Institutional Investors and Their Role in Corporate Governance: Reflections by a "Recovering" Corporate Governance Lawyer

By Porter, David P. | Case Western Reserve Law Review, Spring 2009 | Go to article overview

Institutional Investors and Their Role in Corporate Governance: Reflections by a "Recovering" Corporate Governance Lawyer


Porter, David P., Case Western Reserve Law Review


The Symposium's title question "Institutional Investors in Corporate Governance: Heroes or Villains?" is intentionally so broad that it leaves wide open the limits of discussion. In this Article, I will focus my remarks on my perceptions, based on my experiences over twenty-seven and one-half years of practice, about the intersection between institutional investors and corporate governance in the corporate, non-litigation setting.

To put my comments in perspective, I'll begin with some comments on the role of the corporate governance practitioner. I'll then discuss my views concerning "corporate governance," including the differences between what I term "procedural corporate governance" and "substantive corporate governance," and point out the fundamental difference in the corporate governance model here in Ohio, which is a "constituency state," from that of Delaware, which is not. I'll provide my thoughts on what good corporate governance is in practice, which necessarily includes some of my biases toward corporate control issues in general. With that background in place, I will then discuss how I believe institutional investors have influenced corporate governance, mostly for the good but sometimes for the bad, by examining:

* their role in establishing the current baseline of corporate governance practices in the primary U.S. public capital markets,

* their role in the Rule 14a-8 shareholder proposal process,

* the already large impact of proxy voting advisory services, and the potential game changing impact from the impending revocation of broker discretionary voting authority,

* the hidden world of shareholder "jawboning,"

* the somewhat recent emergence of "hedge fund attacks," and

* the role of institutional investors in the ultimate battleground of corporate governance: takeover fights.

I. THE CORPORATE LAWYER'S ROLE IN CORPORATE GOVERNANCE

I come to this Symposium as a "recovering" corporate governance lawyer, someone who has only recently moved from active practice into the academic world. Until January 1, 2009, I was a partner in a major global law firm, representing numerous publicly-traded U.S. corporate clients, and advising management teams and boards about corporate matters across a broad spectrum of issues. Those issues frequently involved the relationships of corporate executives or Boards of Directors with the corporation's shareholders and with each other--interactions commonly recognized today as corporate governance issues.

I am also an active participant in developing Ohio's corporate governance law. As a member of the Corporation Law Committee of the Ohio State Bar Association, which monitors developments in corporate law and is the primary source for Ohio legislation in the corporation law field, I have led or participated in numerous drafting assignments and chaired various subcommittees, ultimately serving as Vice Chair (2005-2007) and Chair (2007-2009) of the Committee. In those capacities, I have testified numerous times before committees of the Ohio General Assembly on proposed corporate legislation, including a number of measures directly affecting corporate governance. (1)

Throughout my years of practice, and as I heard echoed in some of the remarks earlier in this Symposium, I have observed a tendency by some observers of corporate governance to view corporate lawyers, especially those at large firms, as primarily "defenders of management" and presumptive enemies of good corporate governance. I vehemently disagree. I'll start off by discussing what I see as the proper role of corporate governance lawyers.

My perspective is that of a corporate lawyer, a non-litigator. In the corporate governance arena, the corporate lawyer serves primarily as an "advisor." Under the Model Rule of Professional Conduct (the "Model Rules"), (2) and their Ohio analog ("Ohio Rules"), (3) an advisor is one who "provides a client with an informed understanding of the client's legal rights and obligations and explains their practical implications. …

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