Saturday, June 21, 2014
Professor Urska Velikonja has just published a new article arguing that the trend toward corporate boards with a "supermajority" - not merely a majority - of independent directors is part of a strategy by large institutional investors and corporate managers to fend off more substantive forms of corporate regulation that would reduce shareholder wealth. Her thesis is that when corporations engage in risky and illegal behavior, they - and their shareholders - capture gains while externalizing losses; thus, large shareholders and managers have an interest in staving off real regulation. The easiest way to do that is by advocating for greater board independence - it's functionally a call for self-regulation.
I think the thesis has an intuitive appeal - similar to, for example, The Failure of Mandated Disclosure, which, as Steven Bradford pointed out, argues that we too often default to additional and wasteful disclosures as a substitute for substantive regulation (see also Joan Heminway's post on disclosure creep).
In the case of Professor Velikonja's argument, though, I think the picture is slightly more complicated. Many institutional investors are employee or union pension funds - in other words, their beneficiaries are exactly the third parties to whom corporate misbehavior is externalized. It's not obvious that they, or the funds who represent them, would prefer less substantive regulation, even if it resulted in lower corporate profits; however, the fund fiduciaries - in their capacity as fund fiduciaries - only have limited tools available to protect their beneficiaries. They can advocate for better corporate governance, but it's not obvious that they can, consistent with their fiduciary obligations, advocate for greater corporate regulation. (David Webber discusses some of the limits of fiduciary pension plan discretion in The Use and Abuse of Labor's Capital). Anyway, given these constraints, I am not certain that it is fair to say that institutional investors as a group prefer to advocate for corporate governance reforms over more meaningful regulation - for at least some of them, their options may be somewhat limited.