The Myth that Insulating Boards Serves Long-Term Value
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Columbia Law Review, Vol. 113, No. 6, pp. 1637-1694, October 2013
Harvard Law School John M. Olin Center Discussion Paper No. 755
According to an influential view in corporate law writings and debates, pressure from shareholders leads companies to take myopic actions that are costly in the long term, and insulating boards from such pressure serves the long-term interests of companies as well as their shareholders. This board insulation claim has been regularly invoked in a wide range of contexts to support existing or tighter limits on shareholder rights and involvement. This paper subjects this view to a comprehensive examination and finds it wanting.
In contrast to what insulation advocates commonly assume, the existence of short investment horizons and inefficient market prices does not necessarily mean that board insulation can be expected to serve long-term value. While board insulation may produce some beneficial long-term effects, this paper shows that it can also be expected to produce significant long-term costs. Furthermore, the available empirical evidence provides no support for the claim that board insulation increases overall value in the long term. To the contrary, the evidence favors the view that board insulation at current or higher levels does not serve the long-term interests of companies and their shareholders. The paper concludes that policymakers and institutional investors should reject the arguments made for board insulation in the name of long-term value.
A response to this article by Chief Justice Leo Strine — Strine, “Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law,” Columbia Law Review, Volume 114, 2014, pp. 449-502 — is available on SSRN at:
Number of Pages in PDF File: 59
Keywords: Short-termism, myopia, corporate governance, shareholders, boards, managers, long-term value, investor horizons, shareholder rights, shareholder power, shareholder activism, takeovers, corporate elections, entrenchment, antitakeover defenses, market efficiency, hedge funds
JEL Classification: D21, G32, G34, G35, G38, K22
Date posted: April 11, 2013 ; Last revised: June 11, 2014