Emerging Issues in U.S. Corporate Governance: Are the Recent Reforms Working?
Hann, Daniel P., Defense Counsel Journal
The decade of the 1990s was one of increased emphasis on openness, with accelerated institutional shareholder activity and governmental prodding
WHAT IS "corporate governance"? In the 1990s, the term became a buzz word in board rooms throughout the United States and a battle cry for institutional shareholders. Nevertheless, "corporate governance" means different things to different people at different times.
To define and understand the term, it is well to explore its origins and then examine the legal framework and institutional environment associated with it. What is the perceived impact that the corporate governance movement has had and may have on director and officer liability in the United States and the resulting role of corporate counsel when advising clients on these issues? What about the future?
The modern era of corporate governance has at least four origins. First, it can be traced to the excesses of the 1980s, which was a time of rising executive compensation coupled with a frenzy of merger and acquisition activity. Leveraged buyouts and takeovers resulted in many instances in a need to improve performance by publicly owned companies. The takeover craze of the 1980s reflected an era of financially motivated deals that took advantage of undervalued companies and high inflation. The majority of these transactions were highly leveraged and financed through "junk" bonds, a process that arguably led to the savings and loan crisis. In the new decade, highly leveraged buyouts and takeovers have given way to corporate governance as a means to improve performance of public companies.
A second origin of the corporate governance movement is found in increased government regulation and rulemaking. For example, since 1990 the U.S. Securities and Exchange Commission (SEC) has promulgated or amended numerous rules and regulations that provide for improved shareholder communication and understanding. Examples include proxy reforms that make it easier for shareholders to require management to put an item in the proxy statement for shareholder vote and provide for increased shareholder-to-shareholder communication.
Between 1992 and 1995, the SEC also adopted several new rules governing the disclosure of executive officer and director compensation in registration statements, proxy statements and periodic reports. These measures sought to clarify and enhance the disclosure of executive officer and director compensation and, equally important, to provide explicit rationales and bases for compensation. The SEC's stated goal was to make compensation disclosure more clear, concise and useful to shareholders. These rule changes also resulted in the creation of the now-institutionalized compensation committee, which must issue an annual compensation committee report that discloses in the company's proxy statement the specific rationale used to determine compensation paid to the chief executive officers, as well as the compensation policies applicable to executive officers and the relationship of such compensation to company performance. Numerous other rule changes have been adopted by the SEC in recent years, the Plain English Initiative being one, many of which are aimed at facilitating shareholder communication and improving shareholder understanding.
Third, the information age in which we live today has given shareholders and prospective investors unprecedented access to information that they did not enjoy previously. Through electronic media such as the Internet, shareholders are now better able to access information that was previously difficult or impossible to obtain. This technology also has provided shareholders a vehicle with which to communicate with each another. As a result, shareholders, especially institutional investors, now have a relatively easy and inexpensive way to explore and exercise their newfound clout.
Finally, and most important, the 1990s witnessed a significant change in the composition of corporate shareholders. …