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CALIFORNIA CORPORATE & SECURITIES LAW

Another “Best Practices” May Not Be Best After All

For years, I’ve been critical of governance experts who promote “best practices” without any basis that these practices are actually effective, much less the best.  For example, the Harvard Law School’s Shareholder Rights Project undertook to push numerous companies to eliminate their staggered boards.  Two former SEC Commissioners took the Harvard SRP to task for advancing shareholder proposals that portrayed staggered boards as categorically detrimental to shareholder interests.  Then, two professors conducted an actual study and found:

Declassifying SRP targets, and especially targets more engaged in research and innovation, declined in firm value after declassification, which wealth effect is directly attributable to declassification rather than other activism-related channels.

See Did The Harvard Shareholder Rights Project Prove Itself Wrong?

Now, another “best practice” is being undermined by an actual study.  Simpson Thacher and Rivel Corporate Governance Intelligence Council took a look at all companies in the S&P 500 over three specific time frames.  They found no statistical difference in the financial performance of companies during any of the three time periods between companies that combined the Chairman/CEO roles and those that separated those two roles.   Accordingly, they conclude that “there does not appear to be any compelling economic reason for public companies to adopt any particular CEO/chairman structure”.

This is, of course, old news.  In 2009, Harvard Law School Professor John Coates submitted the following testimony to the U.S. Senate Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance and Investment:

 The only clear lesson from these studies is that there has been no long-term trend or convergence on a split chair/CEO structure, and that variation in board leadership structure has persisted for decades, even in the UK, where a split chair/CEO structure is the norm.

Several years earlier, Yale Law School Professor Roberta Romano wrote:

However, the firms with board characteristics on which shareholder proposals focus, firms whose boards have a majority of independent directors or that split the function of board chairman and chief executive officer (CEO), do not perform significantly better than those whose boards, respectively, have fewer outside directors or do not split these positions.

Less is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance, 18 Yale Journal on Regulation 174, 192-93 (2001) (footnotes omitted).

Notwithstanding decades of studies finding no benefit, ISS’ 2017 proxy voting guidelines state that it will generally recommend a vote for separation.  My question is why?

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