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

Why I’m Opposing the SEC Proposal to Let Shareholders Nominate Directors (II)

My friend and fellow law professor/blawgger Gordon Smith responded to my post Why I'm Opposing the SEC Proposal to Let Shareholders Nominate Directors by arguing that:

Steve is right to oppose the proposed rule, but he has the wrong reason. This is not a problem of the SEC going too far, but rather not going far enough. I hope to share a more complete explanation of my position in a letter to the SEC, but here it is in a nutshell: shareholder voting on board composition is the most important thing that shareholders can do; while we should not allow the shareholder proposal rule to become a vehicle for hostile takeovers, we should enable meaningful ballot access without triggers that evidence managerial dysfunction.

Steve is rightly worried about the costs associated with corporate reform, but this is not the place to draw the line. The SEC should reduce other regulatory burdens, but not stop short of the most important potential corporate governance reform since the adoption of the federal securities laws.

The problem here, of course, is that Gordon and I are coming from very different places with respect to the proper role of shareholders in corporate governance. I start with the premise that the corporation is not a thing capable of being owned. Hence, it is error to view the corporation as being owned by the shareholders. Once you recognize that private property concepts are not relevant, it becomes much harder to see a case for privileging shareholders within the corporate governance structure. Instead, as I see it, the shareholders properly are viewed as just one of many factors of production. Put another way, the corporation is a vehicle by which the board of directors hire, inter alia, equity capital. Of course, in return for their investment of equity capital, the shareholders are entitled to the residual claim on corporate assets and the concomitant shareholder wealth maximization norm. If I'm right about that, then the legitimacy of the corporate governance structure does not depend on shareholder voting. Rather, shareholder voting rights are just one of a myriad of systems by which directors are held accountable for how they exercise their authority. I call this model "director primacy." From a director primacy-based perspective, expanding shareholder voting rights as proposed by the SEC make no sense -- none. Bear with me -- the explanation is pretty long (it also pulls together a number of earlier posts, so it will look familiar to regular readers).