Marcel Kahan, George T. Lowy Professor of Law, and Edward Rock, Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School, whom The Deal.com calls “two of American corporate law’s most thoughtful – and productive – scholars,” offer a thorough overview in their new paper of the trends that have reduced CEO power in favor of shareholders and boards.
In “Embattled CEOs,” Kahan and Rock note that the most important trend is the rise of institutional investors that began as far back as the 1980s and has continued unabated.
“Aggregate ownership by institutions has increased every single year since 2000, meaning that the day is not far off when dispersed individual investors will own only a trivial fraction of equities,” the authors write.
As shareholder power has increased, boards have become more independent of their CEOs, and the percentage of boards with nominating and corporate governance committees has increased over the past decade, as has the percentage with a formal process for evaluating CEOs.
The authors doubt the trend will change. “Unlike the 1980s, the threat to managers derives from multiple sources – traditional institutions, hedge funds, proxy advisors, technology, and their fellow directors – rather than from a small group of raiders.”
Kahan is also working on a series of papers about proxy advisers with Stephen Choi, Murray and Kathleen Bring Professor of Law, and Professor Jill Fisch of the University of Pennsylvania Law School.
In the first, they analyze the recommendations made by four proxy advisory firms. The authors write that the firms provide only “limited transparency” into the ways they reach their decisions despite the importance of their recommendations in director elections and proxy contests.
The authors wonder whether the mutual funds, pension funds, and other investors that use the various firms’ ratings know the reasons for them. If not, then the firms “would lack accountability for, and could pursue their own agenda in making, their voting recommendations,” they write.