Earlier, we dispelled the trivial questions that preoccupy, unnecessarily, activist investors and governance junkies. Proxy access, the CEO as BoD Chair, and many others have straightforward answers that derive from two basic premises:

1. ❖Shareholders alone should decide how governance works at a portfolio company
   

2. ❖Shareholders should elect directors in a clear, simple manner, to represent investor interests above all.
   

Yet, designing appropriate governance does raise certain challenges. Below we set forth the significant current and prospective problems in activist investing and corporate governance.

Director independence

There are easy and hard independence questions. The easy ones are, should the CEO serve on the BoD? Or, should directors endorse themselves for re-election through their own nominating committee? No and no, of course.

But, not all questions are this easy:

1. ❖Should current CEOs serve on a BoD? Does their built-in sympathy for another CEO matter more than their knowledge about how corporations really work?
   

2. ❖How should a corporation compensate directors, say for the considerable time that they spend on company matters, and minimize bias in making company decisions?
   

3. ❖Does appearance of independence matter, or just actual independence?
   

Director elections

Many observers refer to the need for “shareholder democracy”, and liken BoD elections to civic ones. There are other examples and model of how elections should work - even extending to how to pick Oscar winners, or players on the baseball All-Star team.

So, what’s the best system for selecting individuals to represent investor interests? How should BoD elections really look? And, to what extent should these elections allow smaller investors a significant voice?

Corporate Transparency

Much government regulation of corporate governance seeks to assure a certain level of disclosure of internal business information. Investors need this information, so they can decide whether and how much to invest, and when to buy more or sell altogether.

What is the right type and amount of information, though? Too much and investors can’t sort out the important stuff, and executives waste time that they could otherwise spend on managing the business. Too little, and investors can’t decide what to do with their shares.

Private ordering

This refers to the idea that investors should decide the structure and process of governance at a given company, and not some other authority, such as a government agency like the SEC. It starts as an easy question, but becomes hard.

A number of governance observers, many associated with corporate executive interests, advocate for strict private ordering. In principle they’re probably right, and investors should decide these governance questions themselves. The easy answer is, of course investors should prefer private ordering.

In practice, though, one must ask: in the current governance environment, how well can shareholders determine that governance structure and process? In other words, to what extent will executives refrain from influencing shareholder private ordering decisions? Under current governance structures and principles, most shareholders have relatively little practical influence that will allow them to “order privately” the governance at a portfolio company. So perhaps the hard question becomes, “how can investors best assure that they can order privately the governance at a portfolio company?”

Investor Confidentiality

A hallmark of the US capital markets system, shareholders generally need not disclose the extent or even existence of their holdings in a given company. Exceptions include:

1. ❖large holders (greater than 5%)
   

2. ❖insiders, such as executives and directors
   

3. ❖fund managers (with more than $100 million in total assets).
   

This of course makes communicating with investors at best complicated, and mostly expensive and erratic. It also requires investors to compile arcane paperwork to  demonstrate their ownership in some situations, such as when attending an annual meeting in person, voting on corporate matters, or submitting items for the annual meeting agenda.

So, to what extent should investors remain anonymous to the corporation?

Executive Compensation

Investors have debated many such questions endlessly, with little real resolution. In general, how should the corporation compensate executives? More specifically:

1. ❖How can investors use executive pay to align executive interest with investor interest?
   

2. ❖How should investors share the rewards from good performance, and allocate these rewards among executives?
   

3. ❖How much variability in company results should executives bear?
   

4. ❖To what extent should the company reward randomly favorably results, or punish randomly poor ones?
   

These last two questions pertain to one of the great unresolved issues, how executive compensation should consider risk in addition to rewards.

BoD and Executive Decision Authority

Perhaps the greatest unresolved question in governance is, where should the BoD authority end, and executive authority begin?

Some decisions clearly belong only to the BoD, such as which CEO to hire in the first place. Others almost certainly belong to the CEO, such as the color of the carpet in her office. Between these lie hundreds or thousands of decisions that get made every day, week, month, and year. Determining who can make which decision, and why, remains at the heart of corporate governance today.