by Michael Connor
Serving as a corporate board director will soon become more similar to serving as a county commissioner or city assemblyman than serving on a traditional for-profit corporate board, and as a result some directors may choose not to serve, according to a leading U.S. corporate governance expert.
“Whatever you think about the changes, the die is already cast,” says Joseph A. Grundfest, Professor of Law and Business at Stanford Law School and Faculty Director at Stanford’s Rock Center for Corporate Governance.
Grundfest predicts that pending legislation, including the proposed U.S. financial regulation law now being finalized by Senate and House committees, will “cause a clear and profound intrusion of federal law into the internal governance mechanisms of publicly traded corporations.”
“The whole regime is about to be turned upside down,” Grundfest says, with the result being a “significant politicization” of the corporate governance process.
Speaking at a seminar for reporters in New York, Grundfest focused on provisions in the Senate version of the federal law which include requirements for majority voting in uncontested director elections; proxy access for shareholders, or coalitions of shareholders, with one percent of more of the vote; non-binding say-on-pay resolutions on executive compensation; and limitations on “broker non-votes” in non-routine matters, including director elections.
Majority voting in uncontested director elections “will generate strategies whereby shareholders drive structural change by personalizing corporate disputes and targeting individual directors,” even if the director is otherwise qualified to serve, Grundfest says. He thinks that may be especially true at smaller companies outside the S&P 500, which could become targets of governance activists.
Lowering the threshold for access to corporate proxies will enable shareholder activists to wage campaigns with the intention of creating a “megaphone effect” that generates public attention and publicity for an issue, according to Grundfest. “To run is to win,” he says. “Running a candidate increases the stature of leaders within the unions and pension funds, particularly to the extent that those leaders are themselves elected.”
While say-on-pay resolutions would be non-binding on management, Grunfest notes, shareholder disapproval could be combined with “just-vote-no” campaigns targeting directors serving on compensation committees in order to drive fundamental change in compensation practices. Grundfest speculates about the likelihood of executive compensation “tea parties” in which shareholders say of directors: “Let’s get rid of these guys. Let’s throw them overboard.”
In that environment, and because most people who serve on corporate boards “don’t have the stomach” to deal with political pressure, Grundfest says, he would not be surprised if a “non-trivial” number of corporate directors chose not to serve on boards. “If you change the rules of the game, much else may change as well,” he says.
The U.S. Supreme Court’s recent decision in the Citizens United case also “augurs further politicization of the governance process both as Congress sees to regulate corporate political conduct and as corporations may seek to become more actively involved in the political process,” according to Grundfest.
Contrary to the concerns expressed by critics of the Citizens United decision, Grundfest thinks most publicly-held corporations are reluctant to involve themselves in speech or direct contributions in specific campaigns, primarily because they have “many channels of influence” – such as lobbying and issue advertising – already available to them. However, political activity could be driven by “outlier” corporations in “outlier” situations. Incumbent politicians in policy-making positions could also pressure corporations to become more directly involved in campaigns, Grundfest suggests.
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