Martin Feldstein Examines Corporate Governance

Recently, the eminent economist Martin Feldstein gave his views on corporate governance in an interview with the Minneapolis Federal Reserve Bank. He believes that the recent SEC and NYSE rules have strengthened the role of corporate boards in a good way. In his view, boards are working harder and treating themselves as more independent of management. Mr. Feldstein is a professor of economics at Harvard and chaired the Council of Economic Advisers during the Reagan presidency.

In his opinion, the most basic aspect of corporate governance is whether the outside directors meet alone on a regular basis. Not much happens during those meetings, he reasoned, but you have the meeting so you have a chance to say, without management present, “Well, how do you think management is doing? And what message should we give management that would make things better?”A board doesn't run a company, he explained, but it can provide useful feedback to management. He believes that aspect of board independence to be a useful. And when management is failing, he emphasized, a good independent board will force a change of management or even sell the company.

Personally, I think that it is good to have someone from outside the legal and regulatory community provide a perspective on issues such as corporate governance. It appears that Professor Feldstein believes that the most useful aspect of corporate governance is for the outside directors to provide independent advice to the company’s management after due deliberation outside of the presence of management or management directors. This benefit of sound governance has not, in my opinion, been paramount in the legal literature. His advice also raises the further issue of what constitutes a meeting on a regular basis, ie, once a month, once a week.