The Myth of the Shareholder Franchise

This post is by Lucian Bebchuk of Harvard Law School.

I recently completed my final revision of a paper on The Myth of the Shareholder Franchise. The paper will come out in the Virginia Law Review later this spring together with responses to it by Martin Lipton, Jonathan Macey, John Olson, Lynn Stout, and E. Norman Veasey. The abstract of the paper is as follows:

The power of shareholders to replace the board is a central element in the accepted theory of the modern public corporation with dispersed ownership. This power, however, is largely a myth. I document in this paper that the incidence of electoral challenges during the 1996–2005 decade was very low. After presenting this evidence, the paper analyzes why electoral challenges to directors are so rare, and then makes the case for arrangements that would provide shareholders with a viable power to remove directors. Under the proposed default arrangements, companies will have, at least every two years, elections with shareholder access to the corporate ballot, reimbursement of campaign expenses for candidates who receive a sufficiently significant number of votes (for example, one-third of the votes cast), and the opportunity to replace all the directors; companies will also have secret ballot and majority voting in all directors elections. Furthermore, opting out of default election arrangements through share-holder-approved bylaws should be facilitated, but boards should be constrained from adopting without shareholder approval bylaws that make director removal more difficult. Finally, I examine a wide range of possible objections to the pro-posed reform of corporate elections, and I conclude that they do not undermine the case for such a reform.

The article is a work that has been long in the making. It is based on the Raben Lecture in Corporate Law I delivered at Yale Law School in October 2005 and the Uri and Caroline Bauer Lecture I delivered at Cardozo in September 2005. The paper continues my work on invigorating corporate elections in The Case for Shareholder Access to the Ballot and my work on increasing shareholder power in The Case for Increasing Shareholder Power and in Letting Shareholders Set the Rules. This is a subject on which I continue to work so comments would be most welcome.

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