The Case for Increasing Shareholder Power

By L. Bebchuk. 2003

571 citations recorded by the source corpus.

This paper reconsiders the basic allocation of power between boards and shareholders in publicly traded companies with dispersed ownership. U.S. corporate law has long precluded shareholders from initiating any changes in the company's basic governance arrangements. I show, and support with empirical evidence, that shareholders' existing power to replace directors is insufficient to secure the adoption of value-increasing governance arrangements that management disfavors. I put forward an alternative regime that would allow shareholders to initiate and adopt rules-of-the-game decisions to change the company's charter or state of incorporation. Providing shareholders with such power would improve over time to improve all corporate governance arrangements, largely by inducing management to initiate value-increasing changes and without shareholders' having to exercise their power to intervene.Furthermore, I argue that, as part of their power to amend governance arrangements, shareholders should be able to adopt provisions that give them additional power to intervene, down the road, in specific business decisions. Power to intervene in game-ending decisions (to merge, sell all assets, or dissolve) could address management's bias in favor of the company's continued existence. Power to intervene in scaling-down decisions (to make cash or in-kind distributions) could address management's tendency to retain excessive funds and engage in empire-building. Shareholders' ability to adopt, when necessary, provisions that give themselves additional power to intervene could thus produce benefits in many companies. A regime with shareholder power to intervene, I show, would address governance problems that have long troubled legal scholars and financial economists. These benefits would result mainly from inducing management to act in ways that better serve shareholder interests and without shareholders' having to exercise their power to intervene. I also discus how such a regime could best be designed to address concerns that supporters of management insulation could raise; for example, to allay such concerns, shareholder-initiated changes in governance arrangements could be adopted only if they enjoy shareholder support in two consecutive annual meetings. Finally, examining a wide range of possible objections, I conclude that they do not provide a good basis for opposing the proposed increase in shareholder power.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/538955b99685a2b7f06bae39a5a00b51fb0731eb

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Strategy and Management

Citations in the corpus

Shareholder Activism and CEO Pay (2011, background): “Bebchuk, Cremers and Peyer (2008) define this variable as a proxy for CEO “centrality” and show that it is correlated with lower profitability and a greater tendency to reward the CEO for luck.”
The Market Reaction to Corporate Governance Regulation (2010, unknown): “There are very few examples of firms voluntarily adopting this type of proxy access.8 Bebchuk (2005) argues that proxy proposals are an important mechanism for disciplining managers.”
Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors (2009, unknown): “Prior studies on activism almost always find that shareholder activists are more likely to target poorly performing firms (e.g., Gordon and Pound (1993), Bethel, Liebeskind, and Opler (1998), Faleye (2004), Becht et al. (2007)).”
Shareholder Activism through Proxy Proposals: The European Perspective (2010, unknown): “Some studies regard shareholder-initiated proxy proposals as a useful tool of corporate governance and the proposal sponsors as valuable monitoring agents (Bebchuk (2005); Harris and Raviv (2008); Renneboog and Szilagyi (2009)).”
Corporate Governance: What Can We Learn from Public Governance? (2006, background): “Board members are the representatives of shareholders, and it is hardly conceivable that shareholders should not have the possibility to exercise their right of free choice (see also Bebchuk, 2003, 2005 ).”
Governance Mechanisms and Bond Prices (2007, unknown): “Bebchuk, Coates, and Subramanian (2002)”
Shareholder Votes and Proxy Advisors: Evidence from Say on Pay (2013, unknown): “When we include the ratio of CEO pay to the pay of the top five executives, a proxy for CEO centrality often viewed as a symptom of poor governance and excess CEO power (Bebchuk, Cremers and Peyer 2011), the additional variable is not a significant determinant of the voting dissent. Finally, followi”
Control of Corporate Decisions: Shareholders vs. Management (2010, background): “Meanwhile, shareholders have been pressing for changes in the rules governing access to the corporate proxy process, especially in regard to nominating directors.”