The John M. Olin Center

Paper Abstract

500. Lucian Bebchuk, The Case for Increasing Shareholder Power, 12/2004; subsequently published in Harvard Law Review, Vol. 118, No. 3, January 2005, 833-914.

Abstract: 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. My analysis and empirical evidence indicate 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 operate over time to improve all corporate governance arrangements.

Furthermore, I argue that, as part of their power to amend governance arrangements, shareholders should be able to adopt provisions that would give them subsequently a specified power to intervene in additional corporate 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 a specified 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 largely from inducing management to act in shareholder interests without shareholders having to exercise their power to intervene. I also discuss how such a regime could best be designed to address concerns that supporters of management insulation could raise; for example, 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.

500: PDF