Section 971 of Senator Chris Dodd's draft Restoring American Financial Stability Act of 2010 (the Wall Street Reform bill) imposes a federally-mandated majority vote in the election of directors of all corporations.
The provision ought to be removed from the final draft of the bill for three reasons:
- Federal law historically has been concerned solely with disclosures made in connection with shareholder voting and, to a much lesser extent, the processes by which proxy voting takes place. State law traditionally governed substantive issues like the vote required for electing directors. As documented in an earlier post, the dominance of state law in this area has served us well. In contrast, federal law imposes a one size fits all model that will impede innovation in corporate governance.
- A federal majority vote mandate is unnecessary. Both the Delaware General Corporation Law and the Model Business Corporation Act have been amended to authorize majority voting. Unlike Section 971, however, state law does not adopt a one size fits all rule. Instead, both statutes have significant scope for private ordering so that firms can adapt majority voting rules to their unique circumstances.
- The evidence suggests that shareholders do not value majority voting. An event study of "stock price movements of firms around announcements that they have or will adopt some form of majority voting ... found no statistically significant market reaction.
In sum, there is no justification -- none, nada, zilch -- for section 971 to be included in a bill that supposed to be about Wall Street reform.
