6.5 Summary

The discussion on boardroom reform in the US concentrates on both legalistic and economic perspectives of corporate governance. One stream of reformers stresses the need to adopt new legislative standards to improve the formal independence of corporate boards. The American Law Institute’s (ALI) Corporate Governance Project - for example - has been a high profile attempt from the legislative community to set forth new legal standards and recommendations for corporate boards. On the other hand, instead of imposing more legislation on corporate boards, reformers try to set new standards of corporate governance by means of a variety of market forces that give managers and directors the right incentives to act in the interests of shareholders. Institutional investors like CalPERS and TIAA-CREF - for example - have taken the lead in the shareholder activism movement to impose more pressures on corporate boards to alter their governance structures.

According to ICMG (1995:64): “While there have been a number of developments stemming from increased institutional investor pressures on boards and management, this has all occurred within the existing legal and regulatory framework.” As such, the corporate governance debate so far has not resulted to new legislative standards in the US. Federal securities and state corporation laws still do not dictate the structure and composition of corporate boards and the qualification of directors. Instead, the corporate governance system in the US heavily relies on federal and state law regulations that concentrate on the disclosure of board practices.

The Securities and Exchange Commission rigidly enforces the rules of the Securities Act of 1933 and the Securities Exchange Act of 1934. Yet, its powers to regulate the governance structure of corporate boards is rather limited. The corporate governance structure of corporations is mostly a matter of state corporation laws which are generally based on the Model Business Corporation Act and the General Corporation Law of the State of Delaware. Yet, state's indifference to prescribing board composition and size has fostered much diversity in the governance structure of corporate boards (Baysinger and Butler, 1984). The Task Force on Corporate Governance of the International Capital Markets Group (ICMG) states: “There is no significant pressure to change state company laws or federal securities laws and regulations. It is generally believed that the reforms in corporate governance considered necessary can be accomplished within the present legal and regulatory structure and there is no significant desire to revamp it” (ICMG, 1995:67).

Despite the absence of regulatory changes on state corporation level, chapter six has indicated many changes in attributes of one-tier corporate boards of directors in the US. Data from Spencer Stuart, Heidrick and Struggles, Korn/Ferry International, The Conference Board, the NACD and others, suggest that boards are adapting to new corporate governance practices and standards. These changes in the structure and the composition of corporate boards suggest a tendency of one-tier boards in the US to transform towards a more independent board structure. More corporations are assigning non-executive directors to the chairman seat of the board. In the case of CEO-duality, an increasing number of corporations appoints a lead director to their boards. More non-executive directors take over positions from executive directors while the average size of corporate boards has decreased.

Non-executive directors are also increasingly confronted with more stringent requirements with respect to their business relationships with corporations. Finally, audit, remuneration and nomination committees composed of non-executive directors have become increasingly popular in the US. As such, these developments indicate that corporate boards formally have become more independently composed and structured in the US. This development suggests support for the theoretical framework on the separation of decision management from decision control in one-tier boards and the transformation of board models presented in part I of this research. In summary, box 6.6 portrays the developments in the governance structure of boards of directors in publicly held corporations in the US.

 

Box 6.6

Current Trends in Corporate Governance in the US

 

 

Existing corporate governance framework:

  • federal and state securities laws strongly focus on the disclosure of board practices;
  • the State of Delaware and the (R)MBCA provide minimum requirements on board structure and composition in some 37 states;
  • state corporation laws do not rigidly determine board structure and composition - they are to a large degree indifferent to prescribing board structure and composition;
  • articles of incorporation and by-laws provide a diversity in the composition and structure of corporate boards;
  • independent audit committees have become mandatory for listed corporations at the major stock exchanges in the US;
  • compensation committees – when formed - are required by the SEC to file a compensation committee report.

 

Boards in listed corporations are undergoing changes:

  • independent board leadership is receiving more attention - CEO and chairman roles are increasingly being separated;
  • lead directors are becoming more popular - more corporations are designating lead directors to their boards;
  • total board size is downsizing;
  • boards are more predominantly composed of non-executive directors – more non-executive directors take over positions from executive directors;
  • the number of executive directors is decreasing;
  • more work is being done in standing oversight board committees;
  • more non-executive directors take over (leadership) positions in standing oversight committees.

 

Current issues:

  • ongoing debate on self-regulation and implications of corporation laws;
  • whether roles of the CEO and the chairman should be separated;
  • more disclosure of standing oversight board committee composition;
  • ongoing debate on fiduciary duties of non-executive directors.

 

 

Sources: ICMG (1995); Spencer Stuart (1997); Korn/Ferry International (1997);

 Chapter 6.

 


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.