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Mandating board-shareholder engagement?
Abstract
This Article not only argues that corporations must be encouraged to enhance the level of communication between shareholders and the board, but also maintains that the benefits of increased engagement are significant enough that we should consider developing standards for incentivizing, if not mandating, more robust board-shareholder engagement for corporations that fail to respond to such encouragement. In the last several years, shareholders not only have gained increased authority over corporate elections and governance matters, but also have demonstrated a willingness to use that authority to challenge, and even reject, management policies and practices. Shareholders also have begun to demand increased communication with the corporation in general, and the board in particular. This Article argues that corporations should be strongly encouraged, if not compelled, to meet that demand. While acknowledging the potential pitfalls associated with increased board-shareholder engagement, this Article further argues that many of those pitfalls have been overstated, or can be minimized. Moreover, in light of shareholders' enhanced influence over corporate affairs, the costs associated with enhanced engagement may be outweighed by the benefits. While it is not a panacea, increased board-shareholder engagement has the potential to dramatically increase the corporation's ability to promote understanding of its policies and programs, and otherwise avoid the negative repercussions of shareholder activism. Thus, this Article endorses proposals that encourage corporations to increase board-shareholder dialogue with two caveats. First, given the menu of communicative options and the various judgment calls that must be made when implementing particular options, deference should be given to corporations and the board with respect to which option or options to adopt. Second, the benefits of board-shareholder engagement are important enough that we should consider proposals that would more effectively incentivize and even mandate such engagement for those corporations that refuse to answer the calls to increase their dialogue with shareholders.
... When they voted, minority shareholders rarely voted against directors (Baker, 2018). This lack of enthusiasm and critical engagement has been interpreted as an indication of shareholder apathy (Fairfax, 2013). ...
Purpose: The appeal of the Rational Apathy Theory lies in the fact that it is not only a descriptive theory of shareholder behaviour in the modern public firm but also a powerful normative tool which recommends itself to corporate legislators and policymakers. True to their normative logic, proponents of apathy contend that since shareholders of modern public firms will never find it cost-efficient or incentivized to perform their monitoring responsibilities over corporate management, insisting on a shareholder-oriented corporate governance model is undesirable. This article rejects the determinism and immutability of the above thesis and argues that firm investors will embrace activism where the cost of corporate monitoring is reduced, and the benefits of doing so are increased. Given the ability of the internet to reduce monitoring costs for shareholders (predominantly minority shareholders) in public companies, the article campaigns for minority shareholder electronic participation in corporate governance and proposes a careful reform of corporate law and governance in post-covid Nigeria, drawing inspiration from similar reforms on electronic governance in Canada, UK, and the State of Delaware in the US. In a society where digitalization has been identified as a major catalyst for the economic revival of commercial and corporate life, this article recommends itself to policy and lawmakers, corporate boards, corporate law experts, legislators, regulators, and other relevant stakeholders.Methodology: The article adopts doctrinal and comparative methods of legal analysis.Results/Findings: The article finds that while the Rational Apathy Theory may have served the analogue world, it is unsuitable for a digital generation, where issues of cost, communication and participation could be liberalized, through the use of the internet, to serve the interest of shareholder democracy in public companies.
... Exchange of ideas on governance issues such as nomination of directors, remuneration to directors and performance of directors would enhance good governance. Shareholder engagement helps company to design corporate policies and practices in tune with the shareholder interests (Fairfax , 2013). Companies can receive feedback about corporate strategy and governance issues through shareholder engagement (Gregory & Grapsas, 2018). ...
The need for strengthening engagement between companies and its shareholders is being increasingly recognised over the past few years. Various authors have discussed about the role of shareholder engagement in enhancing corporate governance standards. The literatures discussing these aspects are focusing on developed countries. This study seeks to make a contribution to the debate by discussing the scope and challenges for shareholder engagement in India. Many reforms were introduced to enhance shareholder participation and engagement in India. The study explains the significance of shareholder engagement and the strategies adopted by shareholders to influence corporate policy. The study gives a brief overview of scheme of division of power between board of directors and the company in general meeting in India. It examines the statutory reforms introduced in India for promoting shareholder engagement in corporate governance processes. It also discusses some incidents in Indian corporate sector to examine the growth of shareholder engagement in India.
... Bebchuk (2007) holds that "given the clear and widely accepted flaws of plurality voting, majority voting should be the default arrangement." Fairfax (2013) holds that " [t]o the extent the threat of losing a board seat impacts board behavior, majority voting increases shareholders' ability to influence board behavior." 10 While Fich and Shivdasani (2006) consider a board busy if a majority of outside directors serves on more than two corporate boards, our study considers a board busy if a majority of directors serves on more than four corporate boards. ...
We study how Institutional Shareholder Services (ISS) affect firms’ engagement with shareholders. Our analyses exploit a quasi-natural experiment using say-on-pay voting outcomes near a threshold that triggers ISS to review engagement activities. Firms receiving ISS treatment exhibit swift and substantive increases in extensive and intensive margins of engagement, especially when their boards have higher agency conflicts and directors are more likely to lose voting support from ISS. Increases in engagement persist over time, and shareholders appear to value the increased engagement. Collectively, we shed light on an unexplored channel through which ISS positively influences firms’ governance and information environments.
Der Autor schlägt einen vierstufigen Prozess vor, mit dem Destinationen aktives Engagement unter ihren Zweitwohnungsbesitzern gestalten können.
Engagement ist in den letzten Jahren auf der strategischen Prioritätenliste vieler Manager ganz nach oben gerückt. Die Engagement-Theorie hilft zu verstehen, wie die Beziehung zwischen einer Destination und ihren Zweitwohnungsbesitzern produktiver gestaltet werden kann. Die meisten Untersuchungen zu Engagement konzentrieren sich jedoch auf die Nachfrageseite, d.h. darauf, wie sich Kunden, Mitarbeitende oder Investoren mit Unternehmen, Marken oder Destinationen auseinandersetzen. Diese vergleichende Fallstudie untersucht das Engagement von der Angebotsseite her, d.h. wie Destinationen ihre Zweitwohnungsbesitzer aktiv einbinden können.
Der Autor kommt zu dem Schluss, dass Destinationen einen vierstufigen Prozess befolgen müssen, um Engagement ihrer Zweitwohnungsbesitzer zu erreichen. Wenn sich Destinationen darauf konzentrieren, ihre Beziehung zu Zweitwohnungsbesitzern sichtbar, erreichbar, beherrschbar und nutzbar zu machen, können sie Zweitwohnungsbesitzer auf strukturierte und systematische Weise einbinden. Die Studie fördert die angebotsseitige Sicht auf Engagement und die flow-basierte Sichtweise von Destinationen. Die Ergebnisse sind für Destinationsmanager, politische Entscheidungsträger und Tourismusmarketing-Verantwortliche von grosser Bedeutung.
It is the best of times for Canada’s public markets, it is the worst of times for Canada’s public markets. It is an age when markets have been rewarding public companies with the highest valuations seen in generations. It is an age of a rapid decline in Canadian companies opting to go public. Given that Canada’s reliance on public markets is far higher than that of any other country — double that of the next-highest country — we should be alarmed that fewer and fewer companies are choosing to go public. Companies that stay private are, on average, less successful, less productive, less likely to grow into national champions, and more likely to be sold to foreign buyers. The current decline of public markets may go to the heart of what is arguably the biggest long-term policy issue in the country: our innovation gap and declining relative productivity growth. There is no shortage of advantages for a company to go public. Public companies grow faster, grow larger, become both more productive and efficient, and have cheaper access to capital. An IPO permits early investors to exit while allowing managers to continue to build the company. What is evidently causing more and more Canadian executives to avoid going public, despite all these advantages, is a regulatory and governance ecosystem that has grown increasingly hostile to and distrustful of corporate leadership. Executives who consider going public face an environment in which their compensation levels will be high; indeed, pay for senior executives at public companies has grown remarkably in recent years. However, because of increasingly onerous regulatory disclosure requirements, earning those rewards comes at the cost of having their pay disclosed to the public, debated by shareholders and scrutinized by the media. Companies that go public also face a growing loss of control over their own governance due to pressure to adhere to an ever-evolving list of so-called universal best practices that can run dozens of pages long. These practices exact costs but don’t generally improve results. The result is a dominant one-size-fits-all governance model that does not in fact fit many, or even most companies. The key factor creating this hostile environment is a massive intrusion by outside forces on the powers traditionally exercised by boards and executives. Corporate governance used to arise from the bargaining and experimentation of the private parties that coalesce around corporations. Now governance is frequently imposed ex post on public companies by third parties with their own agendas. Particularly problematic are third-party commercial proxy advisors, ostensibly representing the interests of institutional shareholders. Their short-term, faddish, complex, and value-harming governance practices diverge dangerously from the interests of long-term flesh-and-blood investors. The innovations over the past three decades in governance rules were designed to reduce agency costs and improve corporate performance. Those that have proven failures at doing so, and there are several, should be scrapped. Rather than helping Canada’s markets become stronger, public markets have grown substantially weaker, and rather than making Canadian companies better, we now face an environment where companies would rather sell to a foreign buyer and leave the country, than go public here. The repercussions can only be adverse for Canada.
Awareness of the systemic challenges posed by environmental and social issues has driven regulatory action undertaken at the EU level more strongly by far than in any other jurisdiction. Some pieces of regulation adopted under the umbrella of the so-called European Green Deal rely on institutional investors to drive a shift towards sustainable finance. But in spite of the growing practical relevance of active share ownership, including in its environmental and social dimensions, whether institutions are motivated, and are actually able, to effectively play such crucial a role remains controversial. Even assuming they were committed to not just cosmetically address environmental and social issues, still there are limitations to the reasonable reach of investor action in face of the scale of the challenges at stake. Limitations not only derive from the deficient incentives structure and the collective action issues that are typical of asset managers. They also depend on factors not in control of the asset manager, such as varying end-investor preferences and availability of better ESG data and information. The problem of divergent, and opaque, ESG ratings and indices couples with that of non-consistent frameworks for corporate sustainability disclosures, and the underlying differing concepts of materiality, making it hard for investors to resort to reliable yet essential information they need to properly perform sustainability assessments. Some skepticism concerning institutions’ disposition to sustainability seems to be justified also where evidence referring to their actual voting behavior at investee firms is considered.
Corporate scandals related to human rights issues have illustrated the hefty cost associated with ignoring humanitarian issues while conducting business. For example, the Royal Dutch Petroleum Company (Shell) has spent tens of millions of dollars related to the Nigerian government's execution of the "Ogoni 9," which was preceded by a tense relationship between the corporation and Ogoni people of Nigeria. In addition, in India, the Vedanta corporation lost substantial market capitalization following a trial related to its mountain mining activities for its effects on the people of the region. Despite the moral duty that may have compelled action in these examples, it is also clear that a corporation's (particularly a transnational corporation's) decision to develop a framework for proactive corporate responsibility is also good business. Assuming the accuracy of this conclusion, this Article questions what role the board of directors should have in formulating this framework in light of the Alien Tort Claims Act and the United Nations' Guiding Principles on corporate responsibility and human rights. This Article admits that the board of directors will face great challenges when incorporating human rights issues into a company's corporate governance. However, given the central role courts are placing on the board of directors, it would be wise to rise to the challenge and make sure that human rights are a key part of their function.
Shareholder and public dissatisfaction with executive compensation has led to calls for an annual shareholder advisory vote on firms' compensation practices and policies, so-called "say on pay." Proposed federal legislation would man-date "say on pay" generally for U.S. public companies. This Article assesses the case for such a mandatory federal rule in light of the U.K. experience with a similar regime adopted in 2002. The best argument for a mandatory rule is that it would destabilize pay practices that have produced excessive compensation and that would not yield to firm-by-firm pressure. This has not been the U.K. experience; pay continues to increase. The most serious concern is the likely evolution of a "best compensation practices" regime which would embed nor-matively-opinionated practices that would ill-suit many firms. There is some evi-dence of a U.K. evolution in that direction. This problem might be more pronounced in the U.S. because shareholders are even more likely than their U.K. counterparts to delegate judgments over compensation practices to a small number of proxy advisors who themselves will be economizing on analysis. The Article argues instead for a federally provided shareholder opt-in right to a "say on pay" regime, which would change the present reliance on precatory propos-als in the issuer proxy, which are in turn subject to the power delegated to shareholders under state law. Secondarily, the Article argues that any mandatory regime should be limited to the 500 largest public companies by pub-lic market float and should not cover the more than 12,000 firms subject to SEC oversight. Compensation practices at key financial firms present a distinct set of safety and soundness issues because of potential systemic risk from a failure of such firms. These concerns should be addressed separately.
The financial transparency for which U.S. capital markets are renowned derives primarily from mandatory disclosure of operating results under the federal securities laws. In this Article, Professor Williams defends the view that the Securities and Exchange Commission (SEC) can and should require expanded social disclosure by public reporting companies to promote corporate social transparency comparable to the financial transparency that now exists. As used in this Article, "social disclosure" refers to disclosure of specific information about a reporting company?s products, the countries in which a company does business, and the labor and environmental effects of a company?s operations in the United States and around the world. Professor Williams shows that the SEC has the statutory authority in fashioning proxy disclosure under Section 14(a) of the Securities Exchange Act of 1934 to require disclosure either to promote the public interest or to protect investors. To construe the SEC?s public interest disclosure power, she examines the intellectual derivation of the securities laws and their legislative history, demonstrating that increasing corporate accountability to shareholders and to the public was a central goal of Congress in 1933 and 1934, as was constraining the exercise of corporate power and inculcating a greater sense of public responsibility in corporate managers. The legislative history of Section 14(a) indicates that Congress?s purpose in enacting that section was to strengthen the power of shareholders in the corporate governance relationship, and in particular to require companies to provide shareholders with information about management policies and practices. Thus, she argues that it is fully consistent with the language, purpose, and legislative history of the securities laws for the SEC to use its authority under Section 14(a) to require expanded disclosure about management?s policies and practices with respect to social and environmental issues. A close examination of the SEC?s rejection of expanded social disclosure in the 1970s buttresses this conclusion. Professor Williams concludes by making the affirmative case for expanded corporate social transparency and for the SEC?s legitimate role in promoting such transparency, both from the perspective of the "economic" investor, who is assumed to be interested primarily in the financial returns from an investment, and from the perspective of the "social" investor, who is concerned more broadly with the social and environmental effects of corporate conduct.
Many look toward enactment of the law reform agenda held out by proponents of shareholder empowerment as a part of the regulatory response to the financial crisis. This Article argues that the financial crisis exposes major weaknesses in the shareholder case. Our claim is that shareholder empowerment delivers management a simple and emphatic marching order: manage to maximize the market price of the stock. And that is exactly what the managers of a critical set of financial firms did in recent years. They managed to a market that focused on increasing observable earnings and, as it turned out, failed to factor in concomitant increases in risk that went largely unobserved. The fact that management bears primary responsibility for the disastrous results does not suffice to effect a policy connection between increased shareholder power and sound regulatory reform. A policy connection instead turns on a counterfactual question: Whether increased shareholder power would have imported more effective risk management in advance of the crisis. We conclude that no plausible grounds exist for making such a case. In the years preceding the financial crisis, shareholders validated the strategies of the very financial firms that pursued high leverage, high return, and high risk strategies and penalized those that did not. It is hard to see how shareholders, having played a role in fomenting the crisis, have a positive role to play in its resolution.The prevailing legal model of the corporation strikes a better balance between the powers of directors and shareholders than does the shareholder-centered alternative. Shareholder proponents see management agency costs as a constant in history and shareholder empowerment as the only tool available to reduce them. This Article counters this picture, making reference to agency theory and recent history to describe a dynamic process of agency cost reduction. It goes on to show that shareholder empowerment would occasion significant agency costs on its own by forcing management to a market price set in most cases under asymmetric information and set in some cases in speculative markets in which heterogeneous expectations obscure the price’s informational content.
We examine “just vote no” campaigns, a recent innovation in low-cost shareholder activist tools whereby activists encourage their fellow shareholders to withhold votes toward a director's election to express dissatisfaction with management performance or the firm's corporate governance structure. Grundfest [1993. Just vote no: a minimalist strategy for dealing with barbarians inside the gates. Stanford Law Review 45, 857–937] argues that a substantial withheld vote motivates directors to take immediate action to avoid further embarrassment. We find a variety of supportive evidence, including operating performance improvements and abnormal disciplinary chief executive officer (CEO) turnover, indicating that such campaigns induce boards to take actions in shareholders’ interests. Furthermore, abnormal turnover is robust to controlling for concurrent events and firm- and CEO-specific controls.