Corporate governance politics display a peculiar feature: while the rhetoric is often heated, the material stakes are often low. Consider, for example, shareholder resolutions requesting boards to redeem poison pills. Anti-pill resolutions were the most common type of shareholder proposal from 1987–2004, received significant shareholder support, and led many companies to dismantle their pills. Yet, because pills can be reinstated at any time, dismantling a pill has no impact on a company’s ability to resist a hostile bid. Although shareholder activists may claim that these proposals vindicate shareholder power against entrenched managers, we are struck by the fact that these same activists have not made any serious efforts to impose effective constraints on boards, for example, by pushing for restrictions on the use of pills in the certificate of incorporation. Other contested governance issues, such as proxy access and majority voting, exhibit a similar pattern: much ado about largely symbolic change.
Posts Tagged ‘Corporate governance’
Initiatives of shareholder engagement must take into consideration the modern, complex nature of share ownership. Shareholders can no longer be considered as a single group, instead the shareholder base may include a range of institutional investors, hedge funds, private equity funds, sovereign wealth funds and other activist investors. There has been a significant transformation of institutional holdings in recent years, and company boards will need to adjust their behaviour and the nature in which these engage with these new categories of investors.
As the number of—and assets controlled by—sovereign wealth funds (SWFs) has increased dramatically in recent years, so too has scrutiny about how SWFs are making use of these assets. With respect to equity investments in publicly traded firms, one facet of this concern is that SWFs will become activist shareholders. This concern arises in part because of an equivocation of the term “activist” and a misunderstanding of the regulatory consequences of certain kinds of activism by SWFs.
The legal rules governing businesses’ organizational choices have varied across nations along two main dimensions: the number of different forms that firms could adopt; and the extent to which firms had the contractual freedom to modify the available forms to suit their needs. Until the last quarter of the twentieth century, businesses in the U.S. had a narrower range of forms from which to choose than their counterparts in most other countries and also much less ability to modify the basic forms contractually. In the recent NBER Working Paper, Revisiting American Exceptionalism: Democracy and the Regulation of Corporate Governance in Nineteenth-Century Pennsylvania, I explore the exceptional character of the U.S. legal rules by focusing on the different structure of U.S. and British general incorporation laws.
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.
Compliance is hot.
Pick up the New York Times or the Wall Street Journal and you are likely to find a story about yet another huge fine for regulatory infractions.
In early May, to take a recent example, BNB Paribas, the big French bank, admitted that the $1.1 billion it had set aside for infractions involving sanctions regimes would not be nearly enough to cover its expected liability.
A billion dollars is a big number, but it is hardly the largest penalty we have seen in recent years. It is dwarfed, for example, by the more than $13 billion JPMorgan Chase agreed to pay to various regulatory agencies for mortgage infractions.
Numbers like these command attention.
Corporate governance has always been an important topic. It is even more so today, as many Americans recognize the need to develop a more robust corporate governance regime in the aftermath of the deepest financial crisis since the Great Depression.
Although the recent financial crisis—aptly named the “Great Recession”—has many fathers, there is ample evidence that poor corporate governance, including weak risk management standards at many financial institutions, contributed to the devastation wrought by the crisis. For example, it has been reported that senior executives at both AIG and Merrill Lynch tried to warn their respective management teams of excessive exposure to subprime mortgages, but were rebuffed or ignored. These and other failures of oversight continue to remind us that good corporate governance is essential to the stability of our capital markets and our economy, as well as the protection of investors.
The primary function of corporate governance in the United States has been to address the managerial agency cost problem that afflicts publicly traded companies with dispersed share ownership. Berle and Means threw the spotlight on this type of agency cost problem—using different nomenclature—in their famous 1932 book The Modern Corporation and Private Property. Nevertheless, it was only in the 1970s that the now ubiquitous corporate governance movement began. Why did the corporate governance movement gain momentum in the U.S. when it did? And given its belated arrival, why did it flourish during ensuing decades?
Since 2001, eight stock exchanges around the world have launched corporate governance indices (CGIs), sometimes as part of a broader environment, social, and governance (ESG) initiative. The comprehensive analysis of these indices is presented in our World Bank/IFC study: “Raising the Bar on Corporate Governance – A Study of Eight Stock Exchanges Indices”. The study is the first of its kind, and it reveals that CGIs may have a positive impact in enhancing legal and regulatory frameworks by contributing to the development of objective and measurable governance benchmarks. The study also shows that CGIs offer companies an opportunity to differentiate themselves in the market and be more attractive to foreign and domestic capital; and, ultimately, CGIs incentivize companies to adopt better governance practices. Nevertheless, as the process for vetting companies to access the indices continues to evolve, the scrutiny of underlying methodologies, the disclosure of company ratings or company self-assessments, and the on-going monitoring process have still room to improve.
Over recent decades, corporate governance has become an increasingly high profile aspect of legal scholarship and practice. But despite this widespread interest, there remains considerable uncertainty about how exactly corporate governance should be defined or understood. Of particular concern is whether corporate governance is most appropriately understood as an aspect of ‘private’ (facilitative) law, or else as a part of ‘public’ (regulatory) law. In my recent book, Corporate Governance in the Shadow of the State (2013, Hart Publishing), I demonstrate that this question is not just an academic one in the pejorative sense. On the contrary, it is arguably the most important issue confronting those who study or teach the subject of corporate governance in any level of depth or analytical rigour.