The next step in monitoring?

• Author: Tobin, James M.
• Position: Leadership in Environmental Initiatives

Shareholders have been making increasing use of both state and federal authority to advance measures influencing corporation governance, both through actual changes to the bylaws or certificates of incorporation and through precatory proposals.

During the takeover heyday, challenges centered around defensive mechanisms -- poison pills, classified boards, fair price provisions, and opt-outs of state takeover legislation. Results were generally unsuccessful, although votes supporting shareholder resolutions increased incrementally.

Possible subjects for new proposals include the whole range of governance issues already raised or emerging.

Because under typical corporation codes today directors have all the power of management, shareholder efforts to increase active monitoring and reach farther into business operations are likely to come through proposals to restrict the board's ability to delegate its management powers to management. At present, these efforts are relying on informal means, such as meetings with outside directors, or on formal proposals relating to structural matters, such as having nominating committees composed solely of independent directors and separating the CEO and board chairman offices.

Although the takeover-period activist shareholder tactics of proxy proposals have not surfaced in connection with monitoring, the possibility exists and warrants attention. While the SEC's "ordinary operations" exclusion might be applied to those proposals, there is no guarantee that it would be applied.

A shareholder proposal could amend articles of incorporation or bylaws to alter directors' responsibility and authority for management. Less drastic monitoring changes could come about through amendments requiring the board, say, to set its own agenda, precluding the CEO from agenda setting, or to assume responsibility for reviewing the corporation's compliance with laws and regulations.

If more radical changes are formalized, broadly limiting the board's ability to delegate, two issues will arise:

* First, to what extent may shareholders impose different, presumably stricter, standards upon directors?

* Second, will limiting directors' ability to delegate management of the company to officers be a change in form or substance?

As to the first question, were such changes adopted in the articles of incorporation or bylaws of the corporation, those standards might very well be enforced.

The second question is more problematic. A board of...