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C.E.O.s Meet in Secret Over the Sorry State of Public Companies

Warren E. Buffett quietly walked through the lobby of JPMorgan Chase's headquarters on Park Avenue in Manhattan last summer and was ushered up to the 49th floor by a security guard, trying to avoid drawing too much attention. Laurence D. Fink, chairman of BlackRock, the world's largest money manager — with more than $4 trillion — soon was also escorted upstairs. Abby Johnson, the chief executive of Fidelity (which invests more than $2 trillion), and Frederick William McNabb III, chief of Vanguard ($3 trillion), were also shepherded to the elevator.

In all, the parade included about a dozen chief executives of investment firms — T. Rowe Price, State Street — plus the head of a public pension fund and an activist investor. All had arrived for a meeting that they were told they would absolutely have to keep secret.

When they reached the 49th floor, they were met by JPMorgan Chase's chief executive, Jamie Dimon.

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The agenda — shaped over many conversations Mr. Dimon had had with his friend, Mr. Buffett — was to discuss the sorry state of publicly traded companies: too little trust and connection between shareholders and management, too many rules imposed by so-called governance experts and too many idiosyncratic accounting guidelines. As a result, much of the smart money in the United States is going — and staying — private, creating more companies that have less public accountability and transparency.

Jamie Dimon, CEO of JP Morgan Chase.
Andrew Harrer | Bloomberg | Getty Images
Jamie Dimon, CEO of JP Morgan Chase.

Over a series of meetings, conference calls and email exchanges that later included the chiefs of General Motors, General Electric and Verizon, among others, the group discussed a series of corporate governance "principles" that the participants could all agree on: Topics included compensation for chief executives and board members (more payment in stock, less cash) and earnings guidance (the group is generally not a fan). Along the way, at least two major investors, Fidelity and Wellington Management, dropped out, refusing to sign the list of "principles."

On Thursday, the group will release the culmination of its work in an open letter and detailed report that includes its list of principles — which are intended to stir a conversation within the business community.

Read More Read the open letter on best business practices those CEOs signed off on

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The report includes some recommendations that will seem ordinary; they suggest that the boards of public companies should be diverse. But other suggestions, including one that seems to say many public companies should not offer earnings guidance, may be more surprising.

Another principle takes on companies that use accounting methods that exclude stock-based compensation from non-GAAP earnings. The group asserts that stock-based compensation is "plainly a cost of doing business."

The group generally disapproved of companies with dual-class voting, in which people with a privileged category of shares get more say than the average investor. (Examples of companies set up this way include Facebook and The New York Times.) The group said, "If a company has dual-class voting, which sometimes is intended to protect the company from short-term behavior, the company should consider having specific sunset provisions based upon time or a triggering event, which eliminate dual-class voting."

The report also includes a recommendation that may upset chief executives who like to keep a firm grasp on the chain of command and distance between management and the board: The group says that the board of a public company should be able to meet with any employees outside of the presence of the chief executive to get an unvarnished view of the way the company is being run.

The group also decided that if a company did not have two people acting as chairman and chief executive to act as a check on each other, a strong lead director should be chosen.

The principles are considered suggestions, not requirements. "These recommendations are not meant to be absolute," the group wrote. (While various members of the group were willing to be interviewed about the project, they all did so on condition of anonymity.)

The idea for starting the series of meetings grew out of a frustration Mr. Dimon had about public companies. Talented executives have left public companies in droves to work at private companies — outside the harsh spotlight of the stock market, activist investors and new regulations. Many Silicon Valley companies have sought to delay public offerings for as long as possible.

Publicly listed companies in the United States have become something of a dying breed. In 1996, there were 8,025 public listed companies in the United States; by 2012, the number of companies was about half: 4,101, according to the National Bureau of Economic Research.

Mr. Dimon had been on the phone with Mr. Buffett lamenting what he described as the broken system for public companies and corporate governance when he asked him if he would help convene a group of the nation's largest companies and investors to see if they could fix the problem.

One of questions posed to the group: "If you inherited the company you now run and had to hire someone else to manage it, how would you set up its governance?" It was a blue-sky question and the answers were very different from what many governance experts expect of public companies today.

During the meetings, according to several who participated but said they agreed not to speak publicly, some members of the group said that rather than maintaining a board of a dozen or more people, as most public companies do, they'd have only a handful of board members, all of them experts in the business: fewer academics and consultants, more industry professionals.

Many in the group said they wished they could abolish a requirement that board members retire by a certain age as the New York Stock Exchange says; if Mr. Buffett were on your board, why wouldn't you want him to stay?

And many agreed that the board members should be compensated in large part in stock instead of cash; one of the group's published principles is that board members should be receive at least half of their compensation in stock.

Despite the moratorium on speaking publicly, news about the emergence of the group did leak earlier this year in The Financial Times — to the consternation of several participants.

While the "principles" are only recommendations, Fidelity ended up pulling out of the consortium, as did Wellington, in part, because many of their funds have their own fiduciary requirements. "Every company has its own distinct business model, culture and values, and thus, we generally do not sign on to blanket industry documents," Fidelity said while praising the conversation as valuable.