Corporate Governance: Promises Kept, Promises Broken | 
| Author: Jonathan R. Macey
Publisher: Princeton University Press
Category: Book
List Price: $35.00
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Avg. Customer Rating:  1 reviews
Sales Rank: 139131
Media: Hardcover
Number Of Items: 1
Pages: 344
Shipping Weight (lbs): 1.4
Dimensions (in): 9.4 x 6.4 x 1.2
ISBN: 0691129991
Dewey Decimal Number: 658.42
EAN: 9780691129990
Publication Date: October 12, 2008
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Product Description
In the wake of the Enron meltdown and other corporate scandals, the United States has increasingly relied on Securities and Exchange Commission oversight and the Sarbanes-Oxley Act, which set tougher rules for boards, management, and public accounting firms to protect the interests of shareholders. Such reliance is badly misplaced. In Corporate Governance, Jonathan Macey argues that less government regulation--not more--is what's needed to ensure that managers of public companies keep their promises to investors. Macey tells how heightened government oversight has put a stranglehold on what is the best protection against malfeasance by self-serving management: the market itself. Corporate governance, he shows, is about keeping promises to shareholders; failure to do so results in diminished investor confidence, which leads to capital flight and other dire economic consequences. Macey explains the relationship between corporate governance and the various market and nonmarket institutions and mechanisms used to control public corporations; he discusses how nonmarket corporate governance devices such as boards and whistle-blowers are highly susceptible to being co-opted by management and are generally guided more by self-interest and personal greed than by investor interests. In contrast, market-driven mechanisms such as trading and takeovers represent more reliable solutions to the problem of corporate governance. Inefficient regulations are increasingly hampering these important and truly effective corporate controls. Macey examines a variety of possible means of corporate governance, including shareholder voting, hedge funds, and private equity funds. Corporate Governance reveals why the market is the best guardian of shareholder interests.
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seminal scholarship October 25, 2008
Macey examines various market and regulatory mechanisms to improve corporate governance and concludes that our emphasis on regulations and those that have developed are the result of the fact that shareowners are not well organized into effective political coalitions, while managers are. "Managers will staunchly resist corporate governance reforms that put their jobs in jeopardy or threaten their ability to remain independent..."
Regulators and politicians follow the path of least resistance and satisfy the public's outcry that they "do something" "by passing laws like Sarbanes-Oxley that increase the power of 'independent' directors and like the williams Act that weaken the market for corporate control without upsetting the top managers of public companies or any other well-organized special interest group."
As a result, the most effective corporate governance mechanism, the market for corporate control, is hampered by excessive regulation, whereas "ineffective institutions, such as administrative agencies, cerdit-rating agencies, and even boards of directors, enjoy regulatory 'subsidies,'" according to Macey.
Macey is on the right track. Look at what works and what doesn't in keeping the promises that corporations make. For example, he examines the effectiveness of "independent directors" and notes the problem of "board capture," which renders "independence" relatively meaningless, since directors become reputationally linked to management. He later notes that dissident directors put forward by activist investors are far less likely to be captured by managers, since their allegiance lies with shareowners. Strengthening of board independence hasn't reduced the incidence of boar capture, he says. Instead, "What the intense focus on boards has done is to increase managerial autonomy and draw attention away from other potentially more effective solutions to the challenge of providing reliable, objective monitoring of corporate management."
Since the really independent directors come from hedge and private equity funds, that's where Macey says we must turn for solutions. While he is mostly right, his focus on reviewing existing institutions and what works doesn't drive him to apply the tool of imagination as much as he could to explore what might work. Are there other ways to have directors be reputationally linked to shareowners? One mechanism would be proxy access. Although he dismisses Bebchuk's proposal for reimbursing rivals because it exacerbates the "credibility problems" facing challengers, he doesn't explore other options of using proxy access.
In examining shareowner voting, he notes that while it may pay investors to become well-informed about "generic or market-wide" corporate governance issues like poison pills, since the costs of learning is spread across all public companies in their portfolio, it doesn't pay for most diversified investors to dig into "firm specific" corporate governance issues, because the cost is greater than the probable reward. Hedge and private equity funds hold larger blocks in fewer companies, so for them firm specific research pays. However, instead of largely dismissing the power of the vote by most investors, I wish Macey had explored other options.
Macey says the core dilemma of corporate governance is that shareowners have "fidelity to the objects of the corporation" (usually maximizing shareowner value), but not the "knowledge by which these things can be best attained." "While managers and directors, who often (though of course not always) have the knowledge (skill) to run the business, they often lack sufficient commitment to the objectives of the shareholders of the corporation."
The market for corporate control, hedge funds and dissident directors all bridge the problem.
Right now, several broadly diversified funds, such as CalPERS, also take positions in activists hedge funds that primarily use corporate governance strategies to unlock value. Through such efforts, they not only move the bar of averages, they also improve their return.
Another potential unexplored by Marey is the idea of more robust proxy monitoring services selected by all shareowners, paid with corporate funds that would remove "free-rider" issues involved when one fund, even a hedge fund, has to do all the heavy lifting. Mark Latham has written extensively on this possibility, and the idea of "voting by brand," an idea that adds some intelligence with minimal effort. See [...]. Building from the power of shareowners coalescing around brands are two other worthwhile projects.
[...] acilitates the ability of users to see how respected shareholder activists, which should include hedge funds at buildout, are voting. This allows retail shareowners to learn from or copy the voting behavior of more knowledgeable investors. Eventually, the site could facilitate direct voting by brand.
A "proxy exchange" proposed by the Investor Suffrage Movement ([...]) would also facilitate voting by brand by allowing shareowners to assign their proxies to aggregators and ultimately voters, which would include hedge funds and others with firm specific knowledge. Over time, the proxy process would be taken out of the hands of management and would become the responsibility of a self-regulating agency, the proxy exchange. However, what Macey lacks in imagination, he more than makes up for with by explaining existing legal and political problems.
Macey's Corporate Governance is a seminal work, in terms of actually exploring the various corporate governance devices to determine which ones are working, which don't, and why we keep focusing too much on those that don't. As I write this the world's economies are in meltdown, largely the result of promises broken by many self-interested parties. Macey's readers will have a better understanding of how this happened and what can be done so future promises are kept.
Readers who enjoy Macey's book are also likely to enjoy Entrepreneurs and Democracy: A Political Theory of Corporate Governance (Business Value Creation and Society)
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