Finally, Governance Becomes Possible

by Ira Millstein and Stephen Davis for Millstein Center at YALE School of Management,  August 30, 2010.

Thirty years late, the new Dodd-Frank Act hands shareholders power to influence the composition of boards and shape CEO pay. But will these institutional investors, on whom Americans depend for their financial security, use their authority responsibly? Will corporate boards welcome and accept good faith dialogue with their shareholders? Will both sides forego short term financial engineering and align for the long term performance the country badly needs?

For decades, investors, anxious about a company gone awry, have had little choice but to complain from the sidelines, petitioning finger-wagging resolutions directors could easily ignore. Shareholders tried that to no avail at AIG before its epic collapse. Defenses fortified under-performing boards from pressure they should have faced to better control risks and tie CEO pay to measurable actual performance over time. But resolutions and defenses did not stop short-term funds that piled disabling debt on companies. Aggressive investors could cherry-pick firms for proxy fights or use stock techniques to harass. Long term institutional investors were shackled; the short term prevailed. One result: Too many boards tolerated management excesses and failures that ushered in the financial crisis.

Now comes Dodd-Frank. The hardest-fought governance provision in the Act is one that affirms the US Securities and Exchange Commission’s authority to make it easier for investors to nominate candidates to corporate boards. Code named “access,” such rules promise to put pressure on troubled companies to give investors reasons to stay loyal-or risk rebellion. The market won’t collapse once access is part of the governance furniture. Similar rules exist around the world without causing anarchy. Under new SEC rules, challengers holding stock for at least three years would have to meet a 3% ownership threshold to petition a candidate – and then muster a majority vote to get him or her elected. That’s tough unless a company is floundering or a board deeply out of touch. Still, just the existence of access is a powerful signal that alters the balance of power. (continue reading… )


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