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Shareholder Democracy on Trial: International Perspective on the Effectiveness of Increased Shareholder Power
Abstract
Shareholder democracy – efforts to increase shareholder power within the corporation – appears to have come of age, both within the United States and abroad. In the past few years, U.S. shareholders have worked to strengthen their voice within the corporation by seeking to remove perceived impediments to their voting authority. These impediments include classified boards, the plurality standard for board elections, and the inability to nominate directors on the corporation’s ballot. Shareholders’ efforts have also extended to seeking a voice on the compensation of corporate officers and directors. Advocates of shareholder democracy believe that such efforts are critical to buttressing shareholder value and curbing managerial abuses of authority. However, there are many who criticize shareholder democracy, claiming that it will undermine firm value and corporate governance. Opponents also insist that shareholder democracy will undermine corporate efforts to focus on non-shareholder constituents such as employees, customers, and communities. This Article examines these and other criticisms in the context of international efforts to increase shareholder democracy, and argues that the international experience with shareholder democracy undercuts the force of such critiques. Indeed, experiences in other countries suggest that shareholder democracy can achieve its desired result of enhancing financial returns and reducing corporate misconduct. In this way, the Article relies on international corporate governance trends to provide a novel, significant perspective to the ongoing debate over the propriety of shareholder democracy in the United States.
... For more information, see www.decisionsciences.org/publications the democratic ideals espoused in the United States, it is not clear whether shareholder involvement in determining executive pay will have the desired effect. While there is some evidence that shareholder democracy can rein in corporate missteps (Fairfax, 2008), other research indicates that "say on pay" legislation has not worked in limiting executive compensation, at least not in the United Kingdom (Reich, 2007). Still, there is reason to believe that shareholder activism, especially institutional activism, will increase as corporations experience the consequences of Sarbanes-Oxley, as well as changes in the listing standards for the New York Stock Exchange and National Association of Securities Dealers Automated Quotations (known as the NASDAQ Stock Exchange) (Rubach & Sebora, 2009). ...
... Notwithstanding the problems noted above, proxy voting has continued to be a major corporate activity (Alexander et al. 2009;Langley 2003) affecting the daily functions of firms and their governance. As expectations have increased for institutional investors to engage more fully in proxy voting (Fairfax 2008), firms providing proxy advisory services have gained tremendous influence over an increasingly interconnected set of constituents. ...
The current proxy voting system in the United States has become the subject of considerable controversy. Because institutional investment managers have the authority to vote their clients’ proxies, they have a fiduciary obligation to those clients. Frequently, in an attempt to fulfill that obligation, these institutional investors employ proxy advisory services to manage the thousands of votes they must cast. However, many proxy advisory services have conflicts of interest that inhibit their utility to those seeking to discharge their fiduciary duties. In this article, we describe the current proxy advisory network as an example of how current notions of conflicts of interest fall short when explaining the behavior of an interconnected set of market players whose remit is to act in the best interests of their investors. We discuss what participants in this system should do to bring transparency and accuracy to the proxy advice industry.
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
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.
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.
In this Article we examine the fiduciary duties of boards of directors under Delaware law, and conclude that those duties today require Boards to consider the rights and interests of stakeholder groups, including those rights and interests exemplified in the international law of human rights. The Article will concentrate on three reasons why boards' fiduciary duties to their shareholders require consideration of international human rights: (1) the growing importance of Alien Tort Claims Act litigation (discussed in Part III); (2) changing institutional investor behavior (Part IV); and (3) developing public-private governance regimes (Part V), as illustrated by the United Nations Global Compact. To appreciate the context of these developments, the Article will start in Part II by sketching the changes occurring today in the social expectations of global business.
The fundamental assumptions in the law and economics literature about shareholder voting and the one-share/one-vote rule are flawed. The classic view is that share ownership is necessary and sufficient to create voting rights and that such rights should be directly proportional to share ownership. We demonstrate that this assumption is unfounded, both for shares that are economically encumbered (held by shareholders who are not pure residual claimants; e.g., a shareholder who owns one share and is also short one or more shares) as well as shares that are legally encumbered (held or associated with more than one shareholder; e.g., shares that are loaned to a short, who sells that share to another buyer). The one-share/one-vote rule is not only economically suboptimal, but results in substantial deleterious consequences. Quorum and regulatory requirements are distorted; mergers and acquisitions are too easily approved; securities class actions are undervalued and simultaneously under- and over-compensate; bankruptcy distributions are over- and under-inclusive; and fixed-ratio stock offers are preferred over economically superior alternatives. These results all derive from an unfounded reliance upon the one-share/one-vote principle and the belief that even economically or legally encumbered shares are entitled to vote.
Shareholder activism by institutions has become an important aspect of U.S. financial markets. In this article, we provide an overview of shareholder activism by institutional and individual investors. We discuss their objectives in terms of effects on corporate governance, the identity of the activists, and a brief history of their activities. We also present a survey of the theoretical and empirical research regarding the motivations and outcomes of shareholder activism. Draft: October 1998 Forthcoming Contemporary Finance Digest, (Autumn 1998) 2, 3 10-34. * The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author's colleagues upon the staff of the Commission.
This article argues that the effect of the proxy rules on corporate structure is not as straightforward as might be expected. Liberal proxy regulations do not necessarily result in greater shareholder activisim. Other nonlegal factors are important in determining the relative balance of power between management and shareholders. The article examines the proxy systems in Japan and Germany and makes comparisons with the United States. Among other things, the article observes that in the United States, although restrictions on shareholder communications have been eased, restrictions on management communications have not. This is at odds with the hypothesis that American populism has shaped the legal landscape in the United States in a manner that favors management and fragments ownership, as some commentators have maintained.
The large gap between American CEO pay and foreign CEO pay is one of the biggest puzzles in executive compensation. Recent scholarship has suggested that it is the result of board capture. This theory claims that the pay gap arises because in the U.S. passive friendly directors award their CEOs huge pay increases, while in other countries tight-fisted control shareholders suppress CEO pay levels. This paper criticizes Board Capture Theory and then develops four market-based theories that offer persuasive alternative explanations for the international CEO pay gap. It argues that market forces will determine whether the pay gap will disappear and that current proposals for government intervention will be at best ineffective, and more likely counterproductive.
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.
Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions. As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.
This paper reconsiders the basic allocation of power between boards and shareholders in publicly traded companies with dispersed ownership. U.S. corporate law has long precluded shareholders from initiating any changes in the company's basic governance arrangements. My analysis and empirical evidence indicate that shareholders' existing power to replace directors is insufficient to secure the adoption of value-increasing governance arrangements that management disfavors. I put forward an alternative regime that would allow shareholders to initiate and adopt rules-of-the-game decisions to change the company's charter or state of incorporation. Providing shareholders with such power would operate over time to improve all corporate governance arrangements. Furthermore, I argue that, as part of their power to amend governance arrangements, shareholders should be able to adopt provisions that would give them subsequently a specified power to intervene in additional corporate decisions. Power to intervene in game-ending decisions (to merge, sell all assets, or dissolve) could address management's bias in favor of the company's continued existence. Power to intervene in scaling-down decisions (to make cash or in-kind distributions) could address management's tendency to retain excessive funds and engage in empire-building. Shareholders' ability to adopt, when necessary, provisions that give themselves a specified additional power to intervene could thus produce benefits in many companies. A regime with shareholder power to intervene, I show, would address governance problems that have long troubled legal scholars and financial economists. These benefits would result largely from inducing management to act in shareholder interests without shareholders having to exercise their power to intervene. I also discuss how such a regime could best be designed to address concerns that supporters of management insulation could raise; for example, shareholder-initiated changes in governance arrangements could be adopted only if they enjoy shareholder support in two consecutive annual meetings. Finally, examining a wide range of possible objections, I conclude that they do not provide a good basis for opposing the proposed increase in shareholder power.