Document Type

Article

Publication Date

Spring 2007

Keywords

Shareholder control myth, Public companies, Corporate governance, Board governance, Board control, Lucian Bebchuk, Shareholder democracy, Myth of the shareholder franchise

Disciplines

Business Organizations Law

Abstract

In a forthcoming Virginia Law Review article, Professor Lucian Bebchuk argues that the notion that shareholders in public corporations have the power to remove directors is a myth. This is perhaps an overstatement, but Bebchuk is correct to suggest that in a public company with widely dispersed share ownership, it is difficult and expensive for shareholders to overcome obstacles to collective action and wage a proxy battle to oust an incumbent board. Nor is success likely when directors can use corporate funds to solicit proxies to stay in place. The end result, as Adolf Berle and Gardiner Means famously observed in their 1932 book The Modern Corporation and Private Property, is that shareholders in American public corporations are "subservient" to directors "who can employ the proxy machinery to become a self-perpetuating body."

So not only is shareholder control largely a myth in public companies, it has been recognized to be largely a myth for at least three-quarters of a century. What should we conclude from this?

Bebchuk concludes that the time has come to breathe life into the idea of the shareholder-controlled public firm. But there are many myths—vampires, zombies, giant alligators in the sewers of New York City—that we would not want to make real. Would greater shareholder power to oust directors be a similar monster?

An extensive literature on the theory of the corporation suggests that shareholders enjoy net benefits from board governance. Board governance, while worsening agency costs, also promotes efficient and informed decisionmaking, discourages inter-shareholder opportunism, and encourages valuable specific investment in corporate team production. Because board control has both costs and benefits, the wisdom of Bebchuk's proposal to make it easier for shareholders to oust directors must be based on evidence, and the empirical evidence strongly supports the claim that shareholders themselves often prefer firms with strong board control.

Why, then, do so many observers believe shareholders should be given greater influence over boards? Calls for greater "shareholder democracy" have emotional appeal to laymen, the business media, and even many business experts. The emotional appeal of shareholder control can be traced to three sources: a common but misleading metaphor that describes shareholders as the "owners" of corporations; the opportunistic calls of activist shareholders seeking leverage over boards for self-interested reasons; and a strong but unfocused sense that something (anything!) should be done in the wake of recent corporate scandals. The result has been a widespread, and unfortunate, acceptance of yet another myth—the myth that shareholder control of public corporations actually benefits shareholders.

Comments

This article predates the author's affiliation with Cornell Law School.

Publication Citation

Published in: Regulation, vol. 30, no. 1 (Spring 2007).

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