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Reply: LETTING SHAREHOLDERS SET THE RULES
by Lucian A. Bebchuk. [ Full Text ] |
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119 Harv. L. Rev. 1784 (2006) |
In this issue of the journal, Professor Stephen Bainbridge and Vice Chancellor Leo Strine take issue with my arguments for increasing shareholder power. Professor Bainbridge offers the perspective of one who does not wish to see any change in the status quo. He accepts my account of shareholder weakness but believes it should be “welcome[d].” In his view, any increase in shareholder power would be undesirable.
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Vice Chancellor Strine puts forward a critique from the perspective of an “open-minded corporate law ‘traditionalist.’” Unlike Bainbridge, Strine is sympathetic to the concern that, under existing arrangements, boards are insufficiently accountable and excessively insulated. In his view, however, changes, if any, should be limited to enhancing shareholder power to replace directors. Companies must remain purely representative democracies in which shareholders can overrule a board that refuses to make rules-of-the-game changes the shareholders favor only by electing a new team of directors that would initiate such changes.
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I respond below to Bainbridge and Strine as well as further develop my arguments for shareholder power to make rules-of-the-game decisions. Part I discusses the significant costs arising from granting boards control over rules-of-the-game decisions during the often long life of public companies. Part II responds to the claim that shareholder power to make rules-of-the-game decisions is inconsistent with reaping the benefits of centralized management.
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| Part III shows that reform of the corporate election process, which I very much support, would not by itself eliminate the problems resulting from denying shareholders the power to make rules-of-the-game decisions. Part IV argues that, despite problems with shareholder incentives and decisionmaking, leaving boards with unaccountable control over the governance rules could well be inferior to empowering shareholders. Finally, Part V responds to the claim that the proposed arrangement can be dismissed on the grounds that, if it were beneficial, it would already be offered by corporate charters or state law rules.
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