Accountability and Stability - Getting the Balance Right for the Benefit of Corporations and Their Shareholders

Now that most major American corporations have dismantled their takeover defences under pressure from governance advocates and shareholder activists, they are more vulnerable to hostile takeover bids and activist attacks. Despite the new “balance” – or perhaps because of its success in achieving gains in shareholder power – the shareholder activist community is continuing to press for provisions that allow for recall elections at any time on short notice. Some institutional investors have grown concerned about the shorttermism that flows from this new shareholder-centric governance model and are promoting a new paradigm in which more effective engagement and communication with major shareholders would be rewarded with support for well-established long-term plans. It remains to be seen whether institutional long-term investors will honour that tacit understanding when there is a near-term premium on offer. In the near term, we propose that responsible institutional investors should reject further diminution of the mandate delegated to boards of directors to act collectively in the best interests of the corporation and its shareholders. This means not giving further support to recall elections and management by referendum, but instead embracing governance structures that favour annual accountability over constant disruption and distraction. This, we believe, will be to the benefit of shareholders and companies, and encourage more responsible board service and the recruitment and retention of more dedicated and engaged directors