ABA Taskforce asks that Corporate Governance Reform Reject Rigidity in Viewpoints

Editor’s Note: This post is by Holly Gregory of Weil, Gotshal & Manges LLP.

A Task Force of the Corporate Governance Committee of the ABA Section of Business Law has released a report on how governance roles and responsibilities are apportioned between shareholders and boards of directors — an issue of relevance to the current discussion of corporate governance reforms in Congress and among regulators.

The 25 member Task Force, chaired by Holly J. Gregory of Weil, Gotshal & Manges LLP, was comprised of seasoned lawyers representing a broad array of shareholder, corporate and academic perspectives. A copy of the Task Force’s report, which was released on August 1, is available here. The Task Force concluded that “[r]eturning to solid economic growth over the long term will depend in part on the ability of policy makers to respond to concerns over corporate governance as a factor in the present crisis while avoiding reforms that are insensitive to positive aspects of the present legal ordering of decision rights and responsibilities within the corporation.”

The Task Force Report emphasizes the common long-term interest that all parties share in corporate success and effective governance, and asks that participants in reform discussions “reject the rigidity in viewpoints that all too often gets in the way of thoughtful discourse on governance issues.”

The Report includes a number of key observations, including that:

• “Shareholders and boards of U.S. public companies have become increasingly active and engaged in their roles.”

• “Even for reforms that fall short of working a direct shift in decision-making authority, policy makers should be sensitive to how reforms will work in practice.”

• “Shareholder rights to elect the board and make other fundamental decisions should be meaningful. . . . [and] shareholders’ interests in the enhancement of corporate value deserve protection. . . .”

• “[B]oard flexibility and discretion to hire, motivate, guide and oversee the managers to whom they delegate [also] deserves protection.”

• “Divergent shareholder interests complicate the board’s task.”

The Task Force Report includes a set of recommendations for shareholders, boards and policy makers:

Shareholders should:

• “Act on an informed basis with respect to their governance-related rights in the corporation. . . . “

• “Apply company-specific judgment when considering the use of voting rights and contested elections to change board composition. . . . ”

• “Consider the long-term strategy of the corporation as communicated by the board in determining whether to initiate or support shareholder proposals. . . .”

Boards should:

• “Embrace their role as the body elected by the shareholders to manage and direct the corporation by: (a) affirmatively engaging with shareholders to seek their views; (b) considering shareholder concerns. . . . (c) facilitating transparency. . . . ”

• “Acknowledge that, at times, the company’s long-term goals and objectives may not conform to the desires of some shareholders. . . .”

• “Disclose with greater clarity how incentive packages are designed to encourage long-term outlook. . . .”

Policy makers and regulators should:

• “In the context of reform initiatives, understand the rationale for the current ordering of roles and responsibilities in the corporation and assess the impact of proposed reforms on such ordering. . . .”

• “Carefully consider how best to encourage the responsible exercise of power by key participants in the governance of corporations so as to promote long-term value creation. . . .”

• “Ensure that there is equal transparency of long and short, and direct and synthetic, equity positions of shareholder. . . .”

The Task Force concludes: “We all have a keen interest in finding ways to restore investor confidence while positioning the corporation to undertake the actions that will create sustainable long-term value-creation. While the pressures for regulatory solutions are considerable and understandable given the circumstances, caution is prudent with respect to the corporate institution around which so much of our economy is organized.”

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