committees have the authority to retain independent advisors at corporate expense.

Conclusion

Corporate governance in the United States is a dynamic system that balances board authority with shareholder rights. The evolution of independent director requirements, proxy access, and say-on-pay reflects a shift toward greater board accountability. Institutional investors and proxy advisors play an increasingly important role in shaping governance practices. The governance framework continues to evolve in response to changing market conditions and stakeholder expectations.