Sunday, July 1, 2007
The Myth of the Shareholder Franchise, by LUCIAN ARYE BEBCHUK, Harvard Law School; National Bureau of Economic Research (NBER), was recently posted on SSRN. Here is the abstract:
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 inci-dence of electoral challenges during the 1996–2005 decade was very low. After presenting this evidence, the paper analyzes why electoral challenges to direc-tors are so rare, and then makes the case for arrangements that would provide shareholders with a viable power to remove directors. Under the proposed de-fault 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 exam-ple, 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 elec-tions. 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 paper, which is based on the Raben Lecture in Corporate Law at Yale and the Uri and Caroline Bauer Lecture at Cardozo, is scheduled to appear in May 2007 in the Virginia Law Review together with responses to it by Martin Lipton and William Savitt, Jonathan Macey, John Olson, Lynn Stout, and E. Norman Veasey.