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The Future of Shareholder Democracy
Abstract
In 2007, the Securities and Exchange Commission (SEC) considered, and ultimately rejected, a rule that would have required corporations to include shareholder-nominated candidates on the ballot. This Article seeks to ascertain the impact of this rejection. On the one hand, the SEC's rejection appears to be a stunning blow to the shareholders' rights campaign. This is because many shareholders' rights advocates have long considered access to the corporate ballot as the "holy grail" of their campaign for increased shareholder power. Such advocates believe that access to the corporate ballot is critical to ensuring that shareholders can participate legitimately in the corporate electoral process and thereby influence corporate affairs. On the other hand, some corporate experts contend that the SEC' rejection should not be viewed as a major setback. Such experts maintain that characterizingp roxy access as the sine qua non of shareholder influence fails to appreciate the significance of recent developments, such as the success of majority voting and the adoption of the e-proxy rules. Because these developments provide shareholders with alternative methods for influencing corporate affairs, some have even argued that they may make the issue of proxy access moot. This Article reveals the fallacies of such an argument, and hence the importance of the continued pursuit of proxy access. Indeed, after carefully considering the impact of such developments, and critically examining the probable impact of proxy access on shareholders 'efforts to enhance their influence on corporate governance, this Article concludes that although other devices may prove useful, it is not likely that they will be as effective as proxy access in empowering shareholders.I n this respect,future shareholder democracy campaigns must continue to focus on the historical battle for proxy access.
... Agency theory posits that shareholders are at a disadvantage due to the board's superior access to company information, which can lead to hesitant voting behavior, including abstention (Brennan & Solomon, 2008;Bushman & Smith, 2001;Feddersen & Pesendorfer, 1996Healy & Palepu, 2001;Jensen & Meckling, 1976). Similarly, rational apathy theory suggests that if the costs of acquiring information and voting outweigh the perceived benefits, shareholders may opt not to vote (Fairfax, 2009). These theories provide a foundation for hypothesizing that higher information asymmetry increases the likelihood of SOP abstention. ...
... Abstention becomes a viable option when the cost of obtaining information about specific corporate issues and casting votes to oppose management's opinions outweighs the expected or actual benefit. This principle aligns with the concept of free ridership, where shareholders may abstain if they believe the cost of obtaining information is prohibitive and the probability of their votes influencing corporate policy is low (Fairfax, 2009). The free rider problem, rooted in the realization that shareholders can benefit by relying on the actions of others, further diminishes the incentive for individual shareholders to act on their own (Fairfax, 2009;Spatt, 2007). ...
... This principle aligns with the concept of free ridership, where shareholders may abstain if they believe the cost of obtaining information is prohibitive and the probability of their votes influencing corporate policy is low (Fairfax, 2009). The free rider problem, rooted in the realization that shareholders can benefit by relying on the actions of others, further diminishes the incentive for individual shareholders to act on their own (Fairfax, 2009;Spatt, 2007). ...
Analyzing say-on-pay (SOP) data from 2011 to 2015 and using an initial sample of 4,393 firms and 12,644 firm-year observations, we investigate the impact of information asymmetry on SOP abstention. Drawing on agency theory and rational apathy principles, we estimate regression models and find a positive association between information asymmetry and SOP abstention. We contribute to the literature by adding additional mediation analyses. Our mediation analyses reveal that institutional ownership mediates this relationship, suggesting that higher information asymmetry leads to reduced institutional ownership, subsequently contributing to SOP abstention. However, analyst following does not exhibit a significant mediating effect. These findings illuminate the interplay between information asymmetry, shareholder behavior, and the mediating role of institutional ownership in the context of executive compensation governance. Our research highlights the significance of addressing information disparities for improved shareholder engagement and decision-making in corporate governance. Additionally, this study’s findings are relevant to academics, policymakers, and corporate stakeholders seeking to bolster corporate governance practices and strengthen shareholder participation in executive compensation matters.
... Several justifications are given for shareholder democracy. First, shareholders' efforts to increase their participation power are motivated by their desire to make corporate managersofficers and directorsmore accountable (Fairfax 2008;Fairfax 2009;Smythe 2006). "Ultimately, many shareholders and their proponents believe that expanding shareholder democracy will lead to greater managerial accountability, thereby curbing managers' abuses of authority and ensuring that managers pay heed to shareholders' concerns" (Fairfax 2008). ...
... Shareholder democracy is promoted through various strategies designed to give shareholders more power and control. Shareholder democracy first has focused on shareholders' voting power (Fairfax 2008;Fairfax 2009;Feis 1976). Enhancing shareholders' voting power increases the authority of this corporate body vis-à-vis the corporation (Fairfax 2009). ...
... Shareholder democracy first has focused on shareholders' voting power (Fairfax 2008;Fairfax 2009;Feis 1976). Enhancing shareholders' voting power increases the authority of this corporate body vis-à-vis the corporation (Fairfax 2009). Shareholder democracy seeks to enhance shareholder's voting power by reducing corporate management's control of the proxy machinerythe management's power to recommend candidates for nomination to the board and its relationships with significant shareholders who will delegate their voting rights or support the management's recommendations (Fairfax 2008;Fairfax 2009;Garrett 1956;Matheson and Nicolet 2019). ...
... Several justifications are given for shareholder democracy. First, shareholders' efforts to increase their participation power are motivated by their desire to make corporate managersofficers and directorsmore accountable (Fairfax 2008;Fairfax 2009;Smythe 2006). "Ultimately, many shareholders and their proponents believe that expanding shareholder democracy will lead to greater managerial accountability, thereby curbing managers' abuses of authority and ensuring that managers pay heed to shareholders' concerns" (Fairfax 2008). ...
... Shareholder democracy is promoted through various strategies designed to give shareholders more power and control. Shareholder democracy first has focused on shareholders' voting power (Fairfax 2008;Fairfax 2009;Feis 1976). Enhancing shareholders' voting power increases the authority of this corporate body vis-à-vis the corporation (Fairfax 2009). ...
... Shareholder democracy first has focused on shareholders' voting power (Fairfax 2008;Fairfax 2009;Feis 1976). Enhancing shareholders' voting power increases the authority of this corporate body vis-à-vis the corporation (Fairfax 2009). Shareholder democracy seeks to enhance shareholder's voting power by reducing corporate management's control of the proxy machinerythe management's power to recommend candidates for nomination to the board and its relationships with significant shareholders who will delegate their voting rights or support the management's recommendations (Fairfax 2008;Fairfax 2009;Garrett 1956;Matheson and Nicolet 2019). ...
... Povrh navedenoga, važno je naglasiti da se svaki glas koji je dan u postupku odlučivanja može promatrati kao zasebni pravni posao na koji se stoga primjenjuju ista pravna pravila kao i na samu odluku. 15 Jedno od temeljnih načela ugovornog prava jest to da strane svoju volju mogu očitovati u bilo kojem obliku. 16 Navedeno u bitnome vrijedi i za društva kapitala. ...
Elektronička komunikacija uslijed pandemije COVID-a 19 postala je prevladavajući oblik komunikacije što je, očekivano, utjecalo i na modalitete odlučivanja u društvima kapitala. U radu se analiziraju prednosti i nedostaci te pretpostavke dopuštenosti donošenja odluka u društvu primjenom sredstava elektroničke komunikacije. Rješenja hrvatskog statusnog prava analiziraju se uz primjenu poredbenopravne metode, pri čemu se u obzir uzimaju rješenja država kontinentalno-europskog (Njemačka, Austrija i Švicarska) i common law pravnog kruga (Ujedinjeno Kraljevstvo i američka savezna država Delaware). Analiza osobito uzima u obzir razlike koje postoje s obzirom na različite pravne izvore (propisi i autonomno statusno pravo), različite oblike društava kapitala (dioničko društvo i društvo s ograničenom odgovornošću) i različite organe tih društava (uprava, nadzorni odbor i glavna skupština).
... This may also explain why index funds typically do not file their own shareholder proposals and instead only vote on those items submitted by others. 23 While there is frequent use of the term "shareholder democracy" (Fairfax, 2009;Parkinson, 2012;Gantchev and Giannetti, 2018), shareholder votes in most instances are in fact non-binding. Levit and Malenko find that "nonbinding voting generally fails to convey shareholder views when manager and shareholder interests are not aligned" (2011: 1). ...
This paper sets out how passive funds can make a full contribution to mitigating climate change. As a growing number of institutional asset owners are divesting from coal assets, index funds are becoming the holders of last resort. The common wisdom has it that index funds cannot sell out of individual stock holdings. They have a "voice" but no ability to "exit." This paper investigates the relationship between index providers and index funds and finds the traditional understanding that index investors cannot sell to be false. Instead an increasing prevalence of index investors switching both indices and index providers is noted. Such changes provide investors with the opportunity to exclude specific stocks. Indeed, a discussion of where shareholder responsibility sits in the modern-day investment chain highlights the pivotal role of asset managers. This paper therefore suggests a number of solutions for index funds to reduce the carbon intensity of their funds, such as switching the indices their funds employ, discontinuing niche ETFs that are carbon intensive, reducing fees on low-carbon investments, or making use of their financial clout as index providers' biggest customers to advocate for selective index amendments. Adding the threat of exit will increase the power of voice. Doing so will ensure, that rather than functioning as insulators from sustainability pressures, they act as conductors.
... Tout d'abord, la participation des actionnaires, que le say on pay intensifie relativement au sujet de la fixation de la rémunération, existait déjà dans nombre de pays (Tchotourian, 2007), mais semble avoir changé d'intensité. De plus, le say on pay est l'objet de toutes les attentions de la part des organisations internationales (OECD, 2010) et européennes (Commission européenne, 2012 ; Commission européenne, 2011), des régulateurs nationaux (législateurs ou autorités boursières), du milieu des affaires (positions des organisations patronales, d'organismes privés ou de think tanks), ou encore du monde académique (Cuzacq, 2012 ;Fairfax, 2009 ;Mitchell, 2006). Par ailleurs, peu de spécialistes ont présenté à ce jour les dispositifs normatifs mis en place en Amérique du Nord, en Europe et en Australie (Randall, Van der Elst, 2013 ;Dolman, 2010). ...
... Tout d'abord, la participation des actionnaires, que le say on pay intensifie relativement au sujet de la fixation de la rémunération, existait déjà dans nombre de pays (Tchotourian, 2007), mais semble avoir changé d'intensité. De plus, le say on pay est l'objet de toutes les attentions de la part des organisations internationales (OECD, 2010) et européennes (Commission européenne, 2012 ; Commission européenne, 2011), des régulateurs nationaux (législateurs ou autorités boursières), du milieu des affaires (positions des organisations patronales, d'organismes privés ou de think tanks), ou encore du monde académique (Cuzacq, 2012 ;Fairfax, 2009 ;Mitchell, 2006). Par ailleurs, peu de spécialistes ont présenté à ce jour les dispositifs normatifs mis en place en Amérique du Nord, en Europe et en Australie (Randall, Van der Elst, 2013 ;Dolman, 2010). ...
Julien Le Maux, Ivan Tchotourian, « Approche critique du say on pay. Premières leçons d'une analyse substantielle sur les orientations contemporaines du droit des sociétés », Revue internationale de droit économique 2013/4 (t. XXVII), p. 557-568. La reproduction ou représentation de cet article, notamment par photocopie, n'est autorisée que dans les limites des conditions générales d'utilisation du site ou, le cas échéant, des conditions générales de la licence souscrite par votre établissement. Toute autre reproduction ou représentation, en tout ou partie, sous quelque forme et de quelque manière que ce soit, est interdite sauf accord préalable et écrit de l'éditeur, en dehors des cas prévus par la législation en vigueur en France. Il est précisé que son stockage dans une base de données est également interdit.
Electronic voting allows shareholders to participate in shareholder meetings without being physically present. This study examines the effect of electronic voting on firms’ disclosure behavior before the meetings. Empirical analyses reveal that firms that adopt electronic voting are more likely than non-adopting firms to provide good-news earnings forecasts before shareholder meetings. Firms with poorer past performance are more likely to increase disclosure. The positive returns associated with disclosure in the pre-meeting period reverse after the meeting. Overall, the results suggest that electronic voting induces strategic disclosure by managers, significantly altering the corporate information environment.
Temel olarak kamuyu aydınlatma ve şeffaflık, hesap verilebilirlik, sorumluluk ve eşitlik esaslarına dayanan kurumsal yönetim ilkeleri, şirket yönetimi ve menfaat sahipleri arasında dürüstlük ve şeffaflık yaklaşımına dayalı bir yönetimi esas alır. Bu sayede, özellikle halka açık anonim şirketlerde çoğunluk karşısında azınlık pay sahiplerinin de şirket yönetim ve faaliyetlerinde etkili olması amaçlanmaktadır. Bu çalışmada, genel kurul toplantılara ilişkin ana ilkelerin ve bağlantılı kurumsal yönetim ilkelerinin incelenmesi amaçlanmıştır.
The rise in corporate scandals and the dawning of the great recession motivated frustrated shareholders to seek greater power in order to influence the actions of the firms in which they own equity. Shareholder democracy has become the umbrella term for these shareholder empowerment efforts.1 Shareholder democracy is a worldwide movement (Fairfax, 2008a) that, having achieved a foothold in the United States, is gaining ground in Canada (Veall, 2012) and Europe (Rose, 2012). Although recently reinvigorated, this shareholder democracy movement is not new. The concept dates back to shortly after World War II, when Lewis Gilbert popularized the concept in the United States. Emerson and Latcham (1954: 152) later argued that “vigorous shareholder participation” was in keeping with democratic values. Mintzberg (1983) contributed a similar argument, contending that a country can only consider itself to be free if its major institutions subscribe to democratic principles. Arguments in favor of shareholder democracy have ranged from protecting society from corporate power to protecting shareholders from managerial abuse to protecting the rights of shareholders to shape their own destinies (Tsuk Mitchell, 2006). These arguments have taken hold as the shareholder democracy movement has pushed successfully for shareholder empowerment at annual meetings, SEC policy changes, and legislative developments that all have led to greater direct shareholder influence over corporate practices (Cohen & Schleyer, 2012).2
Introduction, Corporate governance has been described as “the system by which companies are directed and controlled.” Because of the importance of publicly traded corporations in society, there are significant issues over the focus of corporate governance, how power should be allocated within the corporation, and the role of law and non-legal mechanisms in protecting investors and other stakeholders and allowing those who manage to function effectively. Traditional concerns have focused on mismanagement and self-dealing, but modern scandals have focused on financial statements, risk management, and executive compensation. This chapter will look at the importance of the publicly traded corporation in the US and the influence of the focus of corporate governance, the nature of shareholder ownership, and federalism on the policy and laws concerning corporate governance. This chapter will focus on both the internal and external corporate governance mechanisms and the significant effect of scandals in corporate governance. US publicly traded corporations, The US has approximately 16,000 publicly traded corporations. At the end of 2008, there were over 6,000 listed companies on the New York Stock Exchange (“NYSE”) and the NASDAQ with a total domestic market capitalization of over US $11 trillion. Corporations during 2001 accounted for 60 percent of US gross domestic product (“GDP”). These corporations are not only major employers and taxpayers with a significant impact on the US economy, but also are an important repository for the savings of US citizens.
The subprime mortgage crisis has been blamed on many: the Bush Administration, Bernie Madoff, the financial industry, overzealous housing developers. Yet little scrutiny has been placed on the American legal system as a whole, even though parts of that system, such as the laws that regulate high-risk lending, have been dissected to bits and pieces. In this innovative and exhaustive study, Steven A. Ramirez posits that the subprime mortgage crisis, as well as the global macroeconomic catastrophe it spawned, is traceable to a gross failure of law. The rule of law must appropriately channel and constrain the exercise of economic and political power. Used effectively, it ensures that economic opportunity isn't limited to a small group of elites that enjoy growth at the expense of many, particularly those in vulnerable economic situations. In Lawless Capitalism, Ramirez calls for the rule of law to displace crony capitalism. Only through the rule of law, he argues, can capitalism be reconstructed.
In the modern corporation, investors provide a company capital in exchange for an ownership interest and the right to elect directors to the company's board. The board of directors is charged with the corporation's management. The board delegates operational control of the corporation to managers it selects. Thus, the board's primary function is to serve the best interests of shareholders by selecting a CEO and supervising the CEO's performance.2 When shareholders become dissatisfied with management and the board, they may either sell their shares, exercise their right to vote to influence governance practices, or oust the board. This structure exists due to state corporation law and private ordering.
The shareholder empowerment debate in corporate law is premised upon a reoccurring assumption that, historically, there has been an erosion of shareholder rights. This article contends that this premise is inaccurate and that shareholder rights have remained fundamentally constant. It goes on to argue that a more promising approach to theexisting understanding of rights in the shareholder empowerment debate may be found in the broader legal rights literature. In analysing shareholder rights through this lens it is contended that, while there has not been an appreciable abrogation of shareholder rights, it is in the nature of legal rights per se to contain power whilst simultaneously reinforcing the institutions and structures from where those rights emanate.
The greatest protection investors have from the risks associated with capital investment is diversification. This Essay introduces a new dimension of diversification for investors: legal diversification. Legal diversification of investment means building a portfolio of securities that are governed by a variety of legal rules. Legal diversification protects investors from the risk that a particular method of minimizing agency costs will prove ineffective and allows investors to own securities in a variety of firms, with each security governed by the most efficient set of legal rules given the circumstances of the investment. Diversification of investment by legal rules is possible because of the varied menu of legal rules firms can choose from when organizing and raising capital. This Essay makes several contributions to the literature. By introducing legal diversification, it reveals a new understanding of how investors, issuers, and society can benefit from maintaining a variety of legal rules to govern investment in businesses. The corporate law scholarship has long advocated preserving a variety of rules under which firms can organize, but it has yet to consider how investors can take advantage of that variety to protect themselves before market competition has revealed the "best" rules. Legal diversification also complements recent literature emphasizing the importance of diversity in financial regulation by highlighting another reason diversity of legal rules is important to healthy capital markets. Legal diversification fills gaps in the literature that advocates regulatory diversity by offering an explanation for why that diversity is a valuable protection for investors and an indispensable mechanism for allowing firms to choose the most efficient legal rules to govern their organization and operation.
The application of agency law to business associations presents a variety of problems. This essay considers an alternative conception of the business association that does not incorporate agency law principles. Borrowing from early ideas of partnership, this alternative conceives of the organization as a pool of assets. The asset pool is the bearer of liabilities; the shareholders and managers have powers and rights relating to the asset pool and to each other. This essay then considers how the law would differ under an asset-pool approach and identifies the potential benefits and disadvantages of the asset-pool conception of business entities.
The recent financial crisis has triggered a renewed emphasis on corporate directors’ duty to exercise oversight. In contrast to the area of discrete decision-making, where academics only rarely dispute the board’s almost complete insulation from liability, there is considerable resistance to the idea that oversight should be subject to equally strict limits to hold directors responsible. Yet, Delaware courts have made it clear that they continue to severely limit, and not expand, directors’ oversight liability, leading Delaware in the opposite direction than that which many of its critics would advocate. However, both policy and theoretical considerations support Delaware’s decision to maintain strict limits on oversight liability. Such restraints protect directors’ ability to exercise independent business judgment, encourage risk-taking and board service by qualified individuals, and prevent directors from assuming the role as insurers of business risks. In addition, limits on oversight liability reduce monitoring costs and promote efficient functioning of boards. Thus, as this Article argues, Delaware’s current solution works and strikes the correct balance between directors’ accountability and authority.
There is a fundamental flaw in the law’s approach to corporate governance. While shareholder primacy is a well-established norm within U.S. corporate law, the business judgment rule essentially holds directors blameless when they fail to maximize shareholder wealth. During the past century, control of the corporation has passed from shareholders to managers. As a result, shareholders have little practical say in who runs the corporation, even though they cannot usually hold managers legally liable when those managers destroy shareholder wealth through incompetence. Despite a number of arguments asserting that shareholders do not deserve any additional management powers, this article concludes that this flaw in corporate governance compels greater shareholder democracy, primarily through access to the corporate proxy to nominate directors.
A dramatic sequence of events starting in the summer of 2007 caused the United States’ banking and financial systems to collapse and thrust the country into the worst financial crisis since the Great Depression. It was not just one thing, but a confluence of factors that led to the collapse and the resultant crisis. Of particular note, though, commentators have pointed to risky lending coupled with inadequate personal savings, collateralized debt obligations backed by subprime mortgages, and flawed economic and monetary policy as the driving forces of the crisis. But the causes of the crisis were not solely the underlying fundamentals of the market, but also its participants. To be sure, chief executive officers and other corporate and institutional managers, whose recklessness and excessive risk taking allowed the crisis to burgeon, have taken the brunt of the criticism. Commentators, however, have also attacked boards of directors - tasked with overseeing some of the United States’ largest corporations - for failing to monitor closely the immoderation of corporate officers, and thereby letting down the shareholders of U.S. corporations. In response, the Securities and Exchange Commission (SEC) adopted Rule 14a-11 on August 25, 2010, which, in a limited manner, opens up a corporation’s proxy statement to its shareholders to nominate their own directors for the board. Rule 14a-11, as adopted by the SEC, is a sensible and appropriate response to the status quo in U.S. corporate law. In promulgating Rule 14a-11, the SEC soundly explained its rationale for proposing the Rule and, in effect, satisfied the arbitrary and capricious standard under the Administrative Procedure Act. Nevertheless, to partially negate some scholars’ concerns over the Rule’s mandatory proxy access, the SEC should amend and adopt parameters within which shareholders could tailor proxy access to a level that is appropriate for their respective corporations.
In this Article, we propose legal reforms to empower shareholders in public corporations. Currently, most shareholders participate in corporate governance in three ways: they vote, they sell, and they sue. We would expand the menu for shareholders in public corporations by enabling them to contract using shareholder bylaws. We contend that such private ordering will improve shareholder monitoring of managers and create laboratories of corporate governance that benefit the entire corporate governance system.
This Essay, written as part of the 2010 Hon. David G. Trager Public Policy Symposium, recasts the corporate criminal liability problem as a tension between corporate and criminal law. On one hand, we would like to use criminal law to exact retribution from corporate entities, express our moral condemnation for the acts that have taken place within and through those entities, and to impose structural reforms that prevent future wrongdoing. Where publicly held corporations are concerned, however, it is difficult to do to impose entity-level criminal liability without also invoking responses from shareholders and innocent employees, who argue quite forcefully that they are not the proper repositories of blame. In response to this critique, some proponents have suggested that shareholders ought to play a greater role in managing the corporation and that criminal liability is valuable insofar as it spurs shareholders to exercise greater oversight over corporate managers. But this question – the role that shareholders ought to play in the management of the publicly held corporation – is not ordinarily the province of criminal law. Rather, it is the preoccupation of corporate law, whose doctrines purposely leave shareholders with relatively little power to run the corporation’s daily affairs. It may be that there is reason to alter this balance of power, but if so, the issue is more appropriately left to the architects of corporate, and not criminal, law.
The shareholder empowerment provisions enacted as part of the recent bailout legislation are internally incoherent because they fail to address the short-termist realities of shareholder ownership today. Ownership has separated from ownership in modern corporate America: individual investors now largely hold stock through mutual funds, pension funds, and hedge funds. The incentives of these short-term financial intermediaries only imperfectly reflect the interests of their long-term holders - an imbalance only exacerbated by the bailout’s corporate governance legislation. The bailout’s focus on shareholder empowerment tactics - such as proxy access, say-on-pay, and increased disclosure - makes little sense if shareholders are only in it for the short term. This Article uses the bailout provisions to illustrate the point that shareholder empowerment inadequately addresses systemic problems. The Article explores the recent regulation of target-date retirement funds as a further example of regulators’ persistent neglect of the separation of ownership from ownership. The Article concludes with some reflections on the difficult question of how to encourage long-lived firms when individual players, including even long-horizoned investors, may be looking for a quick payoff.
Recent developments in Delaware concerning shareholder bylaws and the SEC proposal concerning shareholder proxy access have moved the U.S. closer to a set of optimal rules for shareholder proxy access in nominating director candidates, but not all the way there. These rules must address both the default rule which applies in the absence of agreement within a corporation to the contrary, and the altering rule which specifies who within a corporation may choose to opt out of the default provisions. Applying principles of accountability and freedom of contract, the optimal default rule would allow for certain shareholders to use the corporate proxy to nominate director candidates. The optimal altering rule would make it easy for shareholders to propose bylaws under the Rule 14a-8 process which opt out of the default provisions. Although it would be desirable were states to set these rules on their own, a degree of managerialism at the state level combines with the history of extensive SEC regulation of the proxy process to give the SEC an important role in helping set the rules. As matters currently stand, Delaware is appropriately flexible but has the wrong default rule, while the SEC’s proposal has the right default rule but too little flexibility.
Economic theory that suggests that under-performing boards of directors should be fearful of an ouster vote by shareholders under-appreciates the complexity of shareholder voting decisions. Skill at enhancing firm value has less to do with whether directors win votes and stay at the helm of public companies than previous commentators have acknowledged. Instead, like an incumbent politician, managers of some of the largest US firms tend to stay in charge of the firm because they understand - and take advantage of - the political dynamics of corporate voting. Thus, this Article presents a competing theory of shareholder voting decisions that suggests that the process of arriving at a voting decision for shareholders in corporate elections is not dissimilar from how citizens vote in political elections. Next, the Article presents the evidence. Using a hand-collected dataset from recent elections for board seats, the Article compares the explanatory power of a standard economic variable (long-term stock price returns) and a political variable (money spent on campaigning) on election outcomes. Based on the data, directors’ ability to enhance firm value (as measured by stock price returns) is not significantly related to whether they win re-election. Rather, the likelihood of being returned to office appears to be a function of typical election politics - how much was spent by challengers to put on a campaign. These findings have at least two considerable implications. First, the theory that shareholder voting may be politicized helps point the way to how the SEC ought to craft reforms - and, just as important, how not to craft them. Recent SEC reforms have the laudable goals of creating conduits for shareholders to participate in firm affairs, get shareholder-nominated candidates elected to the board, and discipline incumbent managers. However, the results of this study suggest that these reforms will not achieve the stated goals. Second, the evidence and theory about shareholder voting presented here has significant implications for understanding mergers and acquisitions, particularly hostile acquisitions.
In the vivid imagination of Delaware courts, the shareholder franchise is “the ideological underpinning” upon which corporate power rests. A corporate election to choose who should lead the firm is “corporate democracy” at work, since such elections give shareholders the power “to turn the board out.” However, in reality, the vast majority of corporate elections are ho-hum affairs. The current board members are re-elected without contest. Annual corporate meetings to hold the elections are dull - held in front of tame audiences in quiet auditoriums. Election outcomes are predictable. Rarely is there a contested corporate election, in which the incumbent directors face a challenge for their board seats. Even these affairs, while more interesting, are still as predictable. The incumbents always have the upper hand. The corporate election system is, as a consequence, broken, anti-competitive and in need of significant reform. Yet, as will be shown in this Article, previous proposals have overlooked the “genius” of the public sector. In particular, in political elections campaign reformers have already offered a good answer for how to create competitive elections, even though the costs of campaigning to contestants is high, voters are apathetic and dispersed widely, and incumbents have a natural, built-in advantage: Make campaign subsidies available to challengers. Most notably, for instance, in federal elections the system of public subsidies for eligible presidential campaigns, the Presidential Campaign Fund, provides a remarkably sturdy roadmap for how to reform corporate elections and create a subsidy system for shareholder challenges to the board of directors.
Corporate governance law in the United States played a central role in the subprime debacle. Specifically, CEOs exercised sufficient autonomy to garner huge compensation payments based upon illusory income. Instead of profits, firms absorbed huge risks. The economic losses arising from this misconduct total trillions of dollars. This article seeks to reconfigure CEO autonomy in the public firm based upon the best extant empirical evidence regarding the optimal contours of CEO autonomy. This vision of optimal autonomy is then viewed through the lens of the subprime catastrophe. The article articulates the political dynamics that have led to suboptimal contours for CEO autonomy. In light of this evidence, the article proposes three specific mechanisms for curtailing autonomy pursuant to federal law: a mandatory and independent risk management committee; a mandatory and independent Qualified Legal Compliance Committee, with enhanced attributes; and, a new mechanism for contested corporate board elections. These mechanisms seek to vindicate CEO autonomy over the public firm's operations while expanding the monitoring functions of the board.
The field of corporate governance has long considered the costs of the separation of ownership from control in publicly traded corporations and the regulatory and market structures designed to limit those costs. The debate over the efficiency of regulations designed to limit agency costs has recently focused on the SEC’s new rule requiring companies to include shareholder nominees on the company-financed proxy statement to facilitate insurgent challengers to incumbent board members in board elections. A recent vein of empirical literature has examined the stock price effects of events surrounding the new proxy access rule. We present a study that focuses on small companies that expected an exemption from the rule under the Dodd-Frank legislation that preceded the adoption of the SEC rule. We consider the effect of the August 25, 2010 announcement of the proxy access rule, comparing its effect on the value of medium and large firms, which expected to be subject to the full rule, against its effect on the value of small firms, which were unexpectedly given only a temporary exemption from part of the rule (Rule 14a-11) and no exemption from another part of the rule (Rule 14a-8). Supporters of proxy access have long argued that it will enhance shareholder value. Critics of proxy access have argued that it will empower investors with conflicted agendas that will destroy shareholder wealth. The unexpected application of the rule to small-cap companies on August 25 provides a natural experiment for this question and allows us to examine the differential effect of the rule on firms above and below the arbitrary SEC cutoff of 347 million.
In the sixty years since the Committee on Corporate Laws (Committee) promulgated the Model Business Corporation Act (MBCA), there have been significant changes in corporate law and corporate governance. One such change has been an increase in shareholder activism aimed at enhancing shareholders’ voting power and influence over corporate affairs. Such increased shareholder activism (along with its potential for increase in shareholder power) has sparked considerable debate. Advocates of increasing shareholder power insist that augmenting shareholders’ voting rights and influence over corporate affairs is vital not only for ensuring board and managerial accountability, but also for curbing fraud and other forms of misbehavior. Corporate-governance scandals involving entities such as Enron and American International Group (AIG), as well as the recent financial meltdown, have spurred efforts to enhance shareholder power because they highlight the need for greater accountability and improved safeguards against corporate malfeasance. Opponents contend that increasing shareholder power inappropriately shifts the balance of power away from boards. In their view, such a shift undermines directors’ ability to act independently or otherwise consider the interests of all shareholders and corporate constituents, while increasing the pressure on boards to focus on short-term financial results. Opponents also insist that such a shift inappropriately enhances the power of shareholders with special or narrow agendas who may advance their personal interests at the expense of the broader shareholder class. In many respects, the debate regarding the propriety of shareholder activism and increased shareholder power has been as intense as shareholder activism itself. Importantly, however, shareholder activism has culminated in considerable corporate-governance changes that challenge the board-centric model of corporate governance embedded in the MBCA. These changes likely reflect a permanent shift in the dynamics between boards and shareholders. Although the impact of that shift is not clear, it is clear that the MBCA must take account of that shift, and provide guidance for corporations seeking to determine how best to allocate power between shareholders and directors. Hopefully, the next sixty years will reflect such guidance.
American shareholders lack the ability to consent to political spending by corporations. Indeed, because of gaps between corporate and campaign finance law, U.S. corporations can make political expenditures without giving shareholders any notice of the spending either before or after the fact. This is problematic because the political interests of the managers who spend the corporate money may diverge from the political interests of shareholders who provided the funding. By contrast, British companies must seek permission from shareholders to make political expenditures under the Political Parties, Elections and Referendums Act of 2000 and must report such spending to U.K. shareholders on an annual basis. Shareholders in U.S. companies have been protected by a century’s worth of election laws which limited the amount of money that could be spent in federal elections by corporations, unions and banks. Corporations are required to pay for federal political expenditures through corporate political action committees (PAC's). This PAC requirement was struck in Citizens United, a Supreme Court decision dated January 21, 2010. The federal corporate PAC requirement safeguarded the interests of shareholders in particular because most investors are unaware of how, when or why corporations make political expenditures. For example, in states that lack federal-style election rules, corporations may give political donations directly from their corporate treasuries (money in the corporate treasury includes funds from the sale of stocks and products). Corporations can spend money on politics without consent from or notice to shareholders. The shareholder may not know who the corporation supports or may even actively disagree with who the corporation supports. By contrast, if a shareholder chooses to give to a corporate PAC, then the shareholder is fully on notice that the money will be used for a political purpose and there is meaningful consent in the transaction. The laws that require corporations to pay for political expenditures through corporate PAC's are under legal attack in the courts. Most recently, the Supreme Court overruled Austin v. Michigan Chamber of Commerce and part of McConnell v. Federal Election Commission-two cases which required corporations to conduct political spending through corporate PAC's. The Supreme Court used Citizens United as an opportunity to expand corporate speech rights. This new development in the law has hurt shareholders by allowing corporate managers to use corporate treasury funds to make political expenditures. A recent study, “Corporate Political Contributions: Investment or Agency?” by Aggarwal, Meschke, and Wang (2009) found that large corporate political expenditures are linked with lower shareholder value and poor corporate management. In other words, managers make political donations because they want to, not because giving will necessarily benefit the corporations they manage. Overruling Austin and part of McConnell will give poor managers even more venues in which to spend shareholders’ investments on political expenses. By exploring both campaign finance law and corporate law, this paper, “Political Spending & Shareholders’ Rights,” will argue that the U.S. should adopt the British approach to corporate political expenditures. In the first instance, U.S. corporations should disclose their political spending directly to shareholders and they should give shareholders the opportunity to consent to political spending. These reforms will improve corporate governance and minimize corporate risk. The need for this reform has become heightened with the Supreme Court’s Citizens United decision. In a world where corporations can spend an unlimited amount corporate treasury funds on federal and state elections, shareholders will need new protections to guard against self-interested political spending by corporate managers.
As we reel from the effects of a recent financial disaster, it is apparent that there is a significant gap in corporate governance and accountability for management. One reason why we have experienced this financial cataclysm is the inability of shareholders to do the "shareholder job." Shareholders, as the putative owners of corporations, hold a venerated place in corporate governance. They are responsible for electing directors and monitoring management as well as valuing companies through trades in a vigorous market. The shareholder collective action problem and resulting rational apathy have kept shareholders from effectively fulfilling their role in corporate governance. Individual shareholders have interests that differ and, sometimes, financial interests at odds with those of the corporation. Even if the collective action problem could be overcome and some shareholders decided to take a more active role in corporate affairs, their decisions might not align with those of the rest of the shareholder class. Shareholder powers have always been weak, but, because of the enduring collective action problem, they are now virtually meaningless. This article suggests a solution to the shareholder collective problem. It proposes the use of an "equity trustee," or shareholder representative, to serve as a sophisticated party to perform the shareholder job. An equity trustee would represent the equity interest as a whole, overcoming the diverging interests of individual shareholders, to do the shareholder job of monitoring management and remaining informed about corporate affairs in a manner designed to further the goal of long-term corporate wealth maximization. The use of an equity trustee may also provide a solution to some of the market failures that led to the recent financial crisis such as an unhealthy focus on short-term increases in stock price and the seeming entrenchment of corporate officers and directors. Effective performance of the shareholder job may significantly improve corporate governance and accountability.
In this paper, we argue that chief executive officers of publicly-held corporations in the United States are losing power to their boards of directors and to their shareholders. This loss of power is recent (say, since 2000) and gradual, but nevertheless represents a significant move away from the imperial CEO who was surrounded by a hand-picked board and lethargic shareholders. After discussing the concept of power and its dimensions, we document the causes and symptoms of the decline in CEO power in several areas: share ownership composition and shareholder activism; governance rules and the board response to shareholder activism; regulatory changes related to shareholder voting; changes in the board of directors; and executive compensation. We argue that this decline in CEO power represent a long-term trend, rather than a temporary response to economic and political conditions. The decline in CEO power has several important implications, including implications with respect to the possibility of a regulatory backlash against certain newly empowered shareholder groups, the type of persons who will serve on corporate boards in the future, the type of shareholder initiatives that will be introduced and the corporate response to them, the convergence of corporate laws across countries, and the source of resistance to acquisitions and the legal regulation of target defenses.
Achieving competitive advantage through a broader consideration of stakeholders of the firm is examined. The inclusion of other significant organisational actors such as managers and employees as stakeholders capable of creating competitive strategic advantage for the firm is considered. Findings indicate that competitive advantage within an economic perspective may be garnered by establishing a broader conceptualisation of stakeholders of the firm. It is concluded employees may be characterised as hybrid stakeholders, as they are a mix of residual risk bearers and input suppliers of strategically highly relevant resources and that ways of articulating employee voice is a key element of gaining competitive advantage. The aim of this paper is to analyse internationally operating modern public corporations from an agency theory point of view with the focus on the role of a suite of stakeholders including shareholders, managers and employees. The economic reasoning demonstrates that the employees’ voice is an important component of business from a strategic perspective irrespective of the type of institutional environment present in any given country.
This paper investigates the increased shareholder activism by labor unions and their pension funds, who are now the most aggressive institutional shareholders. Sometimes unions propose traditional corporate-governance measures through procedures familiar to shareholders. Only the union sponsor is novel. But recently unions have pushed innovative methods to get corporations to listen to shareholder complaints. These methods include mandatory amendment of corporate by-laws by shareholders and floor proposals submitted for a shareholder vote at the annual meeting. Unions as shareholders have conflicting roles. We distinguish union-shareholder initiatives designed to further unions' traditional organizing and collective bargaining goals from those that enhance unions' role as a participant in strategic corporate decisions, a newer vision of the union role. With either the traditional or new role, the union shareholder can fight management in ways that benefit other shareholders, or can benefit workers at the expense of other shareholders.We use this framework to describe labor unions' current voting initiatives. From the labor perspective, unions themselves recognize the need for new approaches - including approaches that do not reflexively regard efficiency and profitability as goals of "enemy" shareholders. From the corporate perspective, unions need new approaches because they have remained peripheral players in the boardroom despite their vast stock holdings. We find legal reform to be unnecessary, because existing legal and market checks adequately constrain potential opportunistic union behavior. These checks include the fiduciary structure of Taft-Hartley union pension funds; the need to persuade other self-interested shareholders to vote for union initiatives; and the disciplinary power of capital markets, product markets, and the market for corporate control. These forces adequately limit labor unions' ability to expropriate more corporate value for their members, if they would choose to pursue that course of action.Finally, we suggest that union-shareholder activism may have long-lasting effects on unions' role in corporate governance, but only if unions focus their shareholder voting initiatives in areas where they have special advantages in monitoring management. If unions can package their proposals in ways that emphasize to other shareholders ways in which the two groups' interests are aligned, then union-shareholder activism may become an important force in corporate governance.
This Article examines shareholder primacists' claims that making boards more accountable to shareholders would go a long way toward solving the agency problem between shareholders and managers and enhancing shareholder welfare. I argue that in the shareholder power debate over whether to vest corporate decisionmaking authority primarily in a firm's shareholders or in its board of directors, shareholder primacists underplay deep rifts among the interests of large-block shareholders - those shareholders most likely to make use of increased shareholder power. The argument for reapportioning decisionmaking authority within the firm away from boards toward shareholders assumes that shareholders are a monolith with the single, overriding objective of maximizing share value. Some of the most significant modern shareholders, however, have private interests that conflict with (1) the goal of maximizing shareholder value generally or (2) the interests of other shareholders who would choose to maximize shareholder value differently, given their peculiar characteristics. Such private interests may induce influential shareholders to engage in rent-seeking behavior at the expense of overall shareholder welfare. In light of this possibility, which I argue is substantial, we would do well to pause before implementing corporate governance measures designed to further empower shareholders.
This essay is a response to Lucian Bebchuk's recent article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements. In response, I make three principal claims. First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights. Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule. Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.
This Comment takes the common comparison of shareholder democracy and political democracy in a new direction by exploring the parallels between the board of directors and the Electoral College, examining both institutions in light of the differences between nation and corporation and their contrasting histories. Both are "once removed" representative democracies, because both systems only give the voters the right to vote for representatives who then select those who actually govern. The Comment next considers, with a critical eye, the underlying premise that shareholder and civic democracies can be compared at all, given the radically different nature of the corporate and civic polities. It concludes that the Electoral College/board of directors comparison, like the comparison of the two democracies, is tantalizing but ultimately of limited value given the distinctive roles that each institution, and each polity, play in the modern world.
Never has voting been more important in corporate law. With greater activism among shareholders and the shift from plurality to majority voting for directors, the number of close votes is rising. But is the basic technology of corporate voting adequate to the task? In this Article, we first examine the incredibly complicated system of US corporate voting, a complexity that is driven by the underlying custodial ownership structure, by dispersed ownership and large trading volumes, and by the rise in short-selling and derivatives. We identify three ways in which things predictably go wrong: pathologies of complexity; pathologies of ownership; and pathologies of misalignment of interests. We then discuss the current legal treatment of these pathologies and consider a variety of directions for reform, ranging from incremental modifications to fundamental redesign. We show that, absent a fundamental reconstruction of the ownership structure, the existing system will continue to be noisy, imprecise and disturbingly opaque. The problems with the existing system pose fundamental challenges for both proponents of direct shareholder democracy, who advocate more extensive voting rights for shareholders, and for proponents of indirect shareholder democracy, who advocate deference to a board of directors the legitimacy of which ultimately also rests on shareholder elections.
Automated information systems offer an opportunity to improve the democratic legitimacy of the administrative state. Today, agencies transfer crucial responsibilities to computer systems. Computers gather and interpret important information. For instance, electronic machines record and calculate votes. Automated systems execute policy and render decisions about important individual rights, such as a person’s eligibility for public benefits. Computer systems store sensitive personal information. These systems’ closed architecture, however, shields vital agency decisions from view. No one can see how a system operates without a software program’s source code. Closed code hides programming errors that disenfranchise voters, under-count communities for the census, and distort policy embedded in automated public benefits systems. Neither senior officials nor the public can provide feedback on agency decisions embedded in code. Interested programmers have no opportunity to collaborate on a system’s design or security. In short, these systems’ closed architecture impairs the administrative state’s accountability, denies the public the opportunity to participate in its policymaking, and ignores the availability of valuable expertise. This Essay proposes opening up these black boxes to democratize agencies’ automated decision-making. In revealing the programmer’s instructions to the computer, open code shines light on important regulatory choices currently hidden from both elected policy-makers and the public at large. It creates new opportunities for participation by a broad network of programmers, who can contribute to the development of accurate and secure systems. Such feedback would exert pressure on agencies to fix problems at the margins that agencies might be inclined to ignore. Open code makes programming and system design expertise relevant and available to the administrative state. In short, open code governance provides a means to make agency decisions bound up in information systems more transparent, democratic, and legitimate.
This Article shows how Delaware uses its power in the market for incorporations to increase its profits through price discrimination. Price discrimination entails charging different prices to different consumers according to their willingness to pay. Two features of Delaware law constitute price discrimination. First, Delaware's uniquely structured franchise tax schedule assesses a higher tax to public than to nonpublic firms and, among public firms, to larger firms and firms more likely to be involved in future acquisitions. Second, Delaware's litigation-intensive corporate law effectively price discriminates between firms according to the level of their involvement in corporate disputes. From the perspective of social welfare, price discrimination between public and nonpublic firms is likely to enhance efficiency (although the efficiency effect of franchise tax price discrimination among public firms is indeterminate). By contrast, price discrimination through litigation-intensive corporate law is likely to reduce efficiency.
pdf; see also 2005 PROXY REPORT, supra note 83, at 10. Pfizer adopted the plurality plus model in
- Pfizer See
- Inc
- Corporate
- Principles
See PFIZER INC., CORPORATE GOVERNANCE PRINCIPLES 1-2 (2008), available at
http://media.pfizer.com/files/investors/corporategovemance/cgprinciples.pdf; see also 2005
PROXY REPORT, supra note 83, at 10. Pfizer adopted the plurality plus model in June 2005. See
Press Release, Pfizer, Inc., Pfizer to Amend Corporate Governance Principles Regarding
Election of Directors (June 23, 2005), available at
http://www.pfizer.com/news/press releases/pfizer_pressreleases.jsp (follow "Press Release
Archive," then follow "2005 Archives").
Majority voting is clearly becoming the norm in United States corporations
- See Fleischer
See Fleischer, supra note 215, at 317 ("Majority voting is clearly becoming the norm in
United States corporations.").