Herewith the text of remarks I gave yesterday to a gathering at UCLAW's Lowell Milken Institute:
In the US, corporate governance traditionally has been board-centric. Section 141(a) of the Delaware General Corporation Law commands that “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” The drafters of the Model Business Corporation Act tell us that the corporation code of every state but one have some such formulation. I call this the director primacy model of corporate governance. Other call it the board-centric model. In retrospect, if I had it to do over again, I would too.
Why is director primacy almost universally enshrined in corporate statutes? Why not shareholder primacy, in which management power is vested in the shareholders, who own the corporation? Alternatively, why not managerialism, in which management authority is vested in the Chief Executive Officer (CEO) or an executive committee of top management?
Those are the questions to which the bulk of my scholarship has been devoted for the last 15 years or so.
I set out not to reform the statutory allocation of power, but simply to understand it. As it turned out, however, the analysis ended up having strong normative implications.
In particular, I’ve spent a considerable amount of time debating the merits of shareholder activism. As you likely know, shareholder activists have already achieved considerable results. Majority voting, say on pay, board declassifications, proxy expense reimbursement, and proxy access bylaws are just the most prominent legal changes they have affected.
Demands from the investor community for further shareholder empowerment, moreover, remain unrelenting. As such, the “most important trend in corporate governance today … is the move toward ‘shareholder empowerment.’” Iman Anabtawi & Lynn Stout, Fiduciary Duties for Activist Shareholders, 60 Stan. L. Rev. 1255, 1255 (2008).
The most important question in corporate governance today thus is finding the endpoint of the shareholder empowerment movement. Is there a balance that is both politically feasible and theoretically sound?
I am pleased to report that The Lowell Milken Institute has authorized me to organize a conference at UCLA Law in April 2014 that will bring together prominent corporate law scholars to discuss the central question of corporate governance; i.e., “who decides?” The focus will be on the changing dynamics in both law and practice that have significantly empowered shareholders.
I plan to invite scholars working in all three of the major models of corporate governance currently in widespread use in the corporate legal literature; namely, director primacy, team production, and shareholder primacy.
Director primacy is the model I have developed over the last ten years or so. It attempts to both explain and defend the broad grant of authority to boards of directors that is at the heart of American corporate law. It argues that this grant of authority is essential to ameliorating the informational demands a large corporation faces. The grant of authority, however, creates the potential for abuse of that authority, creating a need for accountability mechanisms to limit such abuses. The tradeoff between authority and accountability is at the heart of corporate law. I propose that a presumption should generally favor authority, and therefore I oppose most proposals to increase shareholder power.
Director primacy has been well received as a model of corporate governance. And I have been recognized as “the leading proponent of the director primacy view,” to quote J.W. Verret, Treasury, Inc.: How the Bailout Reshapes Corporate Theory and Practice, 27 Yale J. on Reg. 283, 321 (2010).
To be sure, director primacy has its critics. Some see it as normatively unattractive, while others see it as lacking descriptive power. A leading competitor to director primacy is the team production theory of Margaret Blair and Lynn Stout. Like director primacy, team production theory defends the broad grant of authority to boards. However, it draws upon a different theoretical framework in doing so. Although team production theorists agree with me on the desirability of granting significant authority to boards, they disagree on the proper ultimate aims of the board in exercising that authority. I believe boards should focus on maximizing the value of the corporation for shareholders. Team production theorists believe boards should focus on maximizing the net value created for all corporate constituents collectively.
More importantly, director primacy is strongly opposed by those scholars who adhere to shareholder primacy, with Lucian Bebchuk as the most prominent example. Shareholder primacy theorists contend not only that shareholders are the principals on whose behalf corporate governance is organized, but also that shareholders do (and should) exercise ultimate control of the corporate enterprise. Hence, for example, shareholder primacy assumes shareholder voting rights that are both exclusive and strong.
The debate between these models is widely recognized as having considerable importance for our understanding of corporate law and governance. Faith Stevelman, for example, notes that “[t]he competing claims of ‘shareholder primacy’ and ‘director primacy. go back to the early beginnings of corporate law.” Faith Stevelman, Globalization and Corporate Social Responsibility: Challenges for the Academy, Future Lawyers, and Corporate Law, 53 N.Y. L. Sch. L. Rev. 817, 841 (2008/2009).
The choice between shareholder and director primacy is most obvious relevant to proposals to empower shareholders, such as say on pay, proxy access, and majority voting. At present, as Gordon Smith notes, “[d]espite the recent moves facilitating shareholder empowerment with respect to director elections, both Delaware and the SEC continue to rely on ‘director primacy’ as a foundational principle of corporate governance.” D. Gordon Smith, Private Ordering With Shareholder Bylaws, 80 Fordham L. Rev. 125, 170 (2011). As advocates of shareholder empowerment continue to press their claims with respect to other legal issues, however, the pressure on Delaware and the SEC to chose between shareholder and director primacy will become even more intense.
The conference therefore will be devoted to using these models to explore the ongoing question of shareholder empowerment.