A Revised Monitoring Model Confronts Today's Movement Toward Managerialism
Thomas, Randall S.
Cox, James D.
There are many lessons to be drawn from the sweep of history. In law, the compelling story repeatedly told is the observable co-movement of law on the one hand, and economic, social, and political changes on the other hand. Aberrations, however, do arise but generally do not persist in the long term. Contemporary corporate law seems to be on the cusp of such an abnormality as legal developments and proposed reforms for corporate law are currently conflicting with the direction in which the host environment is moving. This article identifies a series of contemporary judicial and regulatory corporate governance developments that are at odds with multiple forces unleashed by today's ownership of public companies being highly concentrated in the hands of various types of financial institutions. In particular, we focus on the appropriateness of recent regulatory impediments that have been placed in the path of the continuing evolution of the monitoring board of directors but with an eye to the past, as well as how developments over the last several decades complete the central feature of modern corporate governance, the monitoring model. / To address this question, we begin by travelling back in time to post-World War II America during the dominance of managerialism, when shareholders were analogous to children-seen but not heard. That model was replaced by today's monitoring model, which empowers oversight of management in the hands of outside directors, whose obeisance, at least on paper, is anchored in the firm's residual claimants, the stockholders who elect the directors. But, as we discuss, the monitoring board has something of a checkered history in serving this function. We argue that from its inception the monitoring board was incomplete and board-centric because it was formed in an era where the received model was dispersed, not concentrated, ownership. That, of course, is no longer what characterizes American public companies. Today we believe that the growth of institutional investors' voting power and the engagement of hedge fund activists have repeatedly demonstrated ways to strengthen the monitoring board and in practice remedied many of its weaknesses. We argue that this natural progression has been disrupted by recent regulatory actions aimed at weakening the shareholders' voice. --- We next challenge the emerging New Paradigm and its accompanying appeals to stakeholder primacy that are being advanced as the future models for corporate governance. We conclude the article with a short set of recommendations we believe will bolster the heretofore incomplete and boardcentric monitoring model for corporate governance.