Minnesota Law Review
For large publicly held corporations, “corporate governance,” a common term in current law review articles, is an outdated term. It is outdated because it emphasizes the tensions and power struggles between corporate constituencies and implies an inevitable and immutable governance tug-of-war. It is also outdated because it masks the economic reality of the corporate enterprise: that the raison d’etre of large publicly held corporations is to maximize “longterm shareholder” and corporate value. Finally, it is outdated because today’s globally competitive marketplace requires a corporate focus on long-term performance rather than on divisive factionalism. Accordingly, this Article suggests steps toward minimizing corporate law’s preoccupation with “corporate governance” in favor of a new concept: “corporate cooperation.” Corporate law and contemporary corporate law reform proposals proceed from a fundamentally flawed framework, which depicts management, shareholders, and stakeholders as inherently and inexorably antagonistic. As a result, the United States is in the midst of a corporate law revolution. For the most part, directors of publicly held corporations do not understand their roles and particularly their relationships with large institutional shareholders – despite the fact that institutional shareholders own over fifty percent of all equity securities. For several decades, directors have insulated themselves and management from shareholder accountability, eschewing any real effort to assimilate shareholders into the corporate activity fabric. This anachronistic anti-shareholder attitude will not survive in an era in which shareholders, armed with a revamped proxy system, are determined to be heard. Shareholder activism is changing. Longterm shareholders now realize the need to focus on long-term value maximization to ensure satisfactory corporate performance. Longterm shareholders invest in a corporation expecting their share ownership to engender more than a mere monetary stake. These shareholders expect to have a relationship with the corporation, its board, its management, and other longterm stakeholders. Just as marriage is more than a “transaction,” a longterm shareholder’s commitment to a corporation is more than a monetary “transaction”; both envision a long-term relationship. Corporate law reform must ultimately focus on how to redefine the role of directors to maximize long-term corporate value. Although several proposals purport to resolve this governance conundrum, none adequately addresses the role of the board in a world populated by the new species of shareholder, the longterm shareholder. This Article attempts to fill the void. As the centerpiece of corporate law, boards are fiduciaries for, and are accountable to, the shareholders – the corporation’s primary constituency. Contemporary corporate law endows boards with two primary functions: monitoring and management. The law is oblivious, however, to a potentially far more significant board function, the “relationship management” function. This Article posits that an effective corporate cooperation regime requires that contemporary boards undertake this “relationship management” function. The essence of an effective relationship is communication. Consistent with the role of relationship management, the board of directors, longterm shareholders, and other stakeholders must engage in dialogue – or, more accurately, “trialogue” – to function effectively. This is the trialogical imperative that flows from the board’s relationship management role. This Article sets forth a legal paradigm designed to facilitate a cooperative corporate law regime that will maximize long-term corporate value. This new paradigm comprises three key players: the board of directors, longterm shareholders, and long-term stakeholders, including senior management. In contrast to the old governance paradigm characterized by atomized ownership, pervasive investor apathy, and hostile control battles, this new legal paradigm emphasizes ongoing communication and cooperation among the key players. This Article argues that, of the three key players, the board is the appropriate organ for mediating between the other long-term players to set a course for maximizing the long-term welfare of the corporation, its shareholders, and its constituencies. To implement this proposal successfully, the board, or a committee of the board, will mediate among competing factions. As the master controller of the enterprise, the board will serve as the central information processor between longterm shareholders and stakeholders. Meanwhile, the longterm shareholders and longterm stakeholders, if given appropriate access, will ensure that the board possesses the requisite expertise, authority, and resources to make informed decisions that optimize the players’ mutual long-term interests. In this sense, the board will become a significantly more important and powerful element in synthesizing and coalescing the goals of a corporation. Institutional investors promise to become an integral element of the proposed board-centered governance regime. To monitor and mediate fundamental finance and governance issues effectively, the board needs a great deal of information, much of which institutional investors can supply. Who better to provide information on longterm shareholders’ interests than those shareholders themselves? As one commentator notes, “[i]nstitutional investors are perhaps the strongest force for reform ever to emerge in the history of boards.” Part II of this Article sets forth the contemporary corporate governance landscape. It outlines the three key players in the corporate governance triad. It describes the central importance of the board of directors in corporate governance, explaining why the board continues to be the master controller of the corporate machine. This Part analyzes the promise and limits of independent outside directors and concludes that they are a necessary but insufficient element of effective corporate reform. It also describes the roles of shareholders and stakeholders, the remaining two elements of the corporate governance triad. Part III explores rays of hope on the current “corporate governance” horizon. It suggests that reforms giving shareholders greater voice, although aimed in the right direction, suffer from the same shortcomings as other reform proposals. That is, they continue to rely on the “corporate governance” framework of ages past and ignore the potent and inevitable forces of a “corporate cooperation” regime. Part IV proposes a “corporate cooperation” regime in which the board’s function is “relationship management.” This Part articulates the need for a trialogue between the board, longterm shareholders, and longterm stakeholders.
John H. Matheson and Brent A. Olson, Corporate Cooperation, Relationship Management, and the Trialogical Imperative for Corporate Law, 78 Minn. L. Rev. 1443 (1994), available at http://scholarship.law.umn.edu/faculty_articles/399.