USA Law and Practice Contributed by: Lisa Fontenot, Jennifer Broder, Per Chilstrom and Lothar Determann, Baker McKenzie
1.2 Corporate Governance Legislation and Regulation Sources of Corporate Governance Requirements The United States does not have a single, unified cor - porate governance code. Governance requirements arise from a combination of state law and an entity’s organisational documents, federal securities laws, stock exchange listing standards, and proxy adviser and institutional investor voting policies. State corporate law governs entity formation, internal governance, fiduciary duties and shareholder rights. Most public companies are incorporated in Delaware, whose General Corporation Law provides a mix of mandatory rules and default provisions that may be modified through an entity’s governing documents (for a corporation: a certificate or articles of incorporation, bylaws and any shareholders’ agreements). Many oth - er states base their legislation and interpretation on Delaware law, but variations exist and the corporate governance laws of certain states, namely Nevada and Texas, are evolving to attract corporate domicile. A general partnership and limited partnership are governed by a partnership agreement, and an LLC is governed by an LLC operating agreement. Federal securities laws – including the Securities Exchange Act of 1934 (the Exchange Act), the Sar - banes-Oxley Act and the Dodd-Frank Act – impose disclosure-based governance requirements on public companies, and regulate matters such as audit com - mittee composition, executive compensation disclo - sure and internal controls. Stock exchange listing rules of the New York Stock Exchange (NYSE), Nasdaq and, more recently, the Tex - as Stock Exchange (which has roughly similar require - ments) impose substantive governance requirements as a condition of listing, including regarding director independence, committee structures and codes of conduct. Voting policies and best-practice guidelines issued by proxy advisory firms, institutional investors and governance organisations (such as the National Association of Corporate Directors and the Business Roundtable) are not legally binding but historically
have materially influenced governance practices and shareholder voting outcomes. 1.3 Companies With Publicly Traded Shares Corporate Governance Requirements for Publicly Traded Companies Public companies are subject to extensive govern - ance requirements that exceed those applicable to private companies. These requirements are primarily mandatory and arise from federal securities laws and stock exchange listing standards, and are subject to limited exemptions. Board composition and independence Listed companies must maintain a board with a major - ity of independent directors. Independent committees are required for audit and compensation matters, and NYSE-listed companies must also maintain an inde - pendent nominating and corporate governance com - mittee. Audit committee Audit committees must consist entirely of independent directors, who must meet enhanced financial literacy and independence standards. The audit committee has sole authority over the appointment, compensa - tion and oversight of the independent auditor, and must oversee financial reporting and compliance processes. Compensation committee Compensation committees must be independent, operate under a written charter and have authority to retain independent compensation advisers, subject to independence assessments. Ethics and governance guidelines Listed companies must adopt codes of conduct, and NYSE-listed companies must publicly disclose corporate governance guidelines addressing board structure, succession and evaluation. The NYSE also requires its listed companies to perform annual self- evaluations of the board and mandatory committees. Executive compensation and shareholder voting Public companies must provide detailed executive compensation disclosure in their proxy statements
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