So-called best practices in corporate governance are mere fashions that come and go, according to The Governance Revolution: What Every Board Member Needs to Know, NOW! The author, Deborah Hicks Midanek, is an independent director, corporate restructuring industry pioneer, and serial entrepreneur. She cites former Delaware Supreme Court Chief Justice Myron Steele, who says he has never seen empirical evidence that such widely hailed remedies as separating the chair and chief executive officer roles, granting proxy access with limits, and eliminating staggered boards improve the quality of corporate governance. Midanek questions another popular notion by suggesting that CEOs with high percentages of their net worth invested in their companies’ stock may be prone to distorted judgment. So much for that means of aligning management and shareholder interests!
Midanek goes on to reject activist investors’ assertion that shareholder interests should be the primary—if not the sole—consideration of corporate directors. She would like the United States to adopt an explicit policy similar to the European Union’s 2015 Shareholder Rights Directive, which states, “The position of shareholders is similar to that of bondholders, creditors and employees, all of whom have contractual relationships with companies, but do not own them.” The author cites approvingly a 1948 ruling by the Court of Appeal of England and Wales that “shareholders are not, in the eyes of the law, part owners of the company.”
Furthermore, writes Midanek, the “mantra of maximizing shareholder value is distracting companies and their leaders from the innovation, strategic renewal, and investment in the future that require their attention.” In any event, she argues, the very concept of maximizing shareholder value is illusory. It makes the impossible assumption that all shareholders want the company to maximize their economic return over the identical investment horizon. “Taken to its extreme,” writes Midanek, “maximizing shareholder value can be considered to be at odds with the director’s fiduciary duty, which is owed not to the shareholders but to the enterprise.”
While making her views on the subject abundantly clear, Midanek, to her credit, gives the activists a fair hearing. Specifically, she summarizes the recent findings of academics Edward Swanson and Glen Young on the impact of some 5,000 activist initiatives over a 21-year period. The two Texas A&M University researchers found that the initiatives occasioned not only short-term stock price boosts but also, on average, superior long-term stock performance and improved company fundamentals.
These controversies by no means consume the bulk of this valuable book. The author details the evolution of the board’s role from advisory to supervisory, beginning with the 1970 Penn Central Transportation Company bankruptcy. She provides a wealth of practical advice for investment professionals who aspire to join corporate boards. This advice includes proven strategies for influencing the outcomes of board deliberations.
Midanek draws on her extensive experience to elaborate on the duties of directors spelled out by the New York Stock Exchange. Examples include establishing an ethically sound culture by setting an appropriate tone at the top, determining executive compensation, and maintaining board collegiality. As Midanek explains, collegiality does not preclude challenging the positions of other, possibly longer-tenure directors. She also goes into extensive detail on such nuts-and-bolts matters as structuring committees and the recruitment, training, and evaluation of directors.
In addition, Midanek offers guidance to directors in dealing with special circumstances, such as takeover proposals and bankruptcy. As part of a new paradigm that she proposes for relations between corporations and their shareholders, she describes how institutional investors can work constructively with directors to improve the performance, as well as their understanding, of companies in which they invest. This dialogue, says the author, should occur when things are going well, rather than only under crisis conditions.
Speaking of crises, Midanek commits a small error when she writes, “As the Chinese proverb suggests, in every crisis, there is opportunity.” The cliché she is reaching for is that the Chinese word for “crisis” is composed of the characters for “danger” and “opportunity.” If not an outright fallacy, this shopworn statement falls well short of perfect accuracy.
Leaving aside minor glitches, The Governance Revolution is a valuable resource for both corporate directors and institutional investment officials who are willing to devote time to engaging with the companies they invest in, for mutual benefit. Activist investors will surely disagree with the author’s depiction of them as impediments to sound governance. All readers, however, will profit from Midanek’s personal and historical perspective on key governance issues.
1 Edward P. Swanson and Glen Young, “Are Activist Investors Good or Bad for Business? Evidence from Capital Market Prices, Informed Traders, and Firm Fundamentals,” Mays Business School Research Paper No. 2823067 (31 March 2017).