August 18, 2009
The 25 member Task Force was comprised of seasoned lawyers representing a broad array of shareholder, corporate and academic perspectives and experience in corporate governance, corporate law and securities regulation.
The foundation for the consensus achieved among this diverse group was the recognition 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 provides an overview of the rationale for the apportionment of roles between shareholders and boards, as well as an overview of key developments that influence those roles, in an effort to promote informed and constructive discussion of governance reforms. The 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:
- "The traditional delineation of distinct roles and responsibilities of shareholders and boards of directors in the modern public corporation, as developed primarily through state corporate law, has helped position the U.S. public corporation as a powerful economic engine for the creation of wealth over the long term."
- "Shareholders and boards of U.S. public companies have become increasingly active and engaged in their roles."
- "Direct shifts of decision-making authority from boards to shareholders would need to be reconciled with the board’s responsibility for the management and direction of the corporation and any implications for fiduciary obligations associated with such decision-making. 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."
- "Shareholders’ interests in the enhancement of corporate value deserve protection – whether from board and management deviation from fiduciary obligations or from the self-interested actions of fellow shareholders."
- "Shareholder rights to elect the board and make other fundamental decisions should be meaningful. Given the increased power of shareholders and the successful negotiations that many shareholders and boards have undertaken, reform efforts should be aimed at encouraging communication and negotiation between boards and shareholders on key issues, while also ensuring boards retain the authority and ability to carry out their responsibilities."
- "If the board is to perform its role, board 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. Boards face challenges in addressing a variety of shareholder interests, often under pressures from a vocal subset of shareholders, and yet directors as fiduciaries must apply their own judgment based on their unique vantage point to act in what they believe to be the best interests of the corporation and the entire body of shareholders."
The Task Force Report includes a set of recommendations for shareholders, boards and policy makers:
- "Shareholders, boards and the executives to whom they delegate management authority and those involved in legislative and regulatory reform initiatives should give special consideration to the long-term nature of corporate wealth-generating activity and strive to avoid undue short-term focus and pressures that may impede the capacity of the corporation for long-term investments and decisions necessary for sustainable wealth creation. All parties are also encouraged to recognize both the challenges posed and the values contributed by the current ordering of governance relationships in the U.S. publicly-traded corporation under state law."
- "Act on an informed basis with respect to their governance-related rights in the corporation, and form company-specific judgments regarding such matters while taking into account their own investment goals . . . ."
- "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 proposal . . . ."
- "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 as an important data point in the development and pursuit of long-term corporate strategy; and (c) facilitating transparency by ensuring that shareholders are informed of the company’s efforts toward achieving its identified long-term goals and objectives . . . ."
- "Acknowledge that, at times, the company’s long-term goals and objectives may not conform to the desires of some shareholders, and be prepared to explain board decisions nevertheless to pursue such goals and objectives to shareholders and the market . . . ."
- "Disclose with greater clarity how incentive packages are designed to encourage long-term outlook and to reward steps toward achieving long-term strategies while discouraging unduly risky behavior. . . ."
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."
On August 18, the chair of the ABA Business Law Section sent the Report of the Task Force to the SEC Commissioners and to Congressional leaders. Copies of these letters and the Report are available here: