The next step in monitoring?
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 directors, in today's paradigm, has neither the time, resources, nor staff to manage the corporation itself. Imposing a duty to manage on the board might result in nothing more than executive officers recommending to the board what they previously would have decided on their own, under the direction of the board. The board, in adopting the executive's recommendations, would be formally making the decision itself.
Under this scenario, the law might develop in a pattern similar to that of the business judgment rule -- that is, directors would formally decide to adopt officers' recommendations of management, relying on process values -- good faith and informed decisions -- until an analog to Van Gorkom appears, imposing liability on a board for its decision.
A True Shift
An alternate scenario for the development of these rules would be to see a true shift in the locus of decisionmaking. For such management decisions to be made properly, however, the nature of the board would need to change. Directors would require far more time, resources, and staff. The board would of necessity evolve into an elected, collegial office of the chief executive.
Such a model is fraught with problems. Long-term planning would be difficult. A collegial body would not necessarily be able to respond quickly enough in times of crisis. Committees may not be the best choice for making business decisions. Finally, as directors become more intimately involved with the management of the corporation, they will lose their status as outsiders.
In conclusion, while emerging concerns of institutional shareholders in the structure of corporate governance and monitoring are being pursued through informal means today, the potential for more formal approaches exists and must be considered by anyone planning ahead.
James M. Tobin is the Senior Corporate Partner in Squire, Sanders & Dempsey, the Cleveland, Ohio-based law firm. He has extensive experience in corporate securities matters and general business law counselling. He also heads the firm's tender offer practice and is Co-Chairman of the Proxy and Tender Offer Subcommittee of the American Bar Association's Committee on Federal Regulation of Securities.
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|Title Annotation:||Leadership in Environmental Initiatives|
|Author:||Tobin, James M.|
|Publication:||Directors & Boards|
|Date:||Sep 22, 1993|
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