My friend and former ABA Committee on Corporate Laws colleague has a new article on The Model Business Corporation Act at Sixty: Shareholders and Their Influence (April 25, 2011), which is available at SSRN: http://ssrn.com/abstract=1822401
Abstract: 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.
As one of those opponents who defended what the Committee calls the "board centric" model and that I call "director primacy," I was pleased to see the Committee issue a report strongly affirming board centric governance in Committee on Corporate Laws of the American Bar Association Section of Business Law (2010), “Report on the Roles of Boards of Directors and Shareholders of Publicly Owned Corporations,” available at: http://www.abanet.org/media/nosearch/task_force_report.pdf. Having said that, however, I was disappointed to see the Committee concede to the activist agenda on various issues like majority voting, bylaws, reimbursement, and so on.
Given the huge advantages of director primacy and the huge costs of shareholder activism, as I document in my essay Director Primacy, somebody needs to draw a line in the sand and defend the board centric model against the unrelenting attack launched by special interest shareholders like union and state and local government pension funds and their academic enablers. Hopefully it will by the MBCA's drafters.
