The Myth That Insulating Boards Serves Long-Term Value

By:  Lucian A. Bebchuk

 

According to an influential view in corporate law writings and debates, pressure from shareholders leads companies to take myopic actions that are costly in the long term, and insulating boards from such pressure serves the long-term interests of companies as well as their shareholders. This board insulation claim has been regularly invoked in a wide range of contexts to support existing or tighter limits on shareholder rights and involvement. This Essay subjects this view to a comprehensive examination and finds it wanting.

 

In contrast to what insulation advocates commonly assume, the existence of short investment horizons and inefficient market prices does not necessarily mean that board insulation can be expected to serve long-term value. While board insulation may produce some beneficial long-term effects, this Essay shows that it can also be expected to produce significant long-term costs. Furthermore, the available empirical evidence provides no support for the claim that board insulation increases overall value in the long term. To the contrary, the evidence favors the view that board insulation at current or higher levels does not serve the long-term interests of companies and their shareholders. This Essay concludes that policymakers and institutional investors should reject the arguments made for board insulation in the name of long-term value.

 

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