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Two Years in Review: Are the Commonsense Principles of Corporate Governance 2.0 a Reagent for Success or Just Feel-Good Platitudes?

Just over two years ago, twenty-three prominent executives representing some of America’s largest corporations and investment firms, including J.P. Morgan, Berkshire-Hathaway, and IBM, published and endorsed the Commonsense Principles of Corporate Governance 2.0. The 2.0 Principles were drafted to serve as a “basic framework for sound, long-term-oriented governance” that were flexible enough to accommodate the variance in “size, products and services, geographic footprint, history, [and] leadership and ownership” present in America’s publicly traded companies.1 Unfortunately, for all their breadth and ambition, the 2.0 Principles have seemingly flopped. Since their publication in October 2018, the 2.0 Principles have received hardly any additional signatories, scholarly engagement, or media attention. This result is a far cry from the widespread adoption contemplated in the accompanying publication letter, which envisioned the 2.0 Principles as a guideline which forward-thinking public companies could apply and integrate as necessary into their own corporate governance philosophies.2 Where did things go wrong, or were the 2.0 Principles destined to fail from the start?

To better understand the chilly reception of the 2.0 Principles, a brief discussion of the 1.0 Principles provides some helpful context. The 2.0 Principles were drafted as an expansion of the original 1.0 Principles. The core tenets of the original iteration remained intact, and most benefitted from the refinement and expansion that comes with a detailed second pass. The 2.0 Principles also contain a fair number of proposals and provisions absent in the original iteration.3 When the 1.0 Principles were published in July 2016, their publication spurred a number of other business and investor organizations to publish their own modernized principles of corporate governance. Some of the more prominent initiatives, which were recognized by the 2.0 Principles’ authors, include the investor-led effort from the Investor Stewardship Group (ISG) named the “Framework for U.S. Stewardship and Governance,” a business-led effort called “Principles of Corporate Governance” by the Business Roundtable (BRT), and a standalone piece called “The New Paradigm” from the International Business Council of the World Economic Forum. In short, the 1.0 Principles made a splash, but ultimately only spurred dialogue and the publication of competing sets of principles instead of meaningfully challenging the corporate governance paradigm.

The 2.0 Principles are much broader and more thorough in their approach. They reach a variety of corporate governance concerns, such as the duties and compensation of boards of directors, public reporting, compensation of management, roles for investors in corporate governance, and many others. Notably, the 2.0 Principles take a firm stance on shareholder rights and engagement, stating dual class voting is not a best practice, that public companies ought to embrace some form of proxy access, and that companies should seek to proactively engage with shareholders who have made or are considering making proposals before such proposals appear on the proxy.4

While the 2.0 Principles’ authors endorsed these additional efforts, they tempered their enthusiasm by stating “dueling or competing principles could impede, rather than promote, healthy corporate governance policies.”5 For the 2.0 Principles’ authors, the overall decline in the number of American public companies, driven by alleged unhealthy short-termism, was the primary wrong the 2.0 Principles were drafted to redress.6 The authors were similarly direct about the intended efficacy of the 2.0 Principles, that they are not a mere “academic exercise,” but the endorsed vision for what the common core of America’s largest corporations ought to be.7 The message to public company boardrooms across America was clear, join the charge led by the original signatories and overhaul public company governance so that Americans may continue to participate in markets and enjoy a more secure financial future. A noble and uncontroversial goal, so why has hardly anyone answered the call?

Have public companies viewed the 2.0 Principles as too radical or costly a departure from existing governance infrastructure? Were public company boards spooked by the 2.0 Principles’ favorable stances towards independent directors and their control of key committees? Is the overall decline in the number of American public companies a genuine problem that the 2.0 Principles appropriately address?

Are Founder-Unfriendly Principles to Blame for Non-adoption?

One notable provision in the 2.0 Principles is that dual class voting is “not a best practice,” and if present should have “specific sunset provisions.”8 Very notably, the 2.0 Principles state that shareholders should “be treated equally in any corporate transaction” regardless of share status.9 This is a reversal of corporate board preferences that have been the status quo since the 1980s, when the NYSE, facing pressure from corporate boards and other exchanges, relaxed its ban on dual class voting shares that had been in effect since 1926. This reversal is not a pure battle of interest groups, as Warren Buffet of Berkshire-Hathaway, a 2.0 Principles signatory, currently maintains a dual class structure within Berkshire-Hathaway. Despite Buffett’s counterintuitive stance against dual class shares, the 2.0 Principles position on dual class structures has likely deterred, and will likely continue to deter, industries which frequently avail themselves of dual class voting structures, specifically media & entertainment and technology.10

There is an active debate regarding dual class shares. Proponents claim that they insulate management from the pressures of unhealthy short-termism, allowing management to focus on long-term, strategic initiatives that management believes will create greater value that may not be attractive to short-term investors.11 Critics of dual class structures state that they unfairly allocate risk to common shareholders and allow for troubling corporate governance practices. The concomitant heavy voting control in the absence of commensurate ownership interest creates opportunities for controlling shareholders to make decisions that benefit themselves at the expense of the company’s value.12

The 2.0 Principles’ stance chafes harshly with the growing trend towards dual-class structures over the past two decades. Preliminary reports from the SEC’s Investor as Owner Subcommittee found that while just 1% of firms listed on U.S. exchanges employed a dual class structure in 2005, by 2014 approximately 12% of listed firms employed a dual class or similar structure.13 For media and entertainment companies, the justification for dual class structures has arguably been a requisite for maintaining news independence.14 Whereas the motivations for dual class structures in technology companies appears to stem from the growing importance of intangible investments, the rise of activist investors, and the decline of staggered boards and ‘poison pills,’ which previously afforded management some ability to resist shareholder voting influence.15 In the absence of regulatory pressure or a shift in market forces, or even an enforcement mechanism within the Principles themselves, these industries are unlikely to cease their embrace of dual class structures or sign on to the 2.0 Principles.

Are Boards Reluctant to Bear the Price of Change?

The costs associated with corporate compliance and governance controls are a font from which a near-limitless amount of critical literature flows. Every year, public companies spend billions to ensure that their enterprises comply with the vast array of regulatory obligations which have generally tended towards increasing complexity. Dodd-Frank, Sarbanes-Oxley, NYSE and NASDAQ internal rules, along with a litany of industry-specific regulations and statutes are some of the more prominent sources of compliance costs. For companies which operate in especially highly regulated industries, such as financial services and life sciences (which the majority of the 2.0 Principles signatories do), these costs can be even higher. Thus, it seems relatively uncontroversial that an adoption of a new set of corporate governance principles would require some degree of restructuring of existing corporate governance infrastructure, with greater relative changes resulting in commensurately greater costs. Given the certainty of burdensome up-front costs and uncertainty of savings or positive impacts on growth and shareholder confidence, non-adoption of the 2.0 Principles is almost sympathetic.

However, if high costs are certain while benefits remain unknown and attenuated, why have several of the nation’s largest wealth managers and most valuable public companies committed themselves, at least facially, to the 2.0 Principles? If this crude calculus is the whole story, or even a flatly true part of it, the 2.0 Principles would likely be dead in the water. Perhaps the 2.0 Principles’ signatories see a value in the 2.0 Principles that most other public companies do not, or perhaps, do not stand to gain from.

Are the 2.0 Principles Based on Erroneous Assumptions?

The authors of the 2.0 Principles state that the Principles were drafted in response to the “distinctly and uniquely American” 20-year decline in the number of publicly traded companies, and the accompanying loss of opportunity and future financial security for average Americans.16 However, general economic and market trends do not support the finding that public companies provide less opportunity for Americans today than they did 20 years ago; in fact, quite the opposite appears to be true.

As a top-line measure, U.S. GDP grew nearly 45% between 2000 and 2019.17 Using current USD over the same period, GDP has more than doubled, growing from $10.252 Trillion in 2000 to $21.374 Trillion in 2019.18 The 2.0 Principles authors were concerned primarily with the dwindling number of publicly traded companies and the accompanying loss of opportunity for Americans “to participate in the economic growth generated by our country’s innovation and ingenuity,” so it seems natural to look towards broader trends in U.S. equity markets, rather than debt or money markets, when assessing the underlying assumptions of the 2.0 Principles.19 Total market capitalization of U.S. public companies listed on the NYSE, NASDAQ, and Over-The-Counter Markets were valued at $15.108 Trillion in 2000 and grew to $30.436 Trillion by 2018, priced in current U.S. dollars. (Data on market capitalization is limited to 2018, while data on GDP is current to 2019. These figures are used to highlight broad trends and are not meant to serve as a rigorous statistical analysis.)20 Perhaps the most telling measure of economic opportunity available to equity market participants is the percentage of market capitalization as a percentage of domestic GDP, where total market capitalization was approximately 147% of GDP in 2000, and was 148% in 2018.21

While there has been significant variance in total market capitalization as a percentage of GDP from year to year, Americans who invested in public markets in 2000 do not appear to have benefitted from market conditions unavailable to Americans in 2018. The 2.0 Principles’ stated motivation of combating the dwindling opportunities for Americans to benefit from the growth of public markets seems unnecessarily hitched to the idea that more public companies equals more opportunity. This is an uncomfortably myopic view. Sure, the 2.0 Principles’ authors were spot on that the aggregate number of listed American companies has declined precipitously, from 6,917 companies in 2000 to 4,397 companies in 2018, but that is a purely superficial analysis of market opportunities.22 While there are fewer companies to choose from, Americans are still able to buy into equity markets and benefit from the growth of public companies. There would be cause for alarm if the growth of GDP and privately held companies steadily outstripped that of publicly listed companies, but that simply is not the story that total market capitalization versus GDP tells, despite its relatively greater volatility.

In conclusion, there are likely many reasons why the 2.0 Principles failed to usher in the broad reexamination of corporate governance philosophies that its authors sought. Perhaps the most compelling source of failure though is the authors’ bizarre and seemingly superficial emphasis on the number of public companies as a litmus for opportunity. The whole mosaic of motivations of the 2.0 Principles signatories will likely never be clear, but it’s clear enough that lip service of civic mindedness and the star-power of the original signatories weren’t enough to convince American boardrooms.

  1. Commonsense Principles 2.0, 

  2. Open Letter: Commonsense Principles 2.0, 

  3. Commonsense Principles 1.0/2.0 Redline, 

  4. Open Letter: Commonsense Principles 2.0, 

  5. Id. 

  6. Id. 

  7. Id. 

  8. Commonsense Principles 2.0, 

  9. Id. 

  10. Kosmas Papadopoulos, Institutional Shareholder Services, Inc., Dual Class Shares: Governance Risks and Co. Performance, Harv. L. Sch. F. on Corp. Gov. (June 28, 2019),,Prevalence%20of%20Dual%2DClass%20Share%20Structures,class%20share%20structure%20in%20place. 

  11. See Larry Page & Sergey Brin, 2011 Founders’ Letter (April 2012), 

  12. Committee on Capital Markets Reg., The Rise of Dual Class Shares: Reg. and Implications (April 2020), 

  13. See SEC Investor Advisory Committee, Discussion Draft: Dual Class and Other Entrenching Governance Structures in pub. Companies, at 1, 

  14. Vijay Govindarajan et al., Should Dual-Class Shares be Banned?, Harv. Bus. Rev. (Dec. 3, 2018), 

  15. Vijay Govindarajan & Anup Srivastava, Reexamining Dual-Class Stock, Bus. Horizons (May 1, 2018) 

  16. Commonsense Principles 2.0, 

  17. The World Bank, GDP (Constant 2010 US$) United States 2000-2019, 

  18. The World Bank, GDP (Current US$) – United States 2000-2019, 

  19. Open Letter: Commonsense Principles 2.0, 

  20. The World Bank, Market Capitalization of Listed Domestic Companies (Current US$) United Sates 2000-2018, 

  21. The World Bank, Market Capitalization of Listed Domestic Companies (% of GDP) United States 2000-2018, ( 

  22. The World Bank, Listed Domestic Companies, Total United States 2000-2019, 

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