Kezia Farnham

Senior Manager

Corporate governance rules: What they are & why they matter

Corporate governance is the (not so) secret to efficient, secure, high-performing organizations. However, organizations need corporate governance rules to truly walk the governance walk — not just talk the talk. Rules tell employees at all levels how to put critical governance principles into practice. Yet, rules aren’t just an internal tool.

Just as organizations have rules stakeholders must follow, regulatory agencies have strict rules related to governance. Following them is the key to maintaining good standing, avoiding costly regulatory action, and listing shares in essential markets.

Here, we’ll cover key aspects of corporate governance rules and how to apply them, including:

• What corporate governance rules are
• The five golden rules of corporate governance
• Principles common across modern companies
• Corporate governance listing rules for Nasdaq, the NYSE and the SEC

What are corporate governance rules?

Corporate governance rules are policies and practices that guide stakeholders in enacting the organization’s governance framework. These rules can be issued by the organization itself or by a regulator. In either case, though, rules enhance accountability and organization performance while aiding compliance with key governance practices.

The 5 golden rules of corporate governance

Governance frameworks vary between organizations, but several basic principles underpin them all. These principles are called the “golden rules” because they’re fundamental to effective governance practices and ensure that organizations serve all of their stakeholders well.

These rules are:

1. Responsibility: Organizations are responsible for monitoring and managing risks, including comprehensive internal controls, a clear risk management strategy, and policies for addressing issues like compliance or conflicts of interest.
2. Accountability: Establish clear roles and communicate them effectively so all stakeholders understand exactly what they’re responsible for and who they’re accountable to. Boards, for example, are accountable to shareholders, while management is accountable to the board.
3. Awareness: To follow corporate governance rules, stakeholders need to know them. Awareness ensures that all stakeholders understand their role in upholding the organization’s ethical standards and regulatory requirements.
4. Fairness: Organizations must serve all stakeholders fairly and should have rules to advance that charge. This involves promoting workplace and boardroom equity and fostering an inclusive environment.
5. Transparency: Companies should act transparently internally and externally. Stakeholders should have any information material to their work or investment decisions, while regulators and shareholders should receive timely, accurate financial and non-financial disclosures.

Other principles of corporate governance

Together, the five golden rules form a solid corporate governance foundation, but they are only a few ways organizations should conduct themselves. Governance standards can be wider reaching and often include:

1. Ethics: Companies have a legal and moral obligation to act ethically. Corporate governance rules should include clear codes of conduct, guiding employees at all levels to adhere to practices that promote honesty, fairness and transparency.
2. Risk management: Risk is inherent in any organization, but good governance should mitigate it. This involves developing a risk management framework and internal controls related to risk and financial reporting.
3. Stakeholder engagement: Governance helps corporations serve their shareholders by implementing rules for communicating with and engaging stakeholders, which include shareholders, employees, customers and the community.

Common rules governing modern companies

National laws and regulations often influence corporate governance rules, leading to similar rules across corporations — regardless of the industry. By following them, organizations build trust with their investors, employees and community and affirm their commitment to responsible, ethical operations. Most, if not all, corporations will have rules around:

1. Board composition: Most organizations have corporate governance rules that dictate the number of directors on the board and how many should be executive, non-executive or independent. This ensures a diverse and balanced set of perspectives in the boardroom.
2. Executive compensation: Corporate governance also defines the structure of executive compensation, including salary and non-salary benefits. Compensation should reflect the executive’s experience and the corporation's performance and goals. Organizations should also have rules requiring the disclosure of those salaries and the criteria behind them.
3. Shareholder rights: A key tenet of corporate governance is that shareholders have rights, including voting on key issues. Corporate governance rules entitle shareholders to weigh in on board appointments or changes in strategic direction, among other priorities. Organizations must also protect minority shareholders against controlling shareholders.
4. Financial reporting: Organizations disclose their financials accurately and timely. This supports shareholders’ rights by giving them the information they need to make key decisions, but it’s also a regulatory requirement. Companies that don’t comply face strict regulatory action, including fines.

Nasdaq corporate governance listing rules

Corporate governance rules aren’t just for employees. Nasdaq is one of several markets that has specific corporate governance rules. Organizations that meet them can be listed on the Nasdaq Stock Market, while organizations that don’t either won’t be listed or will risk being de-listed.

The Nasdaq rules seek to promote transparency and accountability in business dealings and oversee several areas, including:

1. Board of Directors: Nasdaq regulates several characteristics of the board. Most board directors must be independent to be listed on the Nasdaq Stock Market. The directors must also meet regularly without management present to ensure impartial board activity.
2. Board committees: Organizations listed on Nasdaq must also have several board committees, each of which should be composed of independent directors and at least one director considered an expert in the subject. These include the audit, compensation and governance committees.
3. Code of conduct: To enhance company integrity, Nasdaq also requires organizations to have a code of conduct that applies to all employees, executives and board directors. The code should be public and include rules specific to conflicts of interest and compliance.
4. Shareholder meetings: Nasdaq requires shareholders to meet annually to ensure shareholders have a voice in the boardroom. Companies must also establish a quorum at those meetings, meaning enough shareholders are present to represent one-third of the shares.
5. Corporate governance framework: Organizations must have corporate governance rules before listing on Nasdaq. That includes adopting and disclosing practices for various operations, including board roles, responsibilities, compensation and more; many organizations use a governance platform to meet this rigorous standard.

NYSE corporate governance listing rules

Like Nasdaq, the New York Stock Exchange (NYSE) has strict rules they monitor and enforce for all listed companies. NYSE does have many of the same rules as Nasdaq, but there are some distinct requirements, including:

1. Shareholder approval of executive compensation: The NYSE requires that shareholders vote on and approve all executive compensation packages, including any changes to the compensation of existing executives.
2. Certification: Before organizations can list on the NYSE, the CEO must personally certify that they do not know of noncompliance with NYSE listing rules. CEOs are also obligated to notify the NYSE immediately if any executive learns of instances of noncompliance.
3. Website disclosure: NYSE-listed companies must have a publicly available website and publish corporate governance documents there, including committee charters, corporate governance principles, and more.

SEC corporate governance listing rules

The Securities and Exchange Commission (SEC) is a regulatory body that governs all publicly traded companies in the United States. As such, the SEC doesn’t have listing rules of its own. Instead, it has various regulations that impact corporate governance, all of which aim to protect investors and maintain fair markets.

A few of the better-known regulations in recent years are:

1. Sarbanes-Oxley (SOX) Act of 2002: The SOX Act relates specifically to financial reporting and disclosures, requiring that covered organizations implement robust internal controls over financial reporting and certify the accuracy of financial statements.
2. Dodd-Frank Wall Street Reform and Consumer Protection Act: This regulation, known as the Dodd-Frank Act, offers guidelines for executive compensation. The act mandates that organizations conduct a non-binding shareholder vote and that companies have policies for recovering executive compensation in the event of misconduct, among other stipulations.
3. Universal proxy: The SEC gives shareholders the right to make their own proposals at annual meetings. Under universal proxy, shareholder proposals will appear on the same universal proxy card as the organization’s proposals, giving more credence to investors’ voices.
4. Climate risk disclosure: One of its newest regulations, the SEC’s climate risk disclosure rule, requires companies to disclose climate-related risks and whether those risks are integrated into the organization’s enterprise risk management strategy.

Master good governance principles and practices

Corporate governance rules are your organization’s rails; they keep the train on track toward ethical, accountable and honest business practices. However, they don’t propel the train forward. The engine does.

Likewise, the combination of effective rules and robust practices truly puts governance in motion. While your rules say to act ethically, for example, the principles explain exactly how employees should act ethically, whether they’re involved in executive compensation decisions, financial reporting, board succession planning or anything else governance touches.

Learn more about what constitutes good governance and how to adopt effective principles for your organization.