Corporate Governance: Does It Make a Difference?
Wachtell, Lipton, Rosen & Katz
Fordham Finance, Securities and Tax Law Forum, Vol. 2, pp. 41-58, 1997
I titled this speech "Corporate Governance: Does it Make a Difference?" I thought what I would do is try to sketch out four or five areas where the term corporate governance is applied and analyze whether it has or has not made a difference.
I think the best way to start is with a quote from the leading judicial corporate law scholar, William Allen, who is the Chancellor of the State of Delaware. Just five years ago, Chancellor Allen described the function of the board of directors of a public company this way:
The conventional perception is that boards should elect senior management, create incentive compensation schemes, and then step back and watch the organization prosper. In addition, board members should be available to act as advisers to the CEO when called upon, and they should be prepared to act during a crisis: an emergency succession problem, threatened insolvency, or a management buyout proposal, for example. This view of the responsibilities of membership on the board of directors of a public company is, in my opinion, badly deficient.
It ignores a most basic responsibility, the duty to monitor the performance of senior management in an informed way. Outside directors should function as active monitors of corporate management, not just in crisis, but continually. They should have an active role in the formulation of the long-term strategic financial and organizational goals of the corporation and should approve plans to achieve these goals. They should, as well, engage in the periodic review of short- and long-term performance according to plan and be prepared to press for correction when in their judgment there is need.
I am not going to stop to parse through each element of that, but I think you can readily see that it is quite an expansive view of the role and the function of the board of directors. Without in any way detracting from the change in the SEC proxy rules that have facilitated institutional shareholders exercising their ability to use their voices to influence management, and the other things that Jon [Lukomnik] and Jami [Heard] mentioned to you. I think that statement by Chancellor Allen as to his view of what the role and duties of directors are: and the fear that that view will be enforced in the courts, has done more than anything else to change the perception of what a board of directors should do in the modem corporate world. As I mentioned, I will break this down into specific areas and try to illustrate where I think it has made a difference and where I think corporate governance has not made a difference.
In large measure it depends on how you define corporate governance. I am going to give corporate governance a fairly expansive definition.
Number of Pages in PDF File: 18Accepted Paper Series
Date posted: March 9, 2012
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