The Trajectory of American Corporate Governance: Shareholder Empowerment and Private Ordering Combat

Jennifer G. Hill is Professor of Corporate Law at Sydney Law School and a Director of the Ross Parsons Centre of Commercial, Corporate and Taxation Law. This post is based on her recent paper. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Shareholder power and activism are topics of enormous current interest in the United States and around the world. The prospect of greater shareholder involvement in corporate governance has been welcomed and encouraged in some jurisdictions, such as the United Kingdom, yet has been met with widespread apprehension in the United States. There is a paradox here. Although the United States is generally regarded as the birthplace of shareholder activism, in fact, US shareholders have traditionally possessed far fewer corporate governance rights than shareholders in other common law jurisdictions, including the United Kingdom and Australia.

Since the global financial crisis, some jurisdictions, such as the United Kingdom and Japan, have encouraged greater shareholder dialogue with management and activism through, for example, voluntary Shareholder Stewardship Codes. These international developments assume that institutional investors have a valuable role to play in corporate governance from an accountability perspective, and that, in appropriate circumstances, this role may include activism. However, an alternative, and fundamentally contradictory, image of shareholders pervades much contemporary US corporate law commentary. This is that shareholders are predatory and/or disloyal to their ultimate beneficiaries. These divergent attitudes to shareholders engender very different regulatory prescriptions and solutions.

In my recent paper, The Trajectory of American Corporate Governance: Shareholder Empowerment and Private Ordering Combat, I examine the trajectory of corporate governance in the United States, with particular attention to the regulatory distinction between shareholder protection and shareholder participation in corporate governance. I discuss evolving shareholder rights in the United States in the context of the shareholder empowerment and proxy access debates, and consider recent corporate governance developments that potentially readjust the balance of power between shareholders and the board of directors in US public corporations. The article discusses use of private ordering by US institutional investors to acquire governance rights, focusing, in particular, on shareholder bylaw amendment proposals to acquire various governance rights, including proxy access rights.

The paper also considers recent examples of pushback by the board of directors, which can result in “private ordering combat.” I use the recent Whole Foods saga as a case study for this phenomenon. The events at Whole Foods arguably provide a good contemporary example of Professor Eisenberg’s concept of ‘impoverished consent’, whereby shareholders are forced to vote for a management-proposed rule, in spite of preferring a different rule.

I raise the question of whether part of the explanation for current developments relating to private ordering in the United States is the fact that, in an era of globalized investment, US institutional investors are now becoming increasingly aware of the rights held by their counterparts in other jurisdictions. The paper also considers the extent to which the rise of ‘agency capitalism’, as described by Professors Gilson and Gordon, has affected the image of institutional investors in the United States. Some recent developments, such as the activist campaign of Trian Management Fund against DuPont, suggest that institutional investors have become the corporate equivalent of swing voters in politics, with activists and boards alike now seeking to woo them in an increasingly globalized investment world.

Finally, I explore the intriguing underlying question of why shareholder empowerment is such a hot button issue in the United States, compared to some other common law jurisdictions, including the United Kingdom. The paper examines this issue through the lens of legal history. It considers the distinctively different origins and trajectories of corporate law in the United States and the United Kingdom, and the complex interplay between law and private ordering, and between mandatory and optional rules, in both jurisdictions.

As the paper shows, In spite of a similar common law heritage, US and UK company law had fundamentally different organizational starting points. US corporate law originated from early UK royal chartered corporations, with quasi-public roots. UK company law, on the other hand, developed from unincorporated joint stock (or ‘deed of settlement’) companies. These companies were effectively large partnerships, which had strong contractual elements and made creative use of the trust concept to replicate certain features of chartered corporations.

In the paper, I explore the ways in which these divergent organizational origins affected legal developments in the United States and the United Kingdom in a range of areas, including: the internal allocation of power in corporations; the interplay between mandatory and optional rules; shareholder rights and exculpation clauses.

I argue that organizational origins matter, and that the divergent organizational origins of US and UK companies is critical to understanding why shareholder participation in corporate governance is such a controversial issue in US corporate governance today.

The full paper is available for download here.

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