Vice Chancellor Strine in the Journal of Corporation Law

Editor’s Note: This post is from Hillary Sale of the University of Iowa College of Law. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The University of Iowa College of Law’s Journal of Corporation Law will publish a unique symposium issue in the Fall of 2007 featuring an essay by Vice Chancellor Leo Strine of the Delaware Chancery Court.  The essay is based on the Vice Chancellor’s keynote speech delivered at the Journal‘s annual banquet.  (The essay was described in a previous post on this Blog located here.)  Past speakers at the banquet have included Chief Justice Myron Steele (whose remarks before the Delaware Bar Association last year were covered in this Blog here) and Justices Randy Holland, Jack Jacobs, Henry Ridgley, as well as former Chief Justice Norman Veasey and former Justice Joseph Walsh.

Vice Chancellor Strine’s essay is provocative and interesting.  The title, Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance,  provides a teaser for the essay’s content.  In the essay, Vice Chancellor Strine explores some of the key corporate governance challenges facing corporate actors today.  What makes his essay unique is his emphasis on bringing both labor and management into the governance picture.  Vice Chancellor Strine urges shareowners to focus their activism on long-run corporate performance and stresses that labor and management ought to work together on these issues.

Arguing that in today’s corporate-governance debate “exaggeration is the norm; conversation the exception,” Vice Chancellor Strine points to various positions of parties involved in the debates and urges that they look toward areas of common concern.  He then focuses on management and labor, noting that the economic wealth of both groups is now, more than ever, tied to their equity positions and that both need domestic corporations to grow and flourish.  Given these shared concerns, the Vice Chancellor argues, the two groups ought to be able to come together more to repel the pressures facing companies today.  The first portion of the essay provides a description of those pressures: shrinking equity returns and corresponding demands for increased investment returns; growth in the business of corporate governance; academic and journalistic laziness (for academics, due to their unproductive focus on agency costs, particularly in the contexts of mergers and acquisitions; for journalists, due to their own inertia); inappropriate praise of the “independent” director’s efficacy; and market globalization in the absence of regulatory parity among nations. 

After providing this lengthy list of issues, Vice Chancellor Strine turns to his own proposal: a corporate-governance agenda that would “better foster mutual interest in sustainable growth.”  This portion of the essay details a set of governance tools on which, the Vice Chancellor argues, management and labor should be able to agree–and for which they should advocate.  For example, the Vice Chancellor proposes that corporations should abandon classified boards but keep their poison pills, which can stimulate better takeover offers than might otherwise be available.  he also urges management to accept shareholder pressure for accountability via elections by providing increased shareholder access.  In addition, the Vice Chancellor argues, precatory proposals should be eliminated in favor of bylaw-based governance, and shareowners should be permitted to adopt nonrepealable bylaws requiring shareholder approval for certain CEO compensation. 

As managers give, the Vice Chancellor notes, so should shareholders, and so he proposes that the groups work together to agree on what aspects of Sarbanes-Oxley’s much-discussed Section 404 should be reformed to allow boards and management to meet Congress’s goals without sacrificing strategic decisionmaking.  He also urges discussion about short-term shareholders and efforts to decrease their influence through, for example, increased disclosure of short positions.  As another disclosure-based reform, the Vice Chancellor suggests that quarterly earnings estimates, which are notoriously unreliable, should be prohibited unless they are part of a broader earnings announcement emphasizing long-term results.

Institutional investors are also on the Vice Chancellor’s list for reforms.  Here he argues that shareholders with short-term or political interests receive too much attention–and others are rationally inert.  In the Vice Chancellor’s words, one should “rationally question a system where it appears that the institutional investors most active in pressuring issuers are pursuing investment strategies at odds with the core principle of the efficient capital markets hypothesis and those who are pursuing the most rational strategy are the most silent.” 

The essay contains a long list of proposals to address these challenges, but I’ll leave them for readers to sift and sort.  Overall, the essay provides a provocative menu of options that, the Vice Chancellor urges, will help to achieve joint gains for all involved.  The full essay is available here

From the Journal of Corporation Law‘s perspective, it will certainly produce a lively debate.  Indeed, the contributors to the symposium issue are themselves the subjects–or, one could say, the targets–of the Vice Chancellor’s essay.  The symposium will include responsive essays by key scholars, lawyers, and activists working in the very corporate-governance areas the Vice Chancellor highlights, including Steve Bainbridge of UCLA Law School (whose response, The Shared Interests of Managers and Labor in Corporate Governance, is available here); John Bogle, founder of Vanguard; Rich Ferlauto, of the American Federation of State, County & Municipal Employees’ Union; Ronald Gilson of Stanford Law School; Larry Hamermesh, of Widener Law School; Marty Lipton, of Wachtell, Lipton, Rosen & Katz; John Olson, of Gibson, Dunn and Crutcher; and Damon Silvers, of the AFL-CIO.

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