At its root, the general governance definition is essentially the same for all industries. Just as regulations occur in society, regulations in the corporate world come into being after corporate tragedies or scandals. The Sarbanes-Oxley Act (SOX), enacted in 2002, was legislation designed to enhance the corporate governance definition, make it more transparent, and ensure that boards would be independent and diverse.
SOX called for establishing financial responsibility for corporate reports, increasing internal controls, disclosing certain off-balance-sheet transactions, prohibiting personal loans to executives from the corporation and requiring companies to have a whistleblower policy. It also established fines and criminal charges for individuals tampering with investigations and required attorneys for public companies appearing before the Securities and Exchange Commission (SEC) to report security violations to the CEO.
Companies have responded to SOX and other laws with various degrees of commitment toward improving governance. Perhaps the biggest difference in how various industries define corporate governance pertains to how they approach the composition of their boards of directors.
What Is the Corporate Governance Definition?
The definition of corporate governance is a set of rules, controls, policies and resolutions that outline corporate behavior. A board of directors is the primary direct stakeholder that influences governance. How the board behaves is crucial to the quality of governance. The performance of boards, whether they are good or bad, has a direct impact on the value of the corporation.
Shareholders elect board directors and boards sometimes appoint board directors. Investors like to see a majority of independent board directors because they feel it gives them the most objective representation. Boards that fail to practice good governance may have difficulty forcing directors to retire.
Since the passage of SOX, corporations are giving more serious consideration to their board composition and corporate governance definition. In the past, boards have typically focused on having a majority of inside directors, such as major shareholders, company founders and senior executives. Today, corporations are feeling pressure to refresh their boards and to have the majority of the board be outside members — directors who don’t have ties to insiders. Often, independent members have experience managing or directing other large companies. Outside board directors help to balance out the power on the board and to align the shareholders’ interests with those of the board.
Investors rely on the definition of corporate governance to assess the quality of the board before they decide to invest in a company. For this reason, boards sometimes create a website for their companies that helps them communicate their governance standards. Such websites typically include sections that describe the articles of incorporation, bylaws, committee charters and stock ownership guidelines. They might also list photos and profiles of their boards of directors and senior executives in order to demonstrate the expertise of the board.
Which Industries Are Taking the Lead to Improve Governance?
According to PwC, the leading issue for corporate boards in 2017 was board refreshment. In 2017, PwC compared the board demographics of select companies in nine industries, including:
- Banking and capital markets
- Entertainment and media
- Industrial products
- Pharma/life sciences
PwC also compared the approach to board directorship to S&P 500 companies.
What they found was that the average age of board directors was pretty close across industries, ranging from 60 to 64 years. The retail industry had the youngest board directors and the insurance industry had the oldest board directors. Across all industries, board director tenure ranged from eight to 10 years. The average number of board directors was 11 to 13, and all boards had four to five committees, on average.
When we look at female directors, we start to see more discrepancies. Banking and capital markets and the retail industries tied, with 26% having female directors. The communications industry had the lowest percentage of female directors, at 20%. The insurance industry had only 7% new female directors. The entertainment and media industry ranked highest, with 60% of companies adding new female directors.
One hundred percent of the banking and capital markets industries added risk committees to their boards. The insurance industry was the next highest, with 29% of insurance companies adding risk committees to their boards. Surprisingly, 0% of the tech companies and the entertainment and media companies added risk committees to their boards.
The corporate governance definition suggests that the board chair and CEO positions be held by different people. About 86% of banking and capital markets organizations appointed separate board chairs. Tech companies ranked lowest, with only 27% having a separate chairperson.
Perhaps the greatest change is the acceptance of adding independent directors. Most industries reported having 94–100% independent directors. Only communications and entertainment and media lagged behind, with percentages of 60% and 69%, respectively.
About 91% of the retail industry had mandatory retirement ages. Entertainment and media had the lowest ranking of mandatory retirement, with 29%. About 18% of the retail companies reported having term limits for board directors. The entertainment and media industries followed closely behind, with 12%. Three industries had 4% of companies with term limits, including industrial, pharma/life sciences and utilities. Three other industries had 0% term limits, and those were banking and capital markets, insurance and tech companies.
Overall, we can see that boards are beginning to change their approaches to governance, beginning with board composition. People are just one indication of a change in governance. Boards can also enhance their approaches to governance by improving their processes and adding solution integration.
Electronic Solutions Enhance the Definition of Corporate Governance
Boards need diverse people to oversee their companies. To be effective in today’s world, individuals need to be willing to accept some help from technology. Electronic board management systems are a good start, and what boards really need is a total enterprise governance management system.
Enterprise governance management (EGM) is the discipline of applying technical tools and resources to the full range of governance needs to govern at the highest level and deliver long-term success and sustainability. For the purpose of enhancing the definition of corporate governance, Diligent created Governance Cloud, a suite of fully integrated governance tools for boards. Board directors can enhance their own performances with the use of D&O questionnaires, self-evaluations, online voting, online entity management and secure communications through Diligent Messenger.
Diligent Corporation entered the governance space well ahead of other companies. With an eye on the evolution of corporate governance, boards can count on Diligent to integrate and digitize governance solutions, adding to the current suite of products. In this way, Diligent innovates for today, as well as for the future.