Lucian Bebchuk's acolytes continue to spread the claim that shareholders ought to be actively involved in an ever-expanding array of corporate decisions. The latest case in point is Robert Jackson's post at the Harvard Forum, which asserts that the SEC should "give shareholders a greater role in corporate political speech decisions."
Jackson praises the SEC's recent shift in position on Rule 14a-8, which allows shareholders to include proposals on the company’s proxy ballot for a vote by shareholders. Formerly, the SEC took the position that proposals affected corporate political speech could be excluded from the company's proxy statement under rule 14a-8(i)(7) as ordinary business matters. Recently, however, the SEC has changed its position and has begun requiring companies to include such proposals. As Jackson explains:
This proxy season, a Home Depot shareholder, NorthStar Asset Management, asked the company to include on its ballot a proposal recommending, among other things, that the board disclose its policies on electioneering contributions—and give shareholders an advisory vote on those policies. Home Depot sought permission from the SEC to exclude the proposal from its ballot, arguing that the proposal related to Home Depot’s ordinary business operations. In a letter opposing Home Depot’s request, and citing our article, NorthStar argued that Rule 14a-8 required the proposal to be included.
In March, the staff agreed with NorthStar, concluding that the proposal could not be excluded on the ground that it related to Home Depot’s ordinary business operations. Home Depot’s proxy statement, filed two weeks later, now includes the proposal on the ballot—along with management’s statement opposing the proposal.
One wonders why the SEC's shift in position on this issue doesn't raise the same sort of issues raised in the ADSCME v. AIG case. AFSCME's pension fund owned a substantial block of AIG stock, and advanced a shareholder proposal that would have amended the firm’s by-laws effectively to turn the firm’s proxy solicitation material into a ballot: the firm would be required to include in its proxy material not just the incumbent board’s slate, but also rival slates proposed by insurgents. AIG management asked the SEC whether it could exclude the proposal on the grounds that “relate[d] to an election” (Rule 14a-8(i)(8)). The SEC replied that it could (i.e., it issued a no-action letter), AIG excluded the proposal, and AFSCME sued.
The court held that AIG may not exclude the proposal.
Because the interpretation of Rule 14a-8(i)(8) that the SEC advances in its amicus brief-that the election exclusion applies to proxy access bylaw proposals-conflicts with the 1976 Statement, it does not merit the usual deference we would reserve for an agency’s interpretation of its own regulations. … The SEC has not provided, nor to our knowledge has it or the Division ever provided, reasons for its changed position regarding the excludability of proxy access bylaw proposals. Although the SEC has substantial discretion to adopt new interpretations of its own regulations in light of, for example, changes in the capital markets or even simply because of a shift in the Commission’s regulatory approach, it nevertheless has a “duty to explain its departure from prior norms.” Atchison, T. & S.F. Ry. Co. v. Wichita Bd. of Trade, 412 U.S. 800, 808, 93 S.Ct. 2367, 37 L.Ed.2d 350 (1973) (citing Sec. of Agric. v. United States, 347 U.S. 645, 652-53, 74 S.Ct. 826, 98 L.Ed. 1015 (1954))....
Why doesn't the same logic require an explanation here? Preferably by way of a formal rule making subject to APA checks and balances, with opportunity for comment by affected parties?
In any case, as is typical with Bebchuk and his acolytes, Jackson is not satisfied with this victory:
... under current corporate-law rules shareholders’ role in this area remains far too limited. For example, NorthStar’s proposal, consistent with Delaware law, merely recommends that the board disclose its policies on political spending and give shareholders a say on those policies. Even if shareholders overwhelmingly vote for NorthStar’s proposal, Home Depot will not be bound to follow it.
To the extent that the interests of directors and executives in corporate spending on politics diverge from those of shareholders, corporate-law rules should give shareholders meaningful authority with respect to those decisions.
One increasingly wonders if there is any issue Bebchuk and his acolytes think ought to be outside the scope of shareholder decision making.
State corporate law provides clearly that the corporation’s business and affairs are “managed by or under the direction of a board of directors.” The vast majority of corporate decisions accordingly are made by the board of directors acting alone, or by persons to whom the board has properly delegated authority. Shareholders have virtually no right to initiate corporate action and, moreover, are entitled to approve or disapprove only a very few board actions. The statutory decision-making model thus is one in which the board acts and shareholders, at most, react.
Shareholder voting thus is simply one of many corporate accountability mechanisms—and not a very important one at that. In theory, of course, shareholders could vote incompetent directors out of office. In the real world, however, so-called proxy contests are subject to numerous legal and practical impediments that render them largely untenable as a tool for disciplining managers. Accordingly, the product, capital, and employment markets are all far more important than voting as a constraint on agency costs. To the extent voting matters, it does so solely because it facilitates the market for corporate control. If agency costs get high enough, it will become profitable for some outsider to acquire a controlling block of shares and exercise their associated voting rights to oust the incumbent board.
Jackson's complaint that Home Depot is not bound by the proposal thus ought to fall on deaf ears. As Delaware’s Chancellor William Allen observed, our “corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm.” Paramount Communications Inc. v. Time Inc., 1989 WL 79880 at *30 (Del. Ch. 1989), aff’d, 571 A.2d 1140 (Del. 1990).
Allen further recognized that the fact that many, “presumably most, shareholders” would have preferred the board to make a different decision “does not . . . afford a basis to interfere with the effectuation of the board’s business judgment.” In short, corporations are not New England town meetings.
It's also worth remembering that the beneficiaries of Bebchuk's incessant pressing of ever expanding shareholder power will not be ordinary investors. Instead. as Roberta Romano observed with respect to union and public pension fund sponsorship of shareholder proposals:
It is quite probable that private benefits accrue to some investors from sponsoring at least some shareholder proposals. The disparity in identity of sponsors—the predominance of public and union funds, which, in contrast to private sector funds, are not in competition for investor dollars—is strongly suggestive of their presence. Examples of potential benefits which would be disproportionately of interest to proposal sponsors are progress on labor rights desired by union fund managers and enhanced political reputations for public pension fund managers, as well as advancements in personal employment. … Because such career concerns—enhancement of political reputations or subsequent employment opportunities—do not provide a commensurate benefit to private fund managers, we do not find them engaging in investor activism.[1]
[1] Roberta Romano, Less Is More: Making Shareholder Activism A Valued Mechanism Of Corporate Governance, 18 Yale J. Reg. 174, 231-32 (2001).
I've dealt with these issues in greater length elsewhere, most notably The Case for Limited Shareholder Voting Rights, 53 UCLA Law Review 601-636 (2006), which explained that:
Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions.
As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before changing making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.
And Director Primacy and Shareholder Disempowerment, 119 Harvard Law Review (2006), which was a response to Lucian Bebchuk's article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements.
In response, I made three principal claims:
First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights.
Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule.
Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.
