Bloomberg Law reports that Jay Clayton recently told the US Chamber of Commerce that:
“We live in a democracy. We have a democratized public company system. That's good.”
Corporate governance is not supposed to be a democracy:
As Delaware’s Chancellor William Allen has 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.” Allen further recognized that the fact that many, “presumably most, shareholders” would have preferred the board to make a different decision “done 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.
As I have explained elsewhere:
As my director primacy model of corporate governance explains, the corporation is a vehicle by which directors hire equity capital. Shareholders are entitled to use the vote to ensure that directors use their capital to pursue wealth maximization rather than personal self-interest, but shareholders have no right to set corporate policy or otherwise exercise the rights of ownership. As I explained in my article Director v. Shareholder Primacy in the Convergence Debate:
Large-scale investor involvement in corporate decisionmaking seems likely to disrupt the very mechanism that makes the public corporation practicable; namely, the centralization of essentially nonreviewable decisionmaking authority in the board of directors. The chief economic virtue of the public corporation is not that it permits the aggregation of large capital pools, as some have suggested, but rather that it provides a hierarchical decisionmaking structure well-suited to the problem of operating a large business enterprise with numerous employees, managers, shareholders, creditors, and other inputs. In such a firm, someone must be in charge: “Under conditions of widely dispersed information and the need for speed in decisions, authoritative control at the tactical level is essential for success.” While Roe argues that shareholder activism “differs, at least in form, from completely shifting authority from managers to” institutions, it is in fact a difference in form only. Shareholder activism necessarily contemplates that institutions will review management decisions, step in when management performance falters, and exercise voting control to effect a change in policy or personnel. For the reasons identified above, giving institutions this power of review differs little from giving them the power to make management decisions in the first place. Even though institutional investors probably would not micromanage portfolio corporations, vesting them with the power to review major decisions inevitably shifts some portion of the board’s authority to them.
As the paper further explains, corporate law therefore provides a whole host of devices that insulate directors from shareholder influence. The drive for shareholder democracy thus ... threatens to undermine the very structures that make corporations work.
All of which brings us to the case for pruning the shareholder proposal rule:
I made the case for pruning the rule in my article Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal (March 29, 2016). UCLA School of Law, Law-Econ Research Paper No. 16-06. Available at SSRN: https://ssrn.com/abstract=2750153....
Update: A friend who knows the SEC very well sent this email in response to this post:
I saw your tweet about Clayton's Chamber remarks. I think there is a disconnect (at least I hope so) between your interpretation and what he meant. I read his comments to applaud the ability of the Everyman to invest in public companies. And separately, he had fantastic commentary on proxy advisory firms and 14a-8 (see below). I think he's our best hope for real reform in the governance space, and he can use allies like you.
