Corporate Governance and the Market for Corporate Control

Corporate governance focuses on balancing the interests of shareholders and other stakeholders. Stakeholders are those who have a claim to a corporation’s resources and include investors, employees, vendors, communities, and society-at-large.

Boards are under unrelenting pressure to meet quarterly earnings targets and are a target for plaintiffs’ attorneys after any hiccup in stock price or profit. Successful governance reflects fair business practices and robust risk management systems.

Mergers and Acquisitions

In theory, the market for corporate control can serve as a powerful force to correct managerial inefficiencies and poor governance practices. In practice, however, it can also abet or encourage these practices. This Chapter marshals aggregate evidence on the number and value of acquisitions that took place during the 1980s and 1990s to assess whether this important external mechanism has actually played either of these roles.

When corporate boards fail to implement the principles of good corporate governance, shareholders lose confidence in their companies and suffer from lapses in financial reporting, accounting and accountability. These lapses can severely damage a company’s reputation, which may lead to losing customers, investors, financiers and employees.

Mergers and acquisitions in particular can be a major source of corporate governance problems. In our litigious system of corporate law, it is virtually impossible for any public-company board to announce a major merger without being sued by plaintiffs’ attorneys seeking to make capital gains from the deal.


Fairness is one of the most important aspects of corporate governance. Companies must treat all stakeholders fairly, including shareholders, employees, suppliers and customers. They should also promote fairness to communities.

Fairness involves a balance between competing visions of the company’s future. This can create a lot of friction, and the best boards will strive to find a middle ground.

Unfortunately, many boards fail to grasp this concept. This is partly due to the shrill voices of shareholder activists and managers, the seemingly unbridgeable divide between these groups, and rampant conflicts of interest that crowd out thoughtful discussion. The solution is to develop a formal process for evaluating director performance. Ideally, this evaluation would be conducted by an outside party. This would give the chairman or lead director objective evidence to have difficult conversations with underperforming directors. Ultimately, this would promote fairness and increase the likelihood that shareholders will support the company. Moreover, this will also help to improve transparency.


Teams that are more transparent perform better, and transparency is one of the key tenets of good corporate governance. Leadership should foster a culture of openness and encourage team members to communicate more candidly and share ideas freely.

Boards of directors should be comprised of both insiders and independent members. Outsiders are able to bring a fresh perspective and dilute the concentration of power among insiders. They also help ensure that the interests of shareholders are aligned with the strategic goals of the company.

In our litigation-prone system, any major deal is subject to litigation by plaintiffs’ attorneys, eager for every hiccup in stock price or earnings. This tax on pursuing value-creating deals discourages many boards from even attempting to make a change. A board portal software solution like OnBoard can help a business create a more efficient framework to foster transparency and fairness. It also helps a board document all activities and meetings for accountability.


Corporate governance is a broad field of study, covering everything from shareholder activism to director evaluations. But in a world of rapidly shifting pressure points, boardrooms need an approach that can adapt quickly.

A good corporate governance system can help to protect a company from bad practices such as unethical business dealings or illegal activities like the Volkswagen Dieselgate scandal of 2015. These lapses can tarnish a firm’s reputation and erode investor confidence.

To do this, boards need to ensure that the company is running as smoothly as possible. This can be done by ensuring robust risk management systems, diversity, independent auditors, satisfied stakeholders, progressive compensation models and transparency. It also means giving auditors freedom to dig into a company’s financial affairs and prepare fair audit reports. This can build a strong culture of accountability, encouraging directors to be careful with their actions and reducing risk. It can also help a firm to attract investors and consumers.