Can Reform of Corporate Governance Boost US Stocks Appeal and Economy?

Third, an active market for corporate control, via takeovers and proxy fights, also provides effective discipline on management. Companies face takeovers and proxy fights when their financial performance has been poor. Subsequent to a takeover or proxy fight, the target company manager’s employment prospects are severely damaged.

Fourth, the incentive compensation structure for U.S. managers has perhaps been the most effective mechanism to encourage U.S. managers to have a laserlike focus in maximizing shareholder value. More than 60% of the average CEO pay in large U.S. corporations is directly linked to shareholder value, hence, that link provides strong incentives to enhance it.

The above market mechanisms have been effective in constraining managers to focus on maximizing long-term shareholder value. However, reforms to these mechanisms could further increase their effectiveness and make U.S. stocks even more attractive to investors—domestic and foreign.

For example, consider the case of CEO incentive compensation. Research has documented the important role of misaligned CEO incentive compensation in the 2008 financial crisis. Surprisingly, similar misaligned incentive compensation played a critical role in the recent demise of Silicon Valley Bank, Signature Bank, and First Republic Bank. Research indicates that these banking crises would have been mitigated if bank CEO compensation consisted only of restricted stock and restricted stock options. Restricted means that CEOs cannot sell shares or exercise options for at least six to 12 months after their last day in office.

Next, consider the case of the proxy advisory market, dominated by two companies, that advises mutual fund managers on how to vote their shares in shareholder meetings on issues related to board governance (e.g., election of board members), management compensation (e.g., structure and amount of cash and incentive compensation), corporate control (e.g., proxy fights, takeovers), and environmental, social, and governance—or ESG—issues. However, there is no consistent evidence that the advice provided is positively related to long-term shareholder value.

The U.S. is the dominant player in the global stock market. U.S. stocks are the preferred investment for most international stock investors. The U.S. rule of law and corporate governance structure has played an important role in establishing and maintaining the dominance of U.S. stock market. With thoughtful corporate governance reforms, the U.S. can further enhance the attractiveness of U.S. stocks to domestic and foreign investors.

We publish a variety of perspectives. Nothing written here is to be construed as representing the views of The Daily Signal.

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Part II – Additional Insights and Other Topics

Dr. Sanjai Bhagat, Ph.D., and Professor Siri Terjesen, associate dean of the Florida Atlantic University College of Business, have raised important points. A few pull quotes from their narrative above can be useful.

…consider the case of CEO incentive compensation. Research has documented the important role of misaligned CEO incentive compensation in the 2008 financial crisis. Surprisingly, similar misaligned incentive compensation played a critical role in the recent demise of Silicon Valley Bank, Signature Bank, and First Republic Bank.

Recently, some U.S. managers have publicly noted that their companies should prioritize environmental and social issues rather than just shareholder value.

Those are topics that have directly or obliquely been periodically raised in this installment “Reality Check” series for this Patch as well as on MHProNews.

An example of the later is linked below.

https://www.manufacturedhomepr…