Pay + Board Composition + Personal Behavior ≠ Corporate Governance: In Search of Conceptual Change
Martin B. Robins
DePaul University College of Law
June 24, 2011
While seemingly everyone agrees that our economy requires substantial improvement in corporate governance in order to avoid a reprise of our recent financial collapse and Great Recession, this is not prompting legislative or private actions which actually facilitate an improvement in decision-making and outcomes of corporate action. Too many “solutions” pertain only to management compensation and board of director composition. Indeed, too many observers, including Nobel Prize winning economist Joseph Stiglitz, equate the two, causing their suggestions to lose impact.
While Congress expressly sought to improve governance in 2010 when it enacted the Dodd-Frank law to improve regulation of the financial sector, its specific provisions largely missed the mark and perpetuated the status quo of governance law addressing many things other than genuine governance, in large part because of their emphasis on procedural matters. A case can be made for the status quo in the context of “ordinary” firms which do not present systemic exposure to the same extent as the large financial firms which led us into the Great Recession, especially in light of the need to minimize the effect on entrepreneurial risk taking. However, a different set of considerations comes into play with other firms the actions of which have such pronounced external implications.
The actions taken in response to Dodd-Frank by the SEC and private actors have had little to do with better strategic decision-making by anyone, and much to do with peripheral and/or procedural matters. They corroborate the assessment that governance law needs fundamental reorientation to cause it to be an instrument facilitating better outcomes than what we have seen all too frequently from our most systemically important firms. Such actions are even less effective than was hoped in light of the strong process orientation of the pre-Dodd-Frank corporate law environment.
This article is a discussion of how Dodd-Frank and its predecessor law are improperly focused and the conceptual changes which are needed. In particular, it calls for a reversal of the pro-director presumption of the business judgment rule for systemically important firms where poor decisions can impose societal costs, where defined adverse events have occurred. In order to minimize the burden on business and underscore what is important, such change would be coupled with a drastic relaxation of requirements around management/director compensation and its disclosure.
In support of he new standard, in addition to discussing problematic elements of current legal doctrine, this article also incorporates very recent commentary on the causes of the Great Recession and discussion of very recent actions of specific companies as illustrations of what the author considers appropriate and inappropriate focus.
Number of Pages in PDF File: 35
Keywords: Corporate Governance, Dodd-Frank
JEL Classification: G30, D81
Date posted: July 7, 2011