Steven Davidoff aptly comments that:
The departure of Vikram S. Pandit shows clearly who is in charge of Citigroup: the board of directors. For good or for bad, boards are increasingly taking charge of corporate America. The reign of the imperial chief executive is over. ...
Board supremacy is a general trend. In the wake of the financial crisis, the big banks have been forced to reconstitute their boards, with Citigroup and Bank of America at the top of the list. But others like Goldman Sachs have also been pushed to bring in more competent people. The new directors are much more aware of what happened in the years leading up to the financial crisis, and to take action.
Everything is proceeding as I have foreseen:
Today, American corporate governance looks very different. The Imperial CEO is a declining breed. Some classes of shareholders have become quite restive, indeed. Most important for our purposes, boards are increasingly active in monitoring top management rather than serving as mere pawns of the CEO.
Several important trends coalesced in recent decades to encourage more active and effective board oversight. Much director compensation now comes as stock rather than cash, which helps to align director and shareholder interests.1 Courts have made clear that effective board proc- esses and oversight are essential if board decisions are to receive the defer- ence traditionally accorded to them under the business judgment rule, especially insofar as structural decisions are concerned (such as those relating to corporate takeovers).2 Director conduct is further constrained, some say, by activist shareholders.3 The Sarbanes-Oxley Act mandated enhanced director independence from management, as did changes in stock exchange listing standards.
Today, as a result of these forces, boards of directors typically are smaller than their antecedents, meet more often, are more independent from management, own more stock, and have better access to information. As The Economist reported in 2003, “boards are undoubtedly becoming less deferential. . . . Boards have also become smaller and more hard- working. . . . Probably the most important change, though, is the growing tendency for boards to meet in what Americans confusingly call ‘executive session,’ which excludes the CEO and all other executives.”4 In sum, boards are becoming change agents rather than rubber stamps.
In this book, I offer an interdisciplinary analysis of the emerging board-centered system of corporate governance. I draw on doctrinal legal analysis, behavioral economic insights into how individuals and groups make decisions, the work of new institutional economics on organiza- tional structure, and management studies of corporate governance. Using those tools, I trace the process by which this new corporate governance system emerged. How did we move from the managerial revolution famously celebrated by Alfred Chandler to the director independence model recently codified in the Sarbanes-Oxley Act and other post-Enron corporate governance mandates? In addition, of course, the book will look at the future. Despite the extensive changes made to the legal structure of corporate governance post-Enron, many legal academics and share- holder activists want to see still more changes, mainly designed to empower shareholders relative to both boards and managers. In the latter portions of this book, I explore whether such changes are desirable. (In short, no.)