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The Impact of the Sarbanes-Oxley Act on Non-Shareholder Constituents: A Silver Lining, But Will it Endure?
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The SEC has proposed rules that, under specified circumstances, would permit shareholders to run an election contest using a company's own proxy statement. The authors argue that the potential harm from this proposal far outweighs any potential benefit. The proposed rules would increase the frequency of election contests, causing significant disruption and diversion of corporate resources every year. The shareholders most likely to seek to nominate directors, such as public pension funds and labor unions, have political agendas and interests beyond the business performance of the company. To the extent dissident directors are elected to boards, these boards are likely to become balkanized and less functional. An increase in the number of election contests is also likely to exacerbate the current difficulties in recruiting qualified new director candidates, and make existing directors more risk averse. Proponents of the proposed rules seem to rest their support on the model of the shareholder as the "owner" of a company, just as an individual owns a piece of property. The relationship of shareholders to a public company, however, is far more complex. This relationship does not support the argument that shareholders have an intrinsic right to use a company's proxy statement to nominate directors. Finally, the authors point out that the last two years have already seen the adoption of the most far-reaching corporate governance reforms since the 1930s. These reforms should be given the chance to work before the SEC pursues a whole new set of rules that will likely do far more harm than good.
The SEC is now considering a proposal to require some public companies to include in their proxy materials candidates for the board nominated by shareholders. I document that incumbents do not currently face any meaningful risk of being replaced via the ballot box, and I argue that providing shareholder access would be a moderate step toward improving board accountability. Analyzing each of the objections that opponents have raised against the proposed shareholder access, I conclude that none of them provides a good basis for opposing it. Indeed, it would be desirable to supplement shareholder access with additional measures to invigorate corporate elections.
Corporate law is said to be witnessing the end of history. The long battle between the conservative, private, shareholder-wealth-maximization school of corporate legal thought and the progressive, public, stakeholder-protection/social responsibility school is now over and the victor, it is claimed by conservatives and progressives alike, is the former. This article argues that the private, shareholder-wealth-maximization school's victory is more illusory than real, and depends on a distortedly narrow view of what constitutes corporate governance. Offering a legal history of how the progressive-inspired ideals of stakeholder protection and corporate social responsibility through mandatory legal rules have shaped the law affecting corporations, this article uncovers two patterns which caution against a rush to declare the ultimate triumph of shareholder primacy. The first pattern is that progressives have successfully influenced several important areas of corporate law, such as the allowance of charitable giving and adoption of constituency statutes. These corporate law victories, however, have had notably mixed results; while sometimes helping stakeholders, they have also expanded managerial discretion and thus permitted self-dealing and opportunism. A second pattern is that progressives have been tremendously successful in shaping laws outside of corporate law but that nevertheless regulate fundamental features of corporate behavior in the name of stakeholders. From securities and labor law reforms in the New Deal to the environmental and consumer protection laws of the 1960s and 1970s, progressives have won a diverse and broad array of mandatory legal rules designed to limit corporate conduct perceived as harmful to non-shareholder constituencies. These various bodies of law - what might be termed the law of business - are forceful shapers of the choices corporate management can make about basic operational and organizational decisions. These patterns suggest that today's progressives might find more success changing laws external to corporate law rather than altering fiduciary principles. They also suggest that claims about the "end of history" and the triumph of shareholder primacy depend on an artificially narrow view of the law affecting corporate management. Whatever its explanatory power in corporate law, shareholder primacy is far from an accurate description of the law of business or of corporate practice.
Post Enron has witnessed renewed concern regarding corporations’ failure to behave responsibly, both in terms of their ethical responsibility and in terms of their responsibilities to advance issues beyond financial matters, such as those that impact employees, customers, and the broader community. Many scholars, legislators, and members of the business community have struggled to find strategies for restoring corporate responsibility. This Article argues that a corporation’s own words or rhetoric may be useful in solving its behavioral defects. In fact, the vast majority of corporations issue statements or otherwise engage in rhetoric that suggest a commitment to issues and concerns beyond financial matters. Most people dismiss this rhetoric as meaningless speech, and as a result there has been very little attempt to analyze its relevance to corporate conduct. This Article insists that such dismissals are shortsighted. First, by critically examining the available empirical evidence, this Article demonstrates that corporate rhetoric has a greater connection to corporate behavior than most would presume. Second, this Article draws on social psychology literature to illuminate how corporate rhetoric on responsibility can be used strategically to increase the likelihood that corporations will engage in behavior consistent with that rhetoric. By highlighting the behavioral significance of corporate rhetoric, this Article offers a unique and novel solution to the problem of corporate irresponsibility.