The Case for Shareholder Access to the Ballot
Lucian Arye Bebchuk, 59(1): 43-66 (Nov. 2003)
The SEC is now considering a proposal to require some public companies to include in their proxy materials candidates for the board nominated by shareholders. Providing such shareholder access to the corporate ballot, I argue, would improve corporate governance. Analyzing each of the objections that have been raised against such shareholder access, I conclude that none of them provides a good basis for opposing shareholder access. The case for shareholder access is strong.
Election Contests In the Company's Proxy: An Idea Whose Time Has Not Come
Martin Lipton and Steven A. Rosenblum, 59(1): 67-94 (Nov. 2003)
The SEC has proposed rules that, under specified circumstances, would permit shareholders to run an election contest using a company's own proxy statement. The authors argue that the potential harm from this proposal far outweighs any potential benefit. The proposed rules would increase the frequency of election contests, causing significant disruption and diversion of corporate resources every year. The shareholders most likely to seek to nominate directors, such as public pension funds and labor unions, have political agendas and interests beyond the business performance of the company. To the extent dissident directors are elected to boards, these boards are likely to become balkanized and less functional. An increase in the number of election contests is also likely to exacerbate the current difficulties in recruiting qualified new director candidates, and make existing directors more risk averse. Proponents of the proposed rules seem to rest their support on the model of the shareholder as the ''owner'' of a company, just as an individual owns a piece of property. The relationship of shareholders to a public company, however, is far more complex. This relationship does not support the argument that shareholders have an intrinsic right to use a company's proxy statement to nominate directors. Finally, the authors point out that the last two years have already seen the adoption of the most far-reaching corporate governance reforms since the 1930s. These reforms should be given the chance to work before the SEC pursues a whole new set of rules that will likely do far more harm than good.
Institutional Perspective on Shareholder Nominations of Corporate Directors
Robert C. Pozen, 59(1): 95-108 (Nov. 2003)
This paper applies the cost-benefit framework for shareholder activism, utilized by most institutional investors, to the five alternative approaches to shareholder participation in director elections suggested by the ABA Task Force on this subject. I show that none of them would likely generate benefits exceeding its costs, although there are worthwhile components of several alternatives suggested by the ABA. I argue that some of the problems involved in the alternatives under consideration could be avoided by allowing institutional investors to cumulate their votes for one director nominee. However, cumulative voting is not permitted by most company charters, which may be changed only if the company's directors put forward a charter amendment for a vote by its shareholders.
Report on Proposed Changes in Proxy Rules and Regulations Regarding Procedures for the Election of Corporate Directors
Task Force on Shareholder Proposals of the committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association, 59(1): 109-43 (Nov. 2003)
Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
70(2): 319-320 (Spring 2015)
Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.