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Dec 12, 2019

Twenty-first century corporate governance moves into adulthood

As we approach the end of the decade, Bob Lamm looks at the development of corporate governance through its adolescence

Twenty-first century corporate governance is about to enter its 20s – or, phrased differently, its teenage years are about to end. Like most teenagers, it has been unpredictable and unruly, with a tendency toward melodrama. Also like most teenagers, however, it has matured almost in spite of itself and, hopefully, will enter its 20s as a more reasonable and responsible creature.

With a new decade about to be upon us, I’ve been contemplating some of the highlights and (to paraphrase Evelyn Davis) lowlights of corporate governance’s teenage years.


The rise of empowered investors – as distinct from activists – strikes me as the single biggest development in governance, not only in the 21st century, but also in the last 40-plus years or more.

The overwhelming majority of the vast changes that have taken place in what is considered good governance, disclosure and related areas has resulted from pressure from investors, rather than from laws, regulations and listing standards. In fact, in many cases the laws, regulations and listing standards that have greatly impacted governance – such as say-on-pay votes – have resulted from investor pressure.

It’s worth noting here that investors do not constitute a monolithic group that thinks, talks and walks in synch. The interests of public pension funds, labor funds and traditional asset managers diverge, sometimes wildly so. This may not make it easier for companies that aren’t quite sure which investors to listen to, but it’s the reality, and companies just have to deal with it.

I distinguish empowered investors from activists because it seems to me that the two groups have different goals and ways of operating. Among other things, activist campaigns against well-known companies generate lots of media attention but studies show that upwards of 80 percent of all activist campaigns are directed against much smaller companies.

By contrast, investors tend to focus on the larger companies, where most of their money is invested. The goals and tactics of the two groups tend to differ as well.


The rise of empowered investors has led to another huge change in the world of corporate governance: the importance of consorting with what might be referred to tongue-in-cheek as the enemy – that is, engaging with shareholders.

I’m very passionate about engagement, having been a staunch advocate since the 1980s. My views on the topic have sometimes generated disagreement, or worse. Early in this decade, I attended a corporate governance-related dinner and sat next to a well-known corporate law scholar, who turned to me just before dessert and said: ‘Do you think it’s OK for board members to speak to investors? What about [Regulation] FD?’ Or words to that effect.

I started to say, ‘I think directors need to speak to investors, albeit not all investors and only in appropriate circumstances’ or words to that effect. But I didn’t get past the comma when someone else at our table, the chief legal officer (CLO) of a very large company whom I’d not met before, started shouting at me at the top of his lungs, saying I was a terrible lawyer who didn’t know what he was talking about, and so on. People at the opposite end of the large dining room started turning around, and the person sitting in between me and the CLO got up and left for fear of getting embroiled in a fist fight.

That is a true story. There are others, too, including one involving a highly regarded governance attorney in the US who once described an investor meeting with board members as ‘corporate governance run amok’.

Well, he who laughs last, I suppose. The person who confronted me at dinner is no longer CLO, and I’ve been vindicated. More progressive corporate governance nerds had been talking to investors and getting board members to do so even before the enactment of the Dodd-Frank Act, but that enactment sealed the deal by requiring a say-on-pay vote. Perhaps for fear of losing such votes, compensation committee chairs and members started reaching out to investors, wisely noting that having the CEO justify his/her compensation to a group of skeptical investors might not work too well.

Following on from this experience, engagement has continued to grow as more companies and their boards realize that talking and listening to investors can be a good thing. In fact, it may have become too much of a good thing, as many investors lack sufficient resources to engage with all the companies that would like to engage with them.


Another major change over the last decade has been the ever-expanding role of the board. Almost without regard to the nature or magnitude of the matter in question, the first question asked by investors, the media and the general public seems be: ‘Where was the board?’ Questions like this suggest that the board is regarded as the guarantor of everything the company does or doesn’t do.

The board’s responsibilities are and should be broad. Legally and practically, however, the board’s role is that of oversight. Regardless of how one defines that word, we should be able to agree that boards are not supposed to – and not designed to – act as a second tier of management, flyspecking and second-guessing everything management does.

As an aside, one thing that drives me crazy when I read governance literature is the phrase ‘the board should ensure that…’ Boards can do many things, but ‘ensuring’ is usually not one of them.

As if the ever-expanding scope of the board’s fiduciary duties were not enough, the notion of ‘corporate social purpose’ and the kerfuffle-inducing Business Roundtable statement this past August have created uncertainties as to the nature of those fiduciary duties and to whom they are owed. More on that later. At least a few years ago we thought we understood that board members owed their duties to shareholders and only to shareholders. Now, it’s not so clear.

The good news is that many boards and directors have responded to this ever-growing responsibility by spending more time on their board work, limiting the number of their directorships and demanding more efficient communications and meetings.

Most directors also seem to think they perform valuable functions for the companies they serve. For example, when I’ve asked board members whether they think organizations should be allowed to serve as board members (rather than helping human board members), the response has consistently been along the lines of: ‘Not only no, but hell no.’


For most of my professional life, it was clear that directors’ fiduciary duties were owed to stockholders – no ifs, ands or buts. During the hostile takeover wars of the 1980s, that changed a bit, as some states tried to protect their local industries by allowing or requiring directors to take other factors into consideration in deciding whether to accept a bid, such as employees and the communities in which they operated. But in the normal course of business stockholders were the North Star, and perhaps the only star.

How things have changed. As we end the teenage years of corporate governance in the 21st century, we are debating the basic, underlying purpose of the corporation. There are many reasons why we are having this debate, and perhaps this is not the place to get into that, but something I think about a great deal is the possible rupture of the social compact that permits corporations to exist in the first place, possibly due to runaway executive compensation in the face of persistent income inequality.

Be that as it may, assuming that the growing focus on corporate social purpose doesn’t turn out to be the governance flavor du jour, it represents a sea change in the role of the board. I am reasonably confident that good boards will adapt and thrive, but the process may not be easy or quick.


Despite all these changes, I note that there’s a vast gulf between the governance practices of large companies versus those of many smaller companies. Governance practices that are de rigueur at larger companies, such as board diversity, annually elected boards and the like, are missing in whole or in part at many of our smaller companies, and despite constant predictions of investor pressure or outright rebellion, those companies seem not to be changing fast, if at all. As 21st century corporate governance moves into adulthood, it will be interesting to see whether this changes.

What is next in corporate governance depends upon so many things, including economic and geopolitical factors, that I hesitate to make any predictions. But there is one exception: that corporate governance in the 21st century will continue to be dynamic if not chaotic well into its adulthood.


Bob Lamm is co-chair of the securities and corporate governance practice at Gunster Yoakley & Stewart in Fort Lauderdale, Florida, and independent senior adviser to Deloitte’s Center for Board Effectiveness