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Corporate Watchdogs: Past, Present and Future?

This paper reviews past, present and proposed practices for protecting investors from self-dealing by a dominant shareholder and/or management. The origin of audit committees is reviewed and their efficacy analyzed when a dominant shareholder and/or management can control the composition of the board and the appointment of the auditor. Sliding scale voting and various approaches are considered for embedding into corporate constitutions the separation of powers introduced by a negative pledge lender, a shareholders agreement with a venture capitalist or the Associates of a LBO. These agreements typically perform some or all of the roles of supervisory board, watchdog board and/or a dominant shareholder. The proposal of the Auditing Practices Board in the UK for a "Shareholder Panel" and those of a US legal scholar for a "Conflicts Board" are considered. The paper concludes that a Watchdog board, separately elected on a democratic basis by shareholders, provides superior investor protection than a committee of directors to counter self-dealing by directors elected or appointed on a plutocratic basis.