Disciplining Corporate Boards and Debtholders Through Targeted Proxy Access
47 Pages Posted: 24 Mar 2016 Last revised: 16 Jul 2016
Date Written: March 23, 2016
Corporate directors committed to a failed business strategy or unduly influenced by the company’s debtholders need a dissenting voice — they need shareholder nominees on the board. This article examines the bias, conflicts, and external factors that impact board decisions, particularly when a company faces financial distress. It challenges the conventional wisdom that debt disciplines management, and it suggests that, in certain circumstances, the company would benefit from having the shareholders’ perspective more actively represented on the board. To that end, the article proposes a bylaw that would give shareholders the ability to nominate directors upon the occurrence of predefined events. Such targeted proxy access would incentivize boards to manage difficult operational and financial situations more proactively, while creating a reasonable oversight mechanism for shareholders if those efforts fail. The article also discusses ways for shareholders to use general proxy access in distressed situations to strengthen the shareholder perspective in, and add value to, boards’ negotiations with debtholders. Yet failing the utility of traditional, general proxy methodology, the article suggests that targeted proxy access is a more tailored solution that mitigates many of the concerns articulated in the proxy access debate and provides a better balance between management autonomy and accountability.
Keywords: corporate governance, fiduciary duties, proxy access, activist investors, insolvency, chapter 11 bankruptcy, corporate restructuring
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