Lisa M. Fairfax’s research while affiliated with George Washington University and other places

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.

As one might expect, there are many similarities between the circumstances of women directors and directors of color, which includes African Americans, Latinos, and Asian Americans. Indeed, both groups began appearing on corporate boards in significant numbers during the same period—right after the Civil Rights Movement pursuant to which the push for racial equality throughout society precipitated efforts to achieve greater representation of people of color as well as women on corporate boards. Moreover, while women and people of color have experienced some increase in board representation over the last few decades, both groups also have encountered significant barriers to their success on corporate boards. However, people of color appear to have experienced more significant barriers than women, while women of color appear to be experiencing the most formidable of such barriers.Without question, corporations have achieved better representation of women and people of color within their boardrooms in recent history. Further, if the historical patterns related to these groups’ increase continue, we may expect that virtually every major corporation will have at least one woman or person of color on their board within the next two decades. However, women and people of color continue to be under represented, suggesting that they face barriers preventing them from translating their thirty percent and near fifty percent status in the labor force into similar numbers at the corporate board level. Part of those barriers stems from the difficulties women and people of color experience with advancing into executive positions at major corporations. Because corporations rely heavily on people who have held such positions, these difficulties have a negative impact on efforts to increase diversity on corporate boards. Of particular concern may be the plight of women of color. Indeed, studies suggest that women of color have achieved the least amount of success with regard to board representation, and that women of color experience the most significant barriers with regard to achieving success within corporate America. This is particularly daunting considering the disproportionate number of African American women in the workforce and student population as compared to African American men, which will make achieving more representative percentages of racial and ethnic diversity on the board significantly more difficult.

Corporate governance scandals inevitably raise concerns about the extent to which corporate directors failed in their responsibility to monitor the corporation and its managers, especially in terms of the latter's’ misdeeds. Corporate governance reforms strive to shore up directors' roles by seeking to ensure that boards have sufficient incentives to engage in effective oversight and to hold the boards more accountable. The current financial crisis has ushered in an era of significant government reform of the financial system and involvement in corporate governance matters. Such involvement has increased board of directors' responsibilities but has not reconciled those responsibilities with board functions and fiduciary law, at least in Delaware. The lack of reconciliation not only represents a missed opportunity to reconsider boards' proper role and function within the modern public corporation, but also may undermine the effectiveness of reforms.

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.

Recently, board diversity advocates have relied on market- or economic-based rationales to convince corporate America to increase the number of women and people of color in the boardroom, in lieu of moral or social justifications. This shift away from moral or social justifications has been deliberate, and it stems from a belief that corporate America would better respond to justifications that centered on the corporate bottom line. However, recent empirical data reveals that despite the increased reliance on, and apparent acceptance of, market- or economic-based rationales for board diversity, there has been little change in actual board diversity. This Article argues that the relative stagnation in board diversity can best be attributed to diversity advocates’ overemphasis on the importance of business rationales for diversity, coupled with their failure to acknowledge or otherwise bolster the importance of social and moral justifications for board diversity efforts. As a result, this Article not only concludes that business justifications may be insufficient, at least standing alone, to advance board diversity, but also insists that diversity advocates must pay greater attention to the role of social and moral justifications in the effort to diversify the corporate boardroom.

In the wake of recent scandals and the economic meltdown, there is nearly universal support for the notion that corporations must have independent directors. Conventional wisdom insists that independent directors can more effectively monitor the corporation and prevent or otherwise better detect wrongdoing. As the movement to increase director independence has gained traction, inside directors have become an endangered species, relegated to holding a minimal number of seats on the corporate board. This Article questions the popular trend away from inside directors by critiquing the rationales in favor of director independence, and assessing the potential advantages of inside directors. This Article argues that the value of independent directors has been overstated, while the value of inside directors has been under-appreciated and under-examined. This argument rests on three critical points. First, independent directors are constrained in their ability to perform their monitoring functions, and many of these constraints may be insurmountable – particularly as we increase independent directors’ responsibilities. Second, inside directors can make valuable, and often overlooked, contributions to board governance. Third, reliance on independent directors as a substitute for external regulation is inappropriate and potentially costly. To this end, this Article suggests that inside directors may serve an important signaling function, underscoring the need for enhanced regulation, while ensuring that corporate monitors are subject to appropriate liability and therefore have increased incentives to perform their responsibilities.To be sure, the case for the inside director is not an easy one, particularly given that any benefits such directors bring to the board come with costs, including the potential for self-dealing and overreaching. However, before we render inside directors extinct, we first should determine whether their costs are outweighed by their benefits.

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.

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.