The devaluation of the director: corporate America today is facing a revolution, the end game of which is management-by-referendum--the shifting of decision-making power away from the board to the shareholders.

AuthorNorwitz, Trevor S.
PositionGOVERNANCE LEADERSHIP

FOR MORE THAN A CENTURY, the corporation has been the engine driving the American economy. By allowing investors of all sizes to diversify their risk in limited-liability entities and pool their capital under professional management, the corporate form has fostered entrepreneurial risk-taking and powered unprecedented growth and productivity. One can think of the American corporation as the goose that lays the golden eggs.

Today that goose is an endangered species. It's not that people no longer like golden eggs. On the contrary, many investors are so enamored of them that they are increasingly frustrated by the natural gestation period of the mother goose. Others love the eggs but wish the goose didn't eat so much, or make such a mess of the lawn. Undeniably there have been some seriously rotten eggs lately, laid by foul fowls with names like Enron and World-Com, but there have also been admirable efforts to improve the diet and behavior of our golden geese. Increasingly, however, a loose syndicate of self-appointed shareholder-rights activists, including trade unionists, "catalyst" investors, and academics, has been trying to remake these imperfect geese, to turn them into "better" (or at least more compliant) creatures. Last year's Interim Report of the Committee on Capital Market Regulation includes, alongside some admirable proposals to improve the global competitiveness of the U.S. capital markets, a number of recommendations regarding "shareholder rights" that similarly call for a radical overhaul of American corporate governance.

Experimenting with the fundamental structure of one of our most successful institutions is a dangerous exercise. It is possible that by stretching the goose's neck enough, these activist-alchemists might create a golden-egg-laying swan. But they may just strangle the goose.

Power grab

At a microeconomic level, we increasingly see hedge funds accumulating stakes in companies, not as traditional investors who like what they see and want a piece of it but because they do not like what they see and want to change or disassemble it. Sometimes their ideas have merit and their efforts are handsomely rewarded. In other cases, their conviction that they understand a company better than its own management and board of directors is wildly misplaced, and they wreak significant harm on the entity and its other stakeholders (even though they may secure a short-term benefit for themselves).

Far more troubling, however, is the macroeconomic manifestation of this phenomenon, in which the activist community is openly seeking to shift decision-making power away from the board of directors to the shareholders (which at best refers to a small number of unelected intermediaries but in effect often means the "squeaky wheels" and special interests). This devaluation of the role of the board of directors as a central and vital component of the corporate...

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