Governance in the Public Corporation of the Future: The Battle for Control of Corporate Governance
22 Pages Posted: 21 Mar 2013
Date Written: 2011
Eight years after passage of the Sarbanes-Oxley Act, Congress has again passed sweeping legislation in response to a corporate crisis. In addition to changes in the regulatory environment for Wall Street financial firms and banks, the Dodd-Frank Act (D-F Act) also proposes reforms to corporate governance.
In this article, the author examines the latest governance mandates under the D-F Act. In particular, this article focuses on the disclosure requirements on the CEO and chairman positions, and argues that disclosures of whether the CEO is also the chairman benefit shareholders' governance rights under state law. The new provisions under D-F Act combined the recent Securities and Exchange Commission (SEC) disclosure rulemaking on board leadership structure address a fundamental issue of board decision-making and the affects of structural bias and "group think" on director behavior. Bifurcation disclosures for public companies provide shareholders with beneficial information on board leadership structure, but more importantly, the disclosure requirements force directors to engage in discussion and analysis of how board decisions are made, and whether such decisions can be unduly influenced by a dominant CEO. State fiduciary duty requirements do not directly address social and structural decision-making biases. Shareholders benefit when federal disclosure rules address state governance shortcomings that are not otherwise conducive to private ordering.
Part I of this article explains the complimentary relationship between federal and state law, and looks at how securities laws focus on disclosure and state laws focus on fiduciary duties to protect shareholders from management misconduct. This part looks at how Congress and the SEC use federal disclosure mandates to affect behavioral changes in board and management conduct.
Part II examines recent efforts by the SEC to influence board and management governance prior to the passage of the D-F Act. This part looks at 2010 SEC rulemaking on risk, compensation, and governance; focusing specifically on the governance rulemaking on disclosure requirements for the CEO and chairman positions. This part discusses the rationale for the rulemaking to address leadership and structural biases in board decision-making, and why board structure influences board decision-making.
Part II also explores briefly the provisions of the D-F Act related to corporate governance and looks at which provisions use disclosure to effect corporate governance changes. While this part briefly identifies and explains other corporate governance provisions in the D-F Act, the focus is on the provisions of the D-F Act that provide Congressional support of the SEC's efforts to influence board leadership and structural bias by examining the legislative history of the bifurcation provisions in the Act.
Part III explores the meaning of structural bias and group-think. This part examines the social nature of boards, how such influences affect leadership structure, and why federal bifurcation rules may benefit shareholders.
Part IV explores Delaware's approach to structural bias and group-think in board decision-making. This part looks at the difficulty shareholders face in trying to demonstrate the governance harm when directors' decision-making is influenced by group-think and CEO dominance. This part argues that federal disclosures on bifurcation forces directors to assess its leadership structure for structural biases and that the D-F Act's and the SEC's disclosure mandates benefit shareholders.
Keywords: Dodd-Frank Act, Sarbanes-Oxley Act, Securities and Exchange Commission, SEC, shareholders, disclosure, public corporation, national exchange, federal securities law, state fiduciary, CEO, bifurcation, corporate governance, group think
JEL Classification: K2, K22, E30, E47, E60, E61, E62, E66, G34, M14
Suggested Citation: Suggested Citation