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E-MailEditor’s Note: This post is from Lynn A. Stout of Cornell Law School. We also recently posted a comment letter from thirty-nine other law professors urging the SEC not to adopt any proposal that would interfere with shareholder access to the corporate ballot. That post is available here.
The Wall Street Journal recently published my op-ed, Corporations Shouldn’t Be Democracies, on the SEC’s forthcoming decision on two proposed rules governing shareholder access to the corporate proxy. As the article notes, Chairman Cox is about to cast a crucial vote on the issue, and he should vote not to expand shareholder access to the corporate ballot. The piece explains:
Successful corporations are not, and never have been, democratic institutions. Since the public corporation first evolved over a century ago, U.S. law has discouraged shareholders from taking an active role in corporate governance, and this “hands-off” approach has proven a recipe for tremendous success.
The full article is available here.
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“’Corporations shouldn’t be democracies,’ argues Lynn Stout, a professor of corporate law at UCLA, in a recent op-ed in the Wall Street Journal. Ms Stout writes at a critical time: shortly before the October 2nd end of a consultation period during which America’s Securities and Exchange Commission (SEC) is considering whether to amend its rules and require companies to pay the expenses of dissident shareholders seeking to replace the board or individual directors.” Thus begins an editorial in The Economist. (In praise of corporate democracy, 10/2/07) (http://www.economist.com/business/displaystory.cfm?story_id=9895518)
The editorial goes on to point out that Stout argument hangs on the fact that “America has more big companies than any other country,” citing figures from The Economist for evidence, “so it must be true.” Most of the powers she cites that UK shareowners have are due to recent reforms that have helped London to attract listings to the point that many on Wall Street feel threatened. Bigness probably has more to do with the size of domestic markets or the ambitions of founders, than shareowner rights of lack of them.
Short-termist pressures “probably owe far more to the obsession of mutual-fund managers with quarterly earnings than the focus of activist shareholders on strategy,” says the editorial, dispelling another contention by Stout. Finally, The Economist points to Stout’s questionable reasoning when she argues that by “giving activists even greater leverage over boards, the SEC’s proposed proxy access rule will undermine American corporations’ ability to do exactly what investors, and the larger society, want them to do.” Why would shareholders get less of what they want if they have more power to decide who runs their firm? The editorial then continues to turn Stout’s argument on its head.
Ms Stout seems to fear the tyranny of the minority, in which activists (whether from hedge funds or union pension-funds) force management to act against majority interest. But the usual problem in democracy is the tyranny of the majority, and it is hard to imagine that this would not be the case with more corporate democracy. And if it is, the oppression of minority views, such as those of activists, would surely be exactly what Ms Stout wants.
Professor Lyn Stout has based her arguments on two errors of fact:
1. It is not true that “Successful corporations are not, and never have been,
democratic institutions.” Dunlavy (1998) reports that “in 1834, the New Jersey Supreme Court disallowed one share one vote as specified in the corporate by-laws of a corporation as being inconsistent with the law”. Professor Stout pointed out that “In the 19th and 20th centuries, they built railroads, canals and factories.
2. It is also not true that the benefits of shareholder democracy are “unsupported by evidence”. Thomas & Logan (1982:126–127) state that: Various indicators have been used to explore the economic efficiency of the Mondragón group of cooperatives. During more than two decades a considerable number of cooperative factories have functioned at a level equal to or superior in efficiency to that of capitalist enterprises. The compatibility question in this case has been solved without doubt. Efficiency in terms of the use made of scarce resources has been higher in cooperatives; their growth record of sales, exports and employment, under both favourable and adverse economic conditions, has been superior to that of capitalist enterprises.
References:
Dunlavy, C.A., (1998), ‘Corporate Governance in Late 19th-Century Europe and the U.S.: The Case of Shareholder Voting Rights’, in Comparative Corporate Governance: The State of the Art and Emerging Research, eds. Klaus J. Hopt, Hideki Kanda, Mark J. Roe, Eddy Wymeersch, and Stefan Prigge, Clarendon Press, pp. 5–39, Oxford, http://papers.ssrn.com/abstract_id=10551.
Thomas, H. and Logan, C. (1982), Mondragón: An economic analysis, George Unwin, London.