This post comes to us from John J. Madden, a member of the Mergers & Acquisitions Group at Shearman & Sterling LLP, and is based on an article that first appeared in the BNA Corporate Governance Report and appears with permission; the complete article is available here.
The widespread public criticism of boards of directors arising from the financial crisis, and the ensuing governance reform initiatives, should not have come as a surprise to those following trends in corporate governance. Instead, they should be seen as part of a series of developments in the evolving relationship between shareholders and their boards in the United States that has been underway for the past two decades. As the shareholder base has largely consolidated into the institutional investor community and those investors have become more organized and focused on exerting the influence inherent in their substantial ownership stakes, we have seen in recent years an accelerating shift in the “balance of authority” exercised by boards and shareholders in the corporate decision-making process.
There is no indication that this trend will reverse or even slow down significantly. Accordingly, directors should understand the origins and key drivers involved, and determine how they can most effectively adapt to this changing environment and secure the confidence and support of their companies’ shareholders.