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48 Bus. Law. 59 (1992-1993)
A Modest Proposal for Improved Corporate Governance

handle is hein.journals/busl48 and id is 95 raw text is: A Modest Proposal for Improved Corporate
By Martin Lipton and Jay W. Lorsch*
Corporate governance in the United States is not working the way it
should. The problem is not the system of laws, regulations, and judicial
decisions which are the framework of corporate governance. It is the
failure by too many boards of directors to make the system work the way
it should. The most obvious sign of this failure is in the gradual decline
of many once great American companies. If boards of directors cannot
find the solutions to these difficulties, the only realistic avenue for share-
holders to voice their disapproval is to sell their shares. Directors eventually
may act, as they recently did at General Motors1, but their actions often
are late, after the shareholders have lost value, employees jobs, and the
corporation its competitive market position.
During the 1980s, it was argued by many academics and financiers that
the disciplines of the capital markets, through the threats or actualities
of takeovers, would cause managers to take corrective action to improve
performance.2 We leave it to historians to decide whether this argument
*Mr. Lipton is a partner of Wachtell, Lipton, Rosen & Katz in New York City. Mr. Lorsch
is Senior Associate Dean, Chairman of Executive Education Programs, and Louis E. Kirstein
Professor of Human Relations at The Graduate School of Business Administration of Harvard
Messrs. Lipton and Lorsch are members of the Subcouncil on Corporate Governance and
Financial Markets of the Competitiveness Policy Council. An earlier version of this article
was considered by the Subcouncil at its August 5, 1992 meeting.
1. Joseph B. White & Paul Ingrassia, Board Ousts Managers At GM, Takes Control of Crucial
Committee, Wall St. J., Apr. 7, 1992, at Al.
2. See, e.g., Frank H. Easterbrook & Daniel R. Fischel, The Proper Role of a Target's Man-
agement in Responding to a Tender Offer, 94 Harv. L. Rev. 1161, 1169 (1981) (tender bidding
process polices managers whether or not a tender offer occurs); RonaldJ. Gilson, A Structural
Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan. L. Rev.
819 (1981).

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