In a recent paper, Jill Fisch and Simone Sepe outline a new model for corporate governance: the Insider-Shareholder Collaborative model.
A Shift Towards Collaboration
Two models have previously dominated the corporate governance discourse: (i) the management-power model and (ii) the shareholder-power model. The former emphasizes a board’s decision-making authority as the corporation’s essential coordinating and monitoring system, the latter emphasizes enhanced shareholder power as the means to hold insiders accountable.
The authors argue these models are outdated since both assume insiders and shareholders are engaged in a struggle for power, when increasingly, the insider-shareholder relationship is collaborative rather than competitive.
The argument is based on the fact that corporate governance has grown increasingly “knowledge intensive” and it is unlikely that any one individual/organization possesses all relevant information required to respond to business challenges. They argue insiders no longer have more information than outsiders and that shareholders often bring new information and insights to the decision-making process. Insiders and outsiders possess partial information not available/known to the other, and aggregation of such information generates value to the firm. Thus, they argue, this trend offers a mechanism for enhancing value, which neither unilateral decision-making model provides.
Flaws in the Collaborative Model
The authors do identify two main risks inherent in this model: (i) misuse of information; and (ii) conflicts of interest. The authors acknowledge there are opportunities for insiders and shareholders to exploit collaboration and further their own interests. For example, shareholders might use information to obtain trading advantages or engage in collusion to the detriment of other stakeholders.
The authors argue that confidentiality agreements and fiduciary duties can be used to help mitigate the foregoing risks. However, upon consideration of the proposed solutions it appears these tools are insufficient.
Confidentiality agreements, for example, inadequately address how a shareholder may use inside information – these instruments limit a shareholder’s ability to share or otherwise disclose valuable information, however, it would be difficult to monitor how possessing such information directly or indirectly influenced their trading activities. While this gap may be bridged by imposing fiduciary duties to prohibit misuse of information or prevent action that conflicts with the best interests of the corporation, in reality, imposing fiduciary duties upon shareholders is not feasible. Shareholders would never be able to discharge their fiduciary duties to multiple corporations simultaneously. Therefore, to comply with fiduciary duties under the proposed model, shareholders would necessarily be restricted in their ownership choices. Those shareholders with the newly imposed fiduciary duty would also become accountable to all other shareholders relying on their decision-making capabilities, making their role look more similar to that of an insider (with checks on its power), which negates the concept of the collaborative model.
While it is clear that there is a trend toward collaboration between insiders and shareholders in the context of corporate governance, the matter remains complex and is not easily classifiable as either purely collaborative or competitive.