Introduction
More than five years after the enactment of the Sarbanes-Oxley Act of 2002, it has become clear that the decisive reaction by governance reformists to Enron and other scandals has proven to be an overreaction, and measures designed to protect shareholder value are impeding its creation. In particular, a key challenge facing boards of directors has emerged with new urgency: the task of promoting long-term value for shareholders in the face of tremendous pressures to realize short-term stock-market gains. These pressures have become acute as hedge funds and other activist shareholders, as well as influential proxy advisory firms, have sought to reshape the landscape in ways that undermine the board-centric model of governance, including their efforts to (a) mandate shareholder referenda on material decisions, including compensation decisions;(b) dilute the ability of companies to defend against hostile takeovers; (c) increase shareholder access to company proxy statements for shareholder-nominated director candidates and other shareholder proposals; (d) influence the membership of boards by means of majority voting proposals and withhold-the-vote campaigns; and (e) circumvent the CEO and exert influence by means of direct lines of communications with directors. As decision-making power shifts from boards to activist shareholders and shareholder advocates, boards are increasingly vulnerable to pressures for short-term share price performance and other agendas.
Furthermore, the corporate governance changes that are being precipitated by these pressures, as well as the procedural imperatives imposed by regulatory and legal reforms, have furthered the shift in the board’s role from guiding strategy and advising management to ensuring compliance and performing due diligence. Directors must navigate a maze of procedural and accounting requirements and a litany of ever-evolving best practices. Boards today are spending more time and energy on compliance, due diligence and investigations, and less on the actual business of their companies and the pursuit of long-term value creation. To be sure, procedural requirements are important safeguards, and monitoring is a core board function, but the key is to strike the right balance.
The need to critically evaluate these trends, rather than passively adhering to the shareholder rights and other activist mantras of the post-Enron period, has become grave. The demonstrated genius of the large public corporation has been its ability to harness equity, debt and human resources to invest in large projects with long-term investment horizons, and the success of such ventures has been integral to the remarkable flourishing of the U.S. economy over time. To the extent that boards are increasingly vulnerable to demands for short-term gains, these trends promise to have repercussions not just for the role of the corporate board but for American business more generally.
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