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

I’m going to go out on a limb and comment without reading the linked articles, so maybe my points are addressed by the authors or known to have been discredited by governance experts.

First, most shareholders do not act like owners.  They act like renters.  This is because their primary remedy if they do not like decisions of the corporation is to sell their shares, rather than replace the directors and thereby the management.

Second, the most significant impact of the first point is that most shareholders do not care much about long-term return, unless it is spread evenly over time, including the short-term.  This causes the interests of “renting” shareholders to diverge from those of “owning” shareholders (i.e., shareholders who hold for a long period of time, measured in at least several years).  Note that it does not matter whether “owning” shareholders are long-term holders because of conscious investment style, legal restrictions on sale, or rank neglect.  Their interests still diverge from “renting” shareholders.

Third, the proportions of “renting” and “owning” shareholders will vary from one public company to another, often for reasons that bear no relationship to the underlying business of the company.  Except perhaps over the very long term, I speculate that these differences are accidents of history rather than a reflection of decisions made by the board to encourage one result or another.

Fourth, it has always seemed to me that if we were to give effect to shareholder “democracy,” we should require a holding period for enfranchisement.  My own view is that the holding period should extend beyond the casting of a vote.  Would it be unreasonable to require that shareholders who vote for directors agree to hold their shares, except under certain circumstances, for some period of time after the vote (say, six months or a year)?  That would require them to live with the consequences of their decisions.  If, for example, they vote to cut executive pay and the management departs, the shareholders that did not vote will have the chance to exit first.  It seems to me that any shareholder unwilling to bear the burden of their vote should not be entitled to have one.  Voters in an actual democracy bear this burden, why shouldn’t voters in a “corporate democracy”?

Fifth, this reform would obviously make it next to impossible to gain control of a corporation through a proxy fight.  We probably need to do something to straighten that out.  My view is that we would do well to lower the obstacles to hostile takeovers.  Bringing back hostile deals might also do something to slow the growth of executive compensation, if that is in fact a useful objective (not that I think it is).

Welcome back.

Looks like the Sarbanes Oxley debate is about to heat up, 2007 should be an interesting year.