Corporate Control and the Need for Meaningful Board Accountability

By Michelle M. Harner. Full text here.

Corporations are vulnerable to the greed, self-dealing, and conflicts of those in control of the corporation. Courts traditionally regulate these potential abuses by designating the board of directors and senior management as fiduciaries. In some instances, however, shareholders, creditors, or others outside of corporate management influence corporate decisions and, in the process, extract corporate value. Courts generally address this type of corporate damage in one of two ways, depending on the party involved. Courts often designate controlling shareholders as corporate fiduciaries, while they characterize creditors, customers, and others as contract parties with no fiduciary duties.

The traditional roles of corporate shareholders and creditors may support the courts’ willingness to treat the former, but not the latter, as corporate fiduciaries. But shareholders and creditors do not always necessarily act in accordance with their traditional roles. Institutional investors, led primarily by hedge funds and private equity firms, are pursuing activist agendas as both shareholders and debtholders and frequently are successful in their efforts to influence corporate affairs. These efforts, however, may not benefit the corporation or stakeholders generally. This Article explores the increasing convergence in the rights and activism of shareholders and creditors and proposes an approach for governing their conduct that focuses on the board of directors.