Professor Bainbridge...on law, politics, religion, culture & food

Shareholder Access and American Exceptionalism

Jay Brown approvingly quotes former SEC Chairman Arthur Levitt:

All 40 of the largest markets outside of our own give shareholders the ability to nominate and remove directors. By reversing its decision from last year, this new SEC will make it very clear that it is not only at full strength, but strongly on the side of investors. It will show the world that the U.S. takes shareholder democracy seriously, strengthening our markets’ standing as the world’s best. More important, it will reinvigorate accountability, restoring trust in a system badly in need of support.

And if 39 other countries jumped off a bridge would you do it too?

More seriously, albeit in the same vein, in an essay challenging “declinism” political science professor Robert Lieber recently argued that:

The overall size and dynamism of the economy remains unmatched, and America continues to lead the rest of the world in measures of competitiveness, technology, and innovation. Here, higher education and science count as an enormous asset. America’s major research universities lead the world in stature and rankings, occupying seventeen of the top twenty slots. Broad demographic trends also favor the United States, whereas countries typically mentioned as peer competitors sag under the weight of aging populations. This is not only true for Russia, Europe, and Japan, but also for China, whose long-standing one-child policy has had an anticipated effect.

In the realm of “hard power,” while the army and Marines have been stretched by the wars in Iraq and Afghanistan, the fact is that no other country possesses anything like the capacity of the United States to project power around the globe. American military technology and sheer might remain unmatched—no other country can compete in the arenas of land, sea, or air warfare.

In corporate governance, as in much else, America is exceptional. More so than that of any other country with which I am familiar, our corporate law enshrines the principle I call “director primacy.” In my essay Director v. Shareholder Primacy in the Convergence Debate, for example, I wrote that:

Although the question of whether international corporate governance is converging on the U.S. model remains contested, there is general agreement as to the nature of that U.S. model. Specifically, virtually all participants in the convergence debate assume that U.S. corporate law is based on a norm of shareholder primacy. This assumption is wrong. U.S. corporate law is far more accurately described as a system of director primacy than one of shareholder primacy. In this essay, the author argues that the comparative corporate governance literature’s erroneous understanding of the U.S. model distorts both the positive and normative aspects of the convergence debate. On the positive side, if we use the extent of shareholder primacy as our metric, we end up with a distorted estimate of the extent to which systems have converged. On the normative side, corporate governance is a potentially important instrument by which to increase the economy’s efficiency. In recent years, elite U.S. corporate law scholars have played a significant role in “reforming” the corporate laws of transition economies. If the goal is to export the U.S. model, on the assumption of its superiority, we do those economies no good - and may do much harm - by exporting the wrong model. Hence, we are constrained to examine the normative question: Does it matter? Is director primacy superior to shareholder primacy? This essay acknowledges that investor participation in corporate governance has economic benefits, but argues that director primacy is preferable on balance.

Our system of director primacy has helped produce the most powerful economy in history, which supports the most powerful military in history, which has made the USA the world’s only hyperpower. Why we would want to trade that system for the mess of pottage called shareholder democracy is something of a mystery to me.