What is the Optimal Balance in the Relative Roles of Management, Directors, and Investors in the Governance of Public Coroporations?

Abstract

American economic success depends on establishing an effective system of corporate governance. Collaboration between the three traditional actors in corporate governance — boards of directors, management, and shareholders — is fundamental to identifying the corporate governance policies and practices that will be most conducive to producing economic growth while reducing attendant financial and legal risk. This white paper provides an overview of the evolution of US corporate governance, the current balance of responsibilities among directors and shareholders and the principal issues in corporate governance today.

The trends analyzed include the effects of increased influence of institutional investors resulting from concentration of ownership in institutional investment and savings vehicles, changes in voting rules and practices, and more assertive shareholder activism; shifting conceptions about the purpose of the corporation and the duty to maximize corporate value; decreased public trust of business leaders following the corporate scandals and the financial crisis; Federal regulations intended to enhance the influence of shareholders and increase board and management accountability, continuing efforts to address executive compensation; and the growth in importance of proxy advisory firms in the shareholder voting process.

Continuing issues examined include whether: federal mandates undermine the benefits of a historically state-driven corporate law system; further changes to board processes and composition are desirable; shareholders should assume a more active role in corporate governance; proxy advisory firms replace, rather than augment, the shareholder voice, and whether the proxy advisory industry should be subject to greater regulation and oversight; changes in voting mechanics can improve the effectiveness of corporate governance; short-termism is a cause for concern, and if so, its causes and remedies; and new challenges are presented by vote decoupling, high-speed trading, and hyper portfolio diversification.

Keywords: corporate governance, boards, directors, shareholder rights, shareholder voting, proxy voting, proxy advisory firms, shareholder activist, corporate elections, anti-takeover provisions, executive compensation, say on pay, governance ratings, securities regulation, state corporate law

JEL Classification: K22, M14, M52