In many respects, the relentless drive to adopt corporate governance mandates seems to have reached a plateau: essentially all of the prescribed “best practices”—including say-on-pay, the dismantling of takeover defenses, majority voting in the election of directors and the declassification of board structures—have been codified in rules and regulations or voluntarily adopted by a majority of S&P 500 companies. Only 11 percent of S&P 500 companies have a classified board, 8 percent have a poison pill and 6 percent have not adopted a majority vote or plurality-vote-plus-resignation standard to elect directors. The activists’ “best practices” of yesterday have become the standard practices of today. While proxy advisors and other stakeholders in the corporate governance industry will undoubtedly continue to propose new mandates, we are currently in a period of relative stasis as compared to the sea change that began with the Sarbanes-Oxley Act and unfolded over the last decade.

In other respects, however, the corporate governance landscape continues to evolve in meaningful ways. We may be entering an era of more nuanced corporate governance debates, where the focus has shifted from check-the-box policies to more complex questions such as how to strike the right balance in recruiting directors with complementary skill sets and diverse perspectives, and how to tailor the board’s role in overseeing risk management to the specific needs of the company. Shareholder engagement has been an area of particular focus, as both companies and institutional investors have sought to engage in more regular dialogue on corporate governance matters. The evolving trend here is not only the frequency and depth of engagement, but also a more fundamental re-thinking of the nature of relationships with shareholders and the role that these relationships play in facilitating long-term value creation. Importantly, this trend is about more than just expanding shareholder influence in corporate governance matters; instead, there is an emphasis on the roles and responsibilities of both companies and shareholders in facilitating thoughtful conversations instead of reflexive, off-the-shelf mandates on corporate governance issues, and cultivating long-term relationships that have the potential to curb short-termist pressures in the market.

Conclusions:

In 2005, Martin Lipton wrote for a symposium commemorating the 25th anniversary of his article attacking financial market short-termism and supporting the legality of corporate management to take actions to defeat hostile takeovers. The conclusion to that piece is as relevant today as it was in 2005:

In the words of [famous educator and management consultant] Peter Drucker, “the Enterprise can be said to be the one innovation that created the Modern Economy—far more so than any other invention, whether material or conceptual.” The American enterprise is the systematic risk-taker and risk-sharer of our economy—the primary means through which wealth and prosperity are generated on a macroeconomic level. Central to this structure is a delicate interrelationship among the enterprise, the CEO (who manages it), the board of directors (which oversees its management) and shareholders and society at large (who benefit from it).

If special-interest shareholders and other “activists” [and the academics who support them] prevail in their latest battle—that is, if additional, more demanding governance and “shareholder empowerment” measures and personal liability for directors become integrated into the regulatory and common law landscape—we will have altered the structure of the enterprise and moved toward excising the board from its principal role. Not only will the board as an institution suffer from the curtailment of its ability to manage the corporation, but we will not be able to attract competent, responsible people to serve as directors of public companies. Moreover, faced with a punitive regime that could extend to any perceived failure of a director (whether or not intentional and whether or not egregious), the people who do serve on boards will focus on their self-protection, and will be hesitant to take risks that may benefit the corporation. As [then] Treasury Secretary John Snow . . . remarked, “some investments that should have been undertaken, that would have been good for society, good for investors, good for shareholders, and good for the economy’s growth, won’t be undertaken.” In short, director passivity will have triumphed over the entrepreneurialism that has always been at the heart of the business judgment rule. We must all brace ourselves for this next battle. And we must do all we can to ensure that the train does not fly off the tracks.