The lack of gender parity in the governance of business corporations has ignited a heated global debate, leading policymakers to wrestle with difficult questions that lie at the intersection of market activity and social identity politics. In my new book, Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge University Press, forthcoming in 2015), I draw on semi-structured interviews with corporate board directors in Norway and documentary content analysis of corporate securities filings in the United States to investigate empirically two distinct regulatory models designed to address diversity in the boardroom—quotas and disclosure.
Posts Tagged ‘Board composition’
Nearly 40 investor representatives shared with us their key priorities for the 2014 proxy season. We review the developments around these topics over the 2014 proxy season through shareholder proposal submissions, investor voting trends, proxy statement disclosures and behind-the-scenes company-investor engagement.
Key Developments in the 2014 Proxy Season
Activist investors are becoming more active and influential: Nearly 150 campaigns by hedge fund activists were launched in just the first half of this year. Both companies and long-term institutional investors are learning to navigate this changing landscape.
Corporate governance remains a hot topic worldwide this year, but for different reasons in different regions. In the United States, this year could be characterised as largely “business as usual”; rather than planning and implementing new post-financial crisis corporate governance reforms, companies have operated under those new (and now, not so new) reforms. We have witnessed the growing and changing influence of large institutional investors, and different attempts by companies to respond to those investors as well as to pressure by activist shareholders. We have also continued to monitor the results of say-on-pay votes and believe that shareholder litigation related to executive compensation continues to warrant particular attention.
Individual- and family-owned businesses are a vital part of our economy. If you or your family owns such a company you understand how important the company’s success is to your personal wealth and to future generations. If you’re a nonfamily executive at a family company, you also recognize that its profitability and resilience is vital to your job security and financial well-being.
I understand today’s participants include a number of trustees and asset managers for some of the country’s largest public and private pension funds. Without a doubt, pension funds play an important role in our capital markets and the global economy. This is due, in part, to the fast growth in pension fund assets, both in the public and private sectors.
For example, since 1993, total public pension fund assets have grown from about $1.3 trillion to over $4.3 trillion in 2011. Over that same period, total private pension fund assets more than doubled from roughly $2.3 trillion to over $6.3 trillion by 2011. As of December 2013, total pension assets have reached more than $18 trillion. This growth was fueled by many factors, including the rise in government support of retirement benefits, and the increased use by companies of pension plans as a way to supplement wages.
In the paper, Lift not the Painted Veil! To Whom are Directors’ Duties Really Owed?, which we recently posted on SSRN, we identify a fundamental contradiction in the law of fiduciary duty of corporate directors across jurisdictions, namely the tension between the uniformity of directors’ duties and the heterogeneity of directors themselves. The traditional characterization of the board as a homogeneous, often largely self-perpetuating body is far from universally true internationally, and it tends to be increasingly less true even in the United States. Directors are often formally or informally selected by specific shareholders (such as a venture capitalist or an important shareholder) or other stakeholders of the corporation (such as creditors or employees), or they are elected to represent specific types of shareholders (e.g. minority investors). The law thus sometimes facilitates the nomination of what has been called “constituency” directors, or even requires their appointment (e.g. employee directors in some European systems). However, even in systems that require the appointment of such directors, legal rules tend nevertheless to treat directors as a homogeneous group that is expected to pursue a uniform goal. We explore this tension and ask why a director representing a specific shareholder cannot advance this shareholder’s interests on the board?
Worker participation in corporate governance varies across countries. While employees are rarely represented on corporate boards in most countries, Botero et al. (2004) state “workers, or unions, or both have a right to appoint members to the Board of Directors” in Austria, China, Czech Republic, Denmark, Egypt, Germany, Norway, Slovenia, and Sweden. Such board representation gives labor a means to influence corporate policies, which may affect productivity, risk sharing, and how the economic pie is shared between providers of capital and labor.
The issue of director tenure recently has garnered significant attention both in the United States and abroad. U.S. public companies generally do not have specific term limits on director service, though some indicate in their bylaws a “mandatory” retirement age for directors—typically between 72 and 75—which can generally be waived by the board of directors. Importantly, there are no regulations or laws in the United States under which a long tenure would, by itself, prevent a director from qualifying as independent.
Institutional Shareholder Services (ISS) and other shareholder activist groups are beginning to include director tenure in their checklists as an element of director independence and board composition. Yet even these groups acknowledge that there is no ideal term limit applicable to all directors, given the highly fact-specific context in which an individual director’s tenure must be evaluated. In our view, director tenure is an issue that is best left to boards to address individually, both as to board policy, if any, and as to specific directors, should the need arise. Boards should and do engage in annual director evaluations and self-assessment, and shareholders are best served when they do not attempt to artificially constrain the board’s ability to exercise its judgment and discretion in the best interests of the company. In addition, much the same way boards consider CEO succession issues, boards are beginning to address director succession issues as well.
Like in the US, European policy-makers have taken a number of measures as a reaction to the financial crisis, some of which address corporate governance issues of credit institutions and investment firms (hereafter collectively referred to as “banks”). Other than in the U.S., however, and more consistently with the financial origins of the crisis, very little has made its way into legislation that applies to non-financial corporations.
As the fallout from the financial crisis recedes and both institutional investors and corporate boards gain experience with expanded corporate governance regulation, the coming year holds some promise of decreased tensions in board-shareholder relations. With governance settling in to a “new normal,” influential shareholders and boards should refocus their attention on the fundamental aspects of their roles as they relate to the creation of long-term value.
Institutional investors and their beneficiaries, and society at large, have a decided interest in the long-term health of the corporation and in the effectiveness of its governing body. Corporate governance is likely to work best in supporting the creation of value when the decision rights and responsibilities of shareholders and boards set out in state corporate law are effectuated.