The Case for Increasing Shareholder Power

Abstract

TABLE OF CONTENTS I. INTRODUCTION: RECONSIDERING THE ALLOCATION OF POWER BETWEEN MANAGEMENT AND SHAREHOLDERS II. THE EXISTING ALLOCATION OF POWER A. U.S. Law 1. Rules-of-the-Game Decisions 2. Specific Business Decisions B. The Different Approach of the United Kingdom III. LETTING SHAREHOLDERS SET THE RULES A. The Limits of Shareholder Power To Replace Directors 1. Some Empirical Evidence 2. Why the Power To Replace Directors Is Insufficient B. Shareholders' Veto Power over Fundamental Changes 1. Cases in Which Management Prefers the Status Quo 2. Cases in Which Both Management and Shareholders Prefer Change 3. Bundling a Change with Something Else C. The Benefits of Letting Shareholders Set the Rules 1. Corporate Charters 2. Reincorporation Decisions and State Law Rules 3. One Rule Change To Improve All Governance Arrangements D. Design 1. Submission of Proposals 2. Adoption of Proposals 3. Adoption of the Proposed Regime IV. OBJECTIONS TO LETTING SHAREHOLDERS SET THE RULES A. Rare Adoption of Shareholder-Initiated Changes 1. Will Shareholders Have Incentives To Bring Proposals? 2. Will Shareholders Vote Against Management? 3. It's the Indirect Benefits, Stupid B. The Costs of Contests over Nuisance Proposals C. Shareholders Will Make the Wrong Decisions 1. Imperfect Information 2. The Consistency Argument Against Back-Seat Driving 3. Special Interests and Short-Term Horizons D. Opportunistic Proposals E. Disruptive Cycles F. Panglossian Claims G. Comparison to Political Referenda V. GAME-ENDING, SCALING-DOWN, AND OTHER SPECIFIC BUSINESS DECISIONS A. Leaving Shareholders the Choice Whether To Have a Choice 1. Management's Informational Advantage 2. Let Shareholders Decide B. Game-Ending Decisions 1. Arrangements with Shareholder Intervention Power 2. Addressing the Managerial Bias Toward Retaining Control C. Scaling-Down Decisions 1. Arrangements with Shareholder Intervention Power 2. Addressing Empire-Building and Free-Cash-Flow Problems VI. MANAGEMENT INSULATION AND STAKEHOLDER INTERESTS A. The Puzzling Scope of the Stakeholder Interests Claim B. Do Weak Shareholders Benefit Stakeholders? C. Management Protection in Stakeholder Clothes VII. CONCLUSION This Article reconsiders the basic allocation of power between boards and shareholders in publicly traded companies with dispersed ownership. U.S. corporate law has long precluded shareholders from initiating any changes in the company's basic governance arrangements. Professor Bebchuk's analysis and his empirical evidence indicate that shareholders' existing power to replace directors is insufficient to secure the adoption of value-increasing governance arrangements that management disfavors. He puts forward an alternative regime that would allow shareholders to initiate and adopt rules-of-the-game decisions to change the company's charter or state of incorporation. Providing shareholders with such power would operate over time to improve all corporate governance arrangements. Furthermore, Professor Bebchuk argues that, as part of their power to amend governance arrangements, shareholders should be able to adopt provisions that would give them subsequently a specified power to intervene in additional corporate decisions. Power to intervene in game-ending decisions (to merge, sell all assets, or dissolve) could address management's bias in favor of the company's continued existence. Power to intervene in scaling-down decisions (to make cash or in-kind distributions) could address management's tendency to retain excessive funds and engage in empire-building. …