Corporate governance “reforms” taking shape in Washington, while aiming to fix the causes of the financial crisis, may in fact add to the problems.
In a memo to clients today, “Corporate Governance in Crisis Times,” the New York law firm Wachtell, Lipton, Rosen & Katz says governance failures of recent years stem from “pressure for short-term performance and quick stock market profits” (greed, you might call it).
But emerging schemes to fix governance, the lawyers note, focus on empowering investors – these might be mutual fund or hedge fund managers – to overrule company managements and boards of directors in matters of corporate policy and direction. Trouble is, at the risk of generalizing, asset managers are the ultimate short-termists. Desire for quick stock market profits is in their job descriptions.
Instead of “reform” like shareholder proxy access, creating a new right to call for sale of a company or dock the CEO’s pay, the lawyers suggest our policy makers should focus on society’s long-term good, including economic growth:
There is no reason to embrace a plethora of ill-conceived federal regulation and legislation that usurps the traditional role of state law and thereby overturn the fundamental legal doctrines that have formed the bedrock of history’s most successful economic system. The engine of true economic growth will always be the informed business judgment of directors and managers, and not the hunger of short-term oriented shareholders for quick profits.
A long-term focus would mean encouraging boards and CEOs to pursue strategies for sustainable growth. Empowering boards of directors rather than arming union pension funds or special-situation hedge fund managers. Freeing rather than tying down managements. Designing incentives rather than Damoclean swords.
Lawmakers, regulators and courts need to remember that allowing companies to pursue long-term strategies (lawyers call it the “business judgment rule”) is the path both to shareholder wealth and societal benefits like job creation. Beware of making a fix, they warn, that may break more than it repairs:
Particularly at a time of depressed stock market valuations and the resulting danger of opportunistic attacks to bust up or takeover American companies, directors and managers must remain free to invest in the future and take the long-term view, so as to ensure prosperity for future generations.
These guys are lawyers for big corporations, of course. As a free-market sort, I’m inclined to agree that Washington doesn’t have the best ideas on what will restore business to a healthy growth trend. What’s your opinion?