3.01. Corporate Governance General
The NAM recognizes that the establishment and governance of business entities are matters of state law. Although the federal government legitimately regulates market mechanisms and establishes rules of disclosure for the protection of small investors, the governance of business entities is a matter appropriately regulated by the states.
3.01a. Disclosure of Information
The NAM believes shareholders and members should receive proper and adequate disclosure of information material to investment decisions.
Recognizing that corporations and other business entities have proven to be an effective source of economic and social progress, they should not be unnecessarily burdened by government regulation or required to disclose information that might be of advantage to competitors while not of significant benefit to investors.
3.01b. Responsibilities of Management and Directors
The structure of corporations and other business entities entails the separation of ownership and control and as a consequence creates necessary fiduciary relationships among management, directors and the investors. While the specific duties implied by such relationships may vary from state to state, the NAM reaffirms the following general propositions:
- Management and directors should pursue the goal of maximizing the long-term performance of the entity as an ongoing enterprise.
- Directors should represent the interests of the investors as a group and the entity as a whole in directing the business and affairs of the entity.
3.01c. The Business Entity's Constituencies
The NAM believes that as responsible citizens, business entities should maintain positive relationships with other constituencies and consider the effect of business decisions on their constituencies. The NAM believes, however, that the fiduciary duties of management and directors are limited to investors and the entity as a whole. Extension of the director's legal accountability to groups other than investors would adversely affect the ability of management and directors to maximize the performance of the enterprise.
3.01d. Investor Communication
The separation of ownership and control has furthered economic progress by permitting expert management of business enterprises, creating risk-bearing enterprises through the diversification of risk over large groups of investors and facilitating limited liability investment opportunities for investors. Implicit in the notion of expert management and risk taking is the efficacy of the business judgment rule, and its corollary, the division of decision making responsibility among investors as a group, management and the directors. By investing in the business entity the investor enters a relationship established by the entity's organizational documents and the law of the state of organization that thus directly facilitates expert management of risk-bearing enterprises, as well as the furtherance of individual investment objectives.
Communication between investors and management is accomplished effectively through the current proxy process, annual meetings, annual reports, analyst meetings and other communications. Investors are also free to correspond at any time with management to make their individual views known. The NAM believes therefore that more than ample channels of communications currently exist to assure the smooth functioning of the corporation. Expansion beyond current channels would be inconsistent with the ideal of separation of ownership and control and would compromise the effectiveness of expert management as well as limit the risk-bearing function of business entities.
3.01e. Business Philanthropy
The NAM believes that a business entity can effectively demonstrate its concern for society through philanthropic activities. Such programs, handled in a businesslike manner, can also serve the business's own needs, show it to be a responsible citizen, benefit the communities in which it operates and in which its employees live, and strengthen independent effort for innovative alternatives.
The principal alternative to private philanthropy is government funding, a system of complex and costly redistribution of tax dollars, which the NAM considers an inherently less efficient, flexible and innovative method. Accordingly, the business community can remain consistent in its initiative to reduce dependence on government by expanding its philanthropic activities.
3.01f. Conflict of Interest Laws
Government should be free to seek and fully utilize the skill and knowledge of business executives in public service without
undue hardship to those who are willing to serve. The conflict of interest laws should be reviewed regularly and revised to
this end.
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Derivatives.
A wide and growing variety of financial instruments or transactions, known as derivatives, are important to businesses in managing financial risk. The role of government in relation to these derivatives is to ensure the integrity of various financial systems while balancing the risks inherent in a market-based economy.
The NAM believes:
- Each party to a derivatives transaction bears responsibilities. The dealer should be responsible for fully disclosing the nature of the transaction and its inherent risks; the end-user should bear responsibility for determining its suitability.
- Any oversight of derivatives activities should be coordinated among domestic and international regulators, including taxing authorities.
- Derivatives should not be unnecessarily burdened by regulations. In the rare situation where regulations are proposed, they should be balanced with the usefulness of the instruments in managing risk and the costs associated with such regulation.
- Accounting standards should reflect the complex and varied nature and uses of derivatives, and permit reporting of derivatives' gains and losses consistent with reporting for the risks being managed. Responsibility for these standards should reside with the private sector, i.e., the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).
- The requirements of disclosure to investors by end-users should be based upon materiality of the risk to the investor's investment rather than the type of instrument used.
- Decisions concerning the use of derivatives by businesses should be left to the business judgment of management.
Adopted Winter meeting 2008, effective until Winter meeting 2012