CEO Leadership: Navigating the New Era in Corporate Governance

Posted by Thomas A. Cole (Sidley Austin LLP), on Monday, September 7, 2020

At the end of 2019 (which now seems so long ago), my book CEO Leadership: Navigating the New Era in Corporate Governance was published by The University of Chicago Press. My target audience is current and future CEOs and board members, those who advise them and those who teach law and business school students who aspire to those positions. My book is a combination of (i) a summary of the seminar on corporate governance that I teach at The University of Chicago Law School, (ii) a summary of a seminar on leadership that I taught to undergraduates at the University and (iii) what I have observed and learned in more than 40 years of advising the CEOs and boards of public companies.

The 13 chapters of my book are divided into four parts:

• Part I is entitled “The Policy, Law, and Market Forces That Have Created the New Era In Corporate Governance”. My point in this section of the book is that politics and market forces are at least as important as law (corporate and other) in shaping what how corporate governance has evolved. That said, some legal developments can be characterized as evolutionary in nature (the common law tradition), while other legal developments are revolutionary (Smith v. van Gorkom and Sarbanes Oxley). The most important market development came in the early to mid-1990s, when institutional ownership of public equities for the first time exceeded household ownership and was accompanied by the ascent of the proxy advisory services. I also discuss the critical threshold issue of “for whose benefit are corporations to be governed?”, noting that that question is often conflated or confused with another question—“to whom are duties owed?” My answer to the former question is that corporations are to be governed for the benefit of the shareholders, but that directors and officers have wide latitude to take actions that benefit non-shareholder stakeholders (the “other constituencies”) so long as there is some reasonable nexus to long-term shareholder value. My answer to the latter question is that duties are owed to all of a corporation’s constituencies, but that duties to non-shareholder stakeholders are derived from very specific laws, regulations and contractual provisions, whereas generalized fiduciary duties are appropriately owed only to shareholders.

• Part II is entitled “The Board-Centric Corporation”. I define corporate governance largely in terms of decision-making authority. In this part, I discuss the change, that started in the mid-1980s, from management-centric to board-centric decision-making over the “big issues” (strategy, succession, compensation, risk oversight and material transactions). I note the risk that some boards can inappropriately cross the line into decisions best delegated to management teams, but assert that where the line should be drawn will vary from company to company and is a function of a number of factors. In an observation that has elicited many chuckles, I state that good board involvement is like spelling “banana”—you have to know when to stop. In this section of the book, I discuss how to assemble and operate an effective board, as well as standards of conduct, standards of judicial review, director accountability and the suite of protections against director financial exposure.

• Part III is entitled “Activism and the Threat of Shareholder-Centricity”. Here I discuss the different types of activists—governance, CSR and financial—and their tools. I note the synergistic relationship between governance and financial activists. I argue against giving shareholders authority over decision-making (beyond that which is required by statute). Among the reasons I give are the following—in most instances, shareholders have no fiduciary duties to their fellow shareholders and thus can act in their own unbridled self-interest; shareholders might force decisions but not be around to live with adverse consequences; shareholders are not necessarily fully informed or expert in the issues they are pushing; and the problem of “empty voting”.

• Part IV is entitled “Challenges to CEO Leadership”. I discuss the critical difference between leadership and management, and note that boards that cross the line (see Part II) and pressures from financial activists can impede the ability of CEOs to lead and to focus on the long-term. To address these concerns, I state that CEOs and boards need to have a common understanding of the purpose of governance, the requirements and appropriate limits of board-centricity and how to be prepared for shareholder activism. As to the last point, I argue that CEOs and boards need to accept activists’ good ideas, but also know how and why to resist the bad ideas. I urge CEOs to develop an effective partnership with their non-executive chairs/lead independent directors. In this section, I also report on my decidedly unscientific (but nevertheless hopefully useful) confidential survey of CEOs. One of the key observations from that survey is that CEOs have to spend a tremendous amount of time dealing with corporate governance issues and that they do not always find that to be time well spent in terms of advancing the business of the company. I worry that the combination of these factors is driving some CEO-level talent away from public companies.

A longer summary of my book appeared in the March/April 2020 edition of The Corporate Board magazine.