Mark Roe has done a great job of explaining how the competitive federalism that once characterized US corporate law has morphed from a competition between states into a competition between the federal government and Delaware. His latest paper in this area is The Corporate Shareholder’s Vote and its Political Economy, in Delaware and in Washington. It's a good read.
Shareholder power to effectively nominate, contest, and elect the company’s board of directors became core to the corporate governance reform agenda in the past decade, as corporate scandal and financial stress put business failures and scandals into headlines and onto policymakers’ agendas. As is well-known to corporate analysts, the incentive structure in corporate elections typically keeps shareholders passive, and incumbent boards largely control the electoral process, usually nominating and electing themselves or their chosen successors. Contested corporate elections are exceedingly rare. But shareholder power to directly place their nomination for a majority of the board in the company-paid-for voting documents, as the SEC pushed towards, could revolutionize American corporate governance, by sharply shifting authority away from insiders, boards, and corporate managements. During the past decade, the SEC proposed, withdrew, and then promulgated rules that would shift the control of some corporate election machinery, to elect a minority of the board, away from insiders and into shareholders’ hands. Then, in July 2011, the D.C. Circuit Court of Appeals struck down the most aggressive of the SEC’s rules.
For corporate law academics, a surprising and controversial foundational feature of this decade-long process was that core corporate law was up for grabs, but until the end of the decade, the action was in Washington, not the states, despite that a century of corporate law theory has focused on jurisdictional competition among states in making corporate law, with analysts praising (or bemoaning) jurisdictional competition as improving (or denigrating) corporate law quality. Yet, states were largely silent on these shareholder-power initiatives until 2009, when Delaware, the state that charters a majority of America’s public corporations, amended its corporate code to facilitate shareholder nominees. The analytics of the interaction between state and federal lawmaking here fail to fit the long-standing state competition analytics that corporate academics have favored and, hence, I analyze what needs to be rethought about corporate lawmaking here. It’s hard to understand Delaware passing its 2009 shareholder statute if the issue had not been on the national agenda for nearly a decade. And, once we see that fact, we need next to understand how strategic motivations could explain some corporate players’ actions, because the strongest interest group inputs at each jurisdictional level sharply differ. The vertical interaction between states and Washington in reforming shareholder-insider voting power in the past decade is a far cry from the classical understanding of American corporate law being honed in horizontal state-to-state competition and implicates sharply differing political economy, interest-group dynamics.
