Shareholders Have Governance Responsibilities

In the aftermath of the financial crisis, there have been many proposals, as well as new rules and regulations to prevent its recurrence. Was it a failure of rules and regulations? What about our current rules, particularly those that apply to the way corporations are run?

Well-known and respected governance attorney Holly Gregory led a group of experienced lawyers reflecting diverse shareholder, corporate and academic perspectives in examining the roles and responsibilities of shareholders and boards under corporate law.

Their report, formally “Report of the Task Force of the ABA Section of Business Law Corporate Governance Committee on the Delineation of Governance Roles & Responsibilities” aka “Governance Task Force” reflects a year of work, sets a constructive tone for boards, shareholders and policy makers to work together in strengthening corporate governance. The report reminds us that shareholders are not the only beneficiaries of the modern corporate system, which has created wealth on a scale previously unseen.  The Governance Task Force report points out that corporations contribute to the public good by employing people, innovating, improving products and services, paying taxes, supporting various community and charitable programs that benefit society at large.

Anyone interested in corporate governance should read the report, not only for the detail of the legal constructs that have created our current system, but for granular detail in the footnotes complete with links that enable the reader to follow their research and come to their own conclusion.

If you are looking for a scapegoat, there isn’t one. Nor does a brush tar one group.   Instead, the report describes how shareholders, management and boards have specific responsibilities to bring accountability to the effective management and oversight.

The recommendations are logical. “Shareholders should act on an informed basis with respect to their governance-related rights…apply company-specific judgment when considering the use of voting rights…consider the long-term strategy of the corporation as communicated by the board in determining whether to initiate or support shareholder proposals.”

Boards should “embrace their role as the body elected by shareholders to manage and direct the corporation by affirmatively engaging with shareholders to seek their views, consider shareholder returns and facilitate transparency.” In addition they should “acknowledge at times the company’s long-term goals and objectives may not conform to the desires of some of the shareholders.” In addition, they should “disclose with greater clarity how incentive packages are designed to encourage long-term outlook…”

Policymakers should “in the context of reform initiatives” understand the rationale for the current roles and “carefully consider how to best encourage the responsible exercise of power by key participants in the governance of corporations so as to promote the long-term value creation….”

The report should be required reading for all shareholders.