I certainly admire Professor Stout‘s work on corporate governance, which has substantially informed my understanding of the issue of shareholder primacy. I cannot agree, however, with the views set forth in her recent Wall Street Journal op-ed on the SEC’s upcoming vote on shareholder proxy access, which urges the SEC to substantially restrict shareholder access to the corporate ballot.
Professor Stout suggests that manager-friendly access rules are responsible for the fact that many of the largest companies are headquartered in the United States, and shareholder-friendly rules explain the absence of large companies in the United Kingdom. But the cross-Atlantic comparison is shaky at best. A variety of macroeconomic differences offer a more cogent explanation for the disparity between the U.S. and the U.K. in headquartering large firms than board sensitivity to shareholder communications. (Moreover, as Jay Brown previously argued on this Blog, many of the largest firms headquartered prior to recent pro-shareholder reforms in the United Kingdom.).
The conventional wisdom has always been that institutional investors are unwilling to engage in substantive oversight of their investments because of conflicts of interest and collective-action problems. Activist hedge funds are changing that calculus because they are able to internalize future reputation benefits from oversight. As I explain in my forthcoming article Pandora’s Ballot Box, or a Proxy With Moxie?, these activists benefit from improved capital flows from institutional investors through reputational benefits, and can use their reputational capital to engage in more cost-efficient saber-rattling in future contests. That reputation benefit only works, however, if the activist fund builds value for the large, long term investors that dominate the electorate.
Skeptics of shareholder empowerment, among whom Professor Stout and Professor Stephen Bainbridge are the leading voices, tend to ignore two critical policy considerations. First, Delaware corporate law has ensconced the shareholder franchise as the basis for its elegant and risk-savvy review mechanism of board decisions, both in the form of the business-judgment rule and the demand requirement for derivative litigation. Second, the relevant question with respect to shareholder empowerment is not how well the status quo has performed in the past, but how much better markets might perform under narrowly tailored proxy reform that would make elections a realistically balanced endeavor.
In Pandora’s Ballot Box, or a Proxy With Moxie?, I set forth my own proposal for proxy reform, which utilizes an instantaneous-runoff voting method and preferential voting to empower a majority of shareholders to supervise the board with minimal cost to the proxy process. My proposal also would address Martin Lipton‘s central objection to most proxy reform by avoiding the election of special-interest directors. The article, which will appear in the The Business Lawyer shortly, is available for download here.