Considering the issue of corporate governance and the independence of directors, shareholder activism, and managerial moral hazard, I think the problem(s) will not be solved (well) by additional regulation, be it imposed from the outside or from within. Among the evils outlined at the Atlantic Monthly’s panel discussion on the topic were gross CEO pay amounts, executives sitting on and picking boards of directors, and the passive-aggressive adherence to regulatory requirements. Panelists complained that CEO pay is not inline with performance or relevant to their value to the company; that boards and executives are far too cozy even with de jure regulation of their interaction; that directors can be voted to the board with (far) less than a majority vote; and that in general there isn’t much relevant transparency regarding financial information.

Besides the root problems describing shareholder involvement or noninvolvement in corporate governance and the various information asymmetry problems (from the moral hazard presented by the principal agent problem to the value to the company or to the executives of maintaining opaque financial reports), I think the main cause of these problems is that the form of the modern public corporation was not created for the benefit of either the company or its shareholders, but was more likely a response to regulation. Thus even with the long term growth of this corporate structure and the birth of companies within it, the structure of boards of directors is still not quite inherent to the being of a corporation. The firm does not need the board to manage its day to day operations. More importantly is the role of shareholders.

It’s rather silly to think of shareholders as ‘owners’ of a company the same way one would consider those in a partnership owners of their company. Sure they have the same legal rights to claim ownership of the firms assets and thus in theory its earnings, but as Joe Schumpeter noted way back when, they are incredibly far removed from even the major decisions the company engages.

The average individual shareholder has the same information availability and incentive to participate as a voter in a large democracy. They are almost entirely impotent to evince change except in the most serious of circumstances, and they depend for their information almost entirely on the very executives whom they ought to monitor.

Few institutional investors have the long term outlook or fortitude to push for the solid, long-term, “value creating” measures that might hurt the companies near term performance and thus, in the case of mutual funds as an example, their own performance ratings.

One panelist touched on the case of pensions as a potential reason companies might want to begin creating greater transparency. Most corporate pension funds are run by the companies themselves, and thus it is in their interest to create greater transparency for the benefit of their own pension funds. Whether or not this is true it is pure bunkum for the very reasons of the executives skewed incentives.