Abstract
Any discussion of faults in governance has to begin with an explanation of the corporation’s ultimate purpose: that is, the criteria by which the corporation’s performance and success are to be measured. Throughout its development the corporation has had one stated objective: ‘the conduct of business activities with a view toward enhancing corporate profit and shareholder gain’.1 While some have argued that employees, suppliers and communities deserve at least some of the residual, or ‘profit’, this has generally been rejected as being in conflict with the conceptual model and state law and judicial decisions.
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Footnotes
American Law Institute, Principles of Corporate Governance: Analysis and Recommendations, 1 (1994), § 2.01(a).
For an entertaining description of the limited liability company as an agent of social and economic change through history, see John Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea (Random House Inc., 2003).
Adolf Berle and Gardiner Means, The Modern Corporation and Private Property (1932), 337; Adam Smith, The Wealth of Nations (1776). Two years later Yale Professor William O. Douglas reiterated the Berle and Means central argument: W.O. Douglas, ‘Directors who do not Direct’, Harvard Law Review, 47 (1305) (1934).
Ronald W. Melicher and David F. Rush, ‘Evidence on the Acquisition-Related Performance of Conglomerate Firms’, Journal of Finance, 29(1) (March 1974), 141–9.
Jae H. Song, ‘Diversifying Acquisition and Financial Relationships: Testing 1974–1976 Behavior’, Strategic Management Journal, 4(2) (April–June 1983), 97–108.
Wilber G. Lewellen, ‘A Pure Financial Rationale for the Conglomerate Merger’, Journal ofFinance (May 1971), 521–37.
John Lintner, ‘Expectations, Mergers and Equilibrium in Purely Competitive Securities Markets’, American Economic Review (May 1971), 101–11.
J. Fred Weston and Surenda K. Mansinghka, ‘Test of the Efficiency Performance of Conglomerate Firms’, Journal ofFinance (September 1971), 919–36.
Dennis C. Mueller, ‘A Theory of Conglomerate Mergers’, Quarterly Journal of Economics, 83(4) (November 1969), 643–59.
Ibid., 644.
Ibid.
Ibid., 659.
For the classic description of the rise of the professional manager in the USA, see generally Alfred D. Chandler, Jr, The Visible Hand: The Managerial Revolution in American Business (1977). As other commentators have noted, in the post-Second World War era professional managers were ‘virtually deified’ by scholars such as Chandler and Peter F. Ducker, while the role of the board was virtually ignored. See, e.g., James Gillies, Boardroom Renaissance: Power, Morality and Performance in the Modem Corporation (1992), 4–7 (describing how boards were viewed as a legal fiction).
Carol J. Loomis, ‘Dinosaurs?’, Fortune, 3 May 1993, 36.
I. Millstein and P. MacAvoy, ‘The Active Board of Directors and Performance of the Large Publicly Traded Corporation’, Columbia Law Review, 98 (June 1998), 1,283, 1,285 (citing Loomis, ‘Dinosaurs?’, 36, 36–7). A dominant managerial system acting without true accountability was held partially to blame.
See, e.g., ‘Thinking More About Institutions’, Institutional Investor (November 1990), 176 (survey of 700 investor relations officers, finding that the courting of institutional investors has never been more intense); Amy L. Goodman, ’Institutional Investors Come of Age’, Insights, 4(2) (December 1990) (reporting that an assembly of 100 private institutional money managers, who had in the past been prepared to sell rather than vote against management, were now focused on proxy activism and shareholder rights); CalPERS, Company Responses to Request for Board Governance Self-Evaluation - Final Report (May 1995) (CalPERS’ survey and scorecard of the corporate governance practices of the 300 largest companies in its portfolio); Russell Reynolds Associates and The Wirthlin Group, Redefining Corporate Governance: 1995 U.S. Survey of Institutional Investors, 3–7 (finding increased investor activism prompts changes in board composition, compensation and activism); Wirthlin Worldwide and Russell Reynolds Associates, Setting New Standards For Corporate Governance: 1997 U.S. Survey of Institutional Investors, 3 (corporate governance examination was given ‘impetus by a number of high-profile cases that demonstrated what could happen when boards were insufficiently vigilant in their oversight duties’); Stuart L. Gillan and Laura T. Starks, ‘A Survey of Shareholder Activism: Motivation and Empirical Evidence’, Contemporary Finance Digest, 2 (Autumn 1998), 10–34 (finding that as the equity ownership of investment advisers, investment companies, bank trust departments, insurance companies, foundations and pension funds increased from 24 per cent of the market in 1980 to just under 50 per cent by the end of 1994, they became more active participants in the governance of their corporate holdings); and Gillan and Starks, ’Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors’, Journal of Financial Economics, 57 (2000), 275–305 (an empirical study of increased shareholder activism on the part of institutional investors over the past 15 years).
See, e.g., Michael J. Barclay and Clifford G. Holderness, ‘Control of Corporations by Active Block Investors’, Journal of Applied Corporate Finance (Fall 1991), 68 (study of 106 block trades of common stock during 1978–1982, finding ‘considerable evidence that block purchasers or their representatives play an active role in firm management’ and that ‘turnover among top managers and directors after the trades substantially exceeded what is normal for public corporations’).
A series of Delaware court decisions in the 1980s concerning the contours of the business judgment rule in the context of board response to a change of control situation emphasized the role of informed independent directors. See Paramount Communications, Inc. v. Time Inc., 571 A.2d 1,140, 1,150–1 Del. Ch. (Del. 1990) (holding board had no duty to maximize shareholder value where there was no evidence that by negotiating with merger partner, dissolution or break up of company was inevitable), affirming 1989 WL 79880, at 19 (14 July 1989) (‘Delaware law does recognize that directors, when acting deliberately, in an informed way, and in the good faith pursuit of corporate interests, may follow a course designed to achieve long-term value even at the cost of immediate value maximization’: emphasis in original); Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1,261, 1,279–80 (Del. 1989) (board breached fiduciary duty by delegating sale process to self-interested CEO and CFO (Chief Financial Officer), who deliberately concealed material information from the board); Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1,334, 1,341, 1,343 (Del. 1987) (presence of independent directors comprising majority of board members that voted on merger enhanced proof that board acted in informed good faith); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (when break-up of the company becomes inevitable ‘directors’ role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders’); Moran v. Household Int’l, Inc., 500 A.2d 1,346, 1,356 (Del. 1985) (independent directors exercised informed business judgment in adopting poison pill shareholder rights plan); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 953–55 (Del. 1985) (whether directors’ actions taken in response to a perceived threat are reasonable in relation to the threat posed is ‘materially enhanced’ where board is comprised of majority of independent directors); see generally Dennis J. Block, Nancy E. Barton and Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors (5th ed. 1998 and Supp. 2002), 823–32 (discussing the impact of Delaware court decisions with respect to the role of outside directors and special committees); Robert A. Ragazzo, ‘Unifying the Law of Hostile Takeovers: The Impact of QVC and its Progeny’, Houston Law Review, 32 (1995), 945, 976 (tracing evolution of judicial definition of board duties).
See memorandum from William T. Allen, Chancellor, Delaware Court of Chancery, to the 1993 Tulane Corporate Law Institute (undated), 11 (on file with the authors) (discussing the role of “soft” concepts like reputation, pride, fellowship and self-respect’ in motivating directors to become more active); William T. Allen, Chancellor, Delaware Court of Chancery, ‘Redefining the Role of Outside Directors in an Age of Global Competition’, Speech at Ray Garrett, Jr, Corporate and Securities Law Institute, Northwestern University (30 April 1992), in Robert A.G. Monks and Nell Minow, Corporate Governance, app. 4 at 494 (1995) (‘For the most part the men and women who sit on the boards … want to do the right thing in that job. They want to deserve the respect of the communities from which they are drawn’); see also Ira M. Millstein, ‘The Evolution of the Certifying Board’, Business Lawyer, 48 (1993), 1,485, 1,488.
In response to legal action by the SEC against Gulf Oil Corp. for alleged political payoffs, the Gulf board formed a special committee to report on Gulf’s internal state: see Allan J. Mayer, ‘Washington Money-Go-Round’, Newsweek (8 December 1975, 71). Following release of company financial statements that revealed misstatements of sales and incomes, the SEC petitioned a Federal Court in 1974 to require Mattel, Inc. to name a majority of independent directors to its board (Felix Belair Jr, Abstract of article, The New York Times, 3 October 1974, 61) and, in settling a civil fraud action against Mattel for improper financial reporting, forced the toy manufacturer to establish two special board committees, one on financial controls and auditing, the other on litigation and claims. see Christopher D. Stone, ‘Public Directors Merit a Try’, Harvard Business Review (March–April 1976), 20. As part of a settlement with the SEC in 1975 regarding illegal political payments in the USA and abroad and the filing of false reports, Ashland Oil Inc. was required to form a special board committee to investigate and report on their findings: see ’Ashland Political Payments Made Abroad, Facts on File’, World News Digest, 19 July 1975, 514 B1. See generally ‘End of the Directors’ Rubber Stamp’, Business Week, 10 September 1979, 72 et seq. Nowhere is the emergence of the activist board more evident than in the creation of various working committees. The idea of boardroom committees goes back more than three decades, but as recently as the mid-1970s, only a small fraction of corporate boards had standing committees composed mostly of outside directors…Most government pressure for more responsible boards… has been coming from the SEC, which lately has dramatically stepped up investigations into director negligence or misconduct.
Millstein and MacAvoy, ‘The Active Board’, 1,283, 1,289–90; CalPERS, Company Responses; General Motors Board of Directors, GM Board of Directors Corporate Governance Guidelines on Significant Corporate Governance Issues ( January 1994, subsequently revised). See discussion, Ch. 4, note 9.
‘Two Wall Street Journal Reporters Win Pulitzer for Coverage of GM’s Turmoil’, Wall Street Journal, 14 April 1993, A2. See Paul J. Ingrassia and Joseph B. White, Comeback: The Fall and Rise of the American Automobile Industry (Simon & Schuster, 1994), 277–321.
See Robert L. Simison, ‘GM Board Adopts Formal Guidelines on Stronger Control Over Management’, Wall Street Journal, 28 March 1994, A4.
Judith H. Dobrzynski, ‘At GM, A Magna Carta for Directors’, Business Week, 4 April 1994, 37.
Within a short time, the National Association of Corporate Directors (NACD) and the American Bar Association (ABA) published guidelines for various aspects of corporate governance. See Report of the Blue Ribbon Commission on Performance Evaluation of Chief Executive Officers, Boards and Directors (1994); ABA Committee on Corporate Laws, Section of Business Law, Corporate Directors’ Guidebook (2nd edn 1994). See also Report of the Committee on the Financial Aspects of Corporate Governance (Cadbury Report) (December 1992, reissued April 1996, combined with other reports into publication by the London Stock Exchange (LSE), Principles of Good Governance and Code of Best Practice (The Combined Code), 1998); Toronto Stock Exchange (TSE) Committee on Corporate Governance in Canada, ‘Where Were The Directors?’: Guidelines for Improved Corporate Governance in Canada (Dey Report) (December 1994). Numerous additional guidelines have issued in the past nine years from the business, investor and labour communities. See American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), Investing in Our Future: AFL-CIO Proxy Voting Guidelines (1997); The Business Roundtable, Statement o f the Business Round Table on Corporate Governance (September 1997), subsequently revised as Statement of the Business Round Table on Corporate Governance Principles Relating to the Enron Bankruptcy (February 2002); TIAACREF, TIAA-CREF Policy Statement on Corporate Governance (October 1997, subsequently revised); CII, Core Policies, General Principles, Positions and Explanatory Notes (March 1998); CalPERS, Corporate Governance Core Principles and Guidelines: The United States (April 1998).
Michael W. Miller and Laurence Hooper, ‘Signing Off’, Wall Street Journal, 27 January 1993, Al, A6 (outsiders will search for a new chief executive to be a ‘Change-Master’).
Susan Pulliam and Steven Lipin, ‘Some Major American Express Holders Voice Disappointment about Robinson’, Wall Street Journal, 29 January 1993, A4.
Ira M. Millstein, ‘The Professional Board’, The Business Lawyer, August 1995; ’The Responsible Board’, The Business Lawyer, February 1997; ‘Director Professionalism’, Report of the NACD Blue Ribbon Commission (1996, updated and reprinted 2001).
See, e.g., Gordon Donaldson, ‘A New Tool for Boards: The Strategic Audit’, Harvard Business Review (July–August 1995), 99; John Pound, ‘Corporate Governance Affects Corporate Strategy’, Corporate Board (July–August 1994), 1; C. Gopinath, J.I. Siciliane and R.L. Murray, ‘Changing Role of the Board of Directors: In Search of a New Strategic Identity?’, Mid-Atlantic Journal of Business, 30 (1994), 175; Allen, ‘Redefining the Role’, 30 April 1992. While strategic planning seems to be more of a developed science, it is suspected that the elements of board involvement in mission development are similarly fuzzy.
Sharon Oster, Modern Competitive Analysis 5 (2nd edn, 1994).
Council on Competitiveness, Capital Choices: Changing the Way America Invests in Industry (1992), 84; See also The Conference Board, Commission on Public Trust and Enterprise: Findings and Recommendations (2003).
Korn/Ferry International, Board Meeting in Session: 23rd Annual Board of Directors Study (1996), 25; Korn/Ferry, 28th Annual Board of Directors Study (2001), 20.
NACD, Public Company Governance Survey, November 2001, 7–9, 18–19.
The Conference Board, The Corporate Board: A Growing Role in Strategic Assessment (1996), 12. An NACD report released prior to the corporate governance scandals of 2001 and 2002 urged that boards should be ‘constructively engaged’ with management to ensure the appropriate development, execution, and modification of the company’s strategy. See the NACD Blue Ribbon Commission Report on the Role of the Board in Corporate Strategy, September 2000, passim.
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© 2003 Paul W. MacAvoy and Ira M. Millstein
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Millstein, I.M., MacAvoy, P.W. (2003). The Emergence and Development of the Governance Problem. In: The Recurrent Crisis in Corporate Governance. Palgrave Macmillan, London. https://doi.org/10.1057/9781403946881_3
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