The board of a public company is responsible for steering them towards long term health and success. But Directors and Officers must contend with shareholders taking on a more active role.
The financial and economic crisis increased scrutiny on public company boards of directors. They have been subject to increasing demands, inspection, and in some cases, have been met with mistrust. The assault on the traditional director-centric model of corporate governance has created a definitive shift in structure of corporate companies in the last few years. Instead of the directors taking a central role, shareholders have become increasingly active and vocal.
In both the shareholder and political arenas, directors and boards are facing increasing demands and opposition. The shift from director-centric to shareholder models of governance has also facilitated the frequency and effectiveness of attacks on public companies by hedge funds and other activist investors. While the growing shareholder activism creates a check of accountability for a board of Directors and Officers, it can also hurt the long term growth.
Shareholder activists tend to demand “value-maximizing” initiatives. Such initiatives include special dividends, share repurchases, and divestitures. However these initiatives all focus on short term results and can deviate away from long term corporate strategy.
It is a balancing act. In some ways, shareholder views can bring useful insights- in other ways they value short-term gains at the expense of the company’s long term health. Companies and boards should continually refine and develop a long term strategy that they can articulate and justify. The board should always be aware of shareholders opinion and take them into account, without sacrificing the long term success strategy for the company.
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