Continuing our faculty workshop series, Nadelle Grossman presented a work in progress earlier this week entitled “Clarifying the Long-Term Nature of Director and Shareholder Fiduciary Duties.” Her presentation examined the various factors that have magnified the influence of short-term institutional shareholders, such as hedge funds and activist investors, over the decisions of corporate management. These factors include the way the market punishes firms that fail to meet their quarterly earnings targets, the incentives of money managers to maximize their own fees by boosting the share price of their holdings, and the increasing effectiveness of the shareholder franchise. Professor Grossman argued that the increasing influence of the “short-termers” has impaired management’s ability to set a long-term strategy for the corporation. Her thesis is that the fiduciary duties of directors and institutional shareholders should be re-examined in order to promote the adoption of business strategies with longer time frames.
Professor Grossman’s thesis has profound implications for the direction of corporate law. At least since Berle and Means published The Modern Corporation and Private Property in 1932, the classic challenge for corporate governance has been viewed as the need to align the interests of management with the long-term interest of shareholders. For over seventy years, developments in executive compensation, shareholder proxy voting, and director fiduciary duties have been directed towards this end. However, the growing influence of “short-termers” with short investment horizons on the process of management decision-making has upset the classical assumption that shareholders will instinctively press management to advance a longer view of the corporate interest.
Perhaps, in the future, the challenge of the corporate law will be viewed differently. Advocates of reform might seek to uncover legal mechanisms that would better align the interests of institutional investors with the interests of private shareholders who hold their stock for the longer term. Alternatively, the goal of corporate law might be to develop ways to protect management from the pressures being applied by short-termers. We may find that the insulation of management from shareholder influence is not the source of the problem in corporate governance, as Berle and Means proposed so long ago; it might turn out to be the solution.