Directors and Officers: The Dangers of Short-Termism to a Board

Directors and Officers: The Dangers of Short-Termism to a Board

Directors & Officers have a unique responsibility of being the liaison between running a company and representing the voices of their shareholders. And balancing those two views isn't always easy.

The Directors and Officers of a board are there to insure the shareholders’ voices and mission of the company are represented. But this idea has also given rise to a shareholder-centric model of corporate governance. While it gives shareholders a voice, it can also lead to incentive structures and practices that don’t optimize a company’s long term potential.

The market-hypothesis theory relies on the idea that stock prices reflect the intrinsic value of the underlying company. Any action that increases a company’s stock price must be good. But this can lead to only short term results, and may not be a viable indicator of a company’s future growth and success. Judging actions based primarily on the stock price, or short term yields can have some dire consequences, as we've seen in bubbles, trends, and crashes in the market over the years. It can cause a herd mentality way of thinking, focusing only on actions that boost the stock price rather than a company’s long term health. Government and academic studies attributed the 2008 banking crises to banks succumbing to the short-term pressures of investors.

It’s a balancing act. The primary focus of a director is to promote and develop the long term success of their company while balancing shareholders’ input. Directors and Officers of companies must pay attention to shareholders’ key concerns. All key changes, whether the structure of executive compensation, the adoption and maintenance of a rights plan, or any other initiative should be done in the best interest of the company’s long term health and have a clear explanation.

Directors and Officers are under increasing scrutiny, both in the public eye and by their shareholders. PLRisk Advisors, Inc. provides Directors & Officers insurance that is specifically designed for the exposures faced by public companies. Contact us today for more information. (855) 403-5982