The Dividing Line Between Shareholder Democracy and Board Autonomy: Inherent Conflicts of Interest as Normative Criterion

Abstract

In the past decades, shareholder democracy has been the center of attention in corporate governance research. Academic commentators have lined up on both sides of the debate and have fiercely advocated either increasing or limiting shareholder power. Yet, the scope of many of these arguments has so far been unclear, so that they could in fact always be used again for even more, or even less, shareholder democracy, until the board or the shareholder meeting is entirely depleted of authority. This article explores the dividing line between shareholder say and board autonomy in public companies and puts forward a normative criterion that can be consistently applied to the various subject matters of corporate decision-making. A criterion based on “inherent” conflicts of interest of directors, I argue, is economically efficient and meets the underlying rationale of existing corporate law systems in Europe and the United States. Specifically, shareholder power should comprise, but also be limited to, matters in which directors face an inherent conflict of interest. The problems of shareholder passivity, short-termism and empty voting and the concern about stakeholder interests do not call for a further reduction of shareholder power beyond this limitation.