There's a new paper out, Back to the Future? Reclaiming Shareholder Democracy Through Virtual Annual Meetings (August 26, 2020), by Yaron Nili and Megan Shaner, which argues that:
From demanding greater executive accountability to lobbying for social and environmental policies, shareholders today influence how managers run American corporations. In theory, shareholders exert that influence through the annual meeting: a forum where any shareholder, large or small, can speak their mind, engage with the corporation’s directors and managers, and influence each other. But today’s annual meetings, where a widely diffused group of owners often vote by proxy, are largely pro forma: only handful of shareholders attend the meeting and voting results are largely determined prior to the meeting. In many cases, this leaves Main Street investors’ voice unspoken for.
But modern technology has the potential to resurrect the annual meeting as the deliberative convocation and touchstone of shareholder democracy it once was. COVID-19 has forced most American corporations to hold their annual meetings virtually. Virtual meetings allow shareholders to attend meetings at a low cost, holding the promise of re-engaging retail shareholders in corporate governance. If structured properly, virtual meetings can reinvigorate the annual meeting, reviving shareholder democracy while maintaining the efficiency benefits of proxy voting.
It's a well written and researched paper, but I don't believe either that there ever was such a thing as shareholder democracy or that we should try to create shareholder democracy. (To be clear, I'm talking here about public corporations, not close corporation).
As to the former, the separation of control and the concomitant limitation of shareholder participation in corporate decision making is not new:
According to Berle and Means's version of economic history, dispersed ownership arose as a consequence of the development of large capital-intensive industrial corporations during the late nineteenth century. These firms required investments far larger than a single entrepreneur or family could provide, which could be obtained only by attracting funds from many investors. Because small investors needed diversification, even very wealthy individuals limited the amount they would put at risk in any particular firm, further fragmenting share ownership. The modern separation of ownership and control was the direct result of these forces, or so the story goes.
Professor Walter Werner aptly referred to Berle and Means's account as the “erosion doctrine.” According to their version of history, there was a time when the corporation behaved as it was supposed to:
The shareholders who owned the corporation controlled it. They elected a board of directors to whom they delegated management powers, but they retained residual control, uniting control and ownership. In the nation's early years the states created corporations sparingly and regulated them strictly. The first corporations, run by their proprietors and constrained by law, exercised state-granted privileges to further the public interest. The states then curtailed regulation . . . and this Eden ended. The corporation expanded into a huge concentrate of resources. Its operation vitally affected society, but it was run by managers who were accountable only to themselves and could blink at obligations to shareholders and society. The erosion doctrine, however, rested on a false account of the history of corporations. Werner explained that economic separation of ownership and control in fact was a feature of American corporations almost from the beginning of the nation:
Banks, and the other public-issue corporations of the [antebellum] period, contained the essential elements of big corporations today: a tripartite internal government structure, a share market that dispersed shareholdings and divided ownership and control, and tendencies to centralize management in full-time administrators and to diminish participation of outside directors in management.
In contrast to Berle and Means's account, which rested on technological changes during the nineteenth century, this alternative account rests on the early development of secondary trading markets. Such markets existed in New York and Philadelphia by the beginning of the nineteenth century. The resulting liquidity of corporate stock made it an especially attractive investment, which in turn made selling stock to the public an attractive financing mechanism. Stocks were purchased by a diversified and dispersed clientele, including both institutions and individuals. The national taste for speculation also played a part in the early growth of the secondary trading markets and, in turn, to dispersal of stock ownership. As a result of these economic forces, ownership and control separated not at the end of the nineteenth century, but at its beginning.
If this version of history is correct, [and it is] there never was a time in which unity of control and ownership was a central feature of U.S. corporations. To the contrary, it appears that ownership and control separated at a very early date.
Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. Rev. 601, 620–21 (2006).
As to the second point, I have long argued that:
While notions of shareholder democracy permit powerful rhetoric, corporations are not New England town meetings. Put another way, we need not value corporate democracy simply because we value political democracy.
Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 Del. J. Corp. L. 769, 812 (2006).
More recently, I have argued that:
Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the traditional answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions.
This allocation of decision-making power follows from the basic principle that public corporations are not shareholder democracies. Although shareholders nominally own the corporation, they possess very few control rights normally associated with ownership. Instead, corporate law assigns virtually plenary decision-making authority to the board of directors and the subordinate managers to whom the board properly delegates authority.
This allocation of authority is essential if the corporation is to be run efficiently. Just as a large city cannot be run as a New England town meeting, a large corporation is a poor candidate for direct democracy. There simply are too many widely dispersed shareholders who have varying degrees of information about the company, differing goals and investment time horizons, and competing ideas about optimal business practices for their preferences to be aggregated efficiently. Accordingly, state corporate law traditionally has given primary decision-making authority to the board and the managers to whom the board properly delegates authority. As the Delaware General Corporation Law puts it, the “business and affairs” of a corporation “shall be managed by or under the direction of a board of directors.”
Stephen M. Bainbridge, Revitalizing SEC Rule 14a-8's Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705, 707–08 (2016).
My longest and most detailed argument against policies designed to promote shareholder democracy is contained in Chapter 1 of my book The New Corporate Governance in Theory and Practice
In sum, there was no Golden Age of shareholder democracy. There simply is nothing there to reclaim. And that's a very good thing.
