Christine has already waded into the debate started by Larry, who was inspired by Vic. (Got that?) These are big questions, and everyone is covering a lot of contested ground. Let me throw out a suggestion, recognizing that a blog is not the right forum to do all of the "hard thinking" that Larry rightly believes is necessary.
In my view, the biggest theoretical issue facing the SEC is defining the role of stockholders in the corporate governance system. Christine is concerned about retail investors, but I am more interested in thinking about the role of institutional investors. In my first article as a law school professor, I addressed the role of stockholders, arguing that stockholders should be encouraged to participate in board composition decisions (i.e., election of directors), but should be discouraged from participating in policy decisions (e.g., whether to invest in international expansion). The trick, of course, is that giving stockholders the power to elect directors necessarily gives them some power over specific policies. Steve Bainbridge has written about this same issue, stating, "Establishing the proper mix of discretion and accountability thus emerges as the central corporate governance question."
Why is this the SEC's job? Well, it doesn't have to be, but the SEC has inserted itself into every important stockholder voting issue, including the recent debate about director nominations. Delaware and the other states have some influence over voting rules, but the SEC is where the action is today.
In my view, the SEC should: (1) revisit the rules governing director nominations by stockholders, allowing for limited ballot access (that is, ballot access that does not serve as a takeover mechanism); or (2) allow stockholders to vote on proposals for mandatory bylaws that provide for stockholder nominations on a firm-by-firm basis. Or both.
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1. Posted by Ann on June 3, 2005 @ 11:52 | Permalink
What you proposed sounds sensible, but you should remember that the relative strength of institutional investors is evaluating stocks, not running companies. The best (not only, but best) way that institutional investors can put pressure on companies is through trading in a way that drives market prices towards levels that reflect the choices of management. And to do that, they need information.
2. Posted by Gordon Smith on June 3, 2005 @ 12:06 | Permalink
Ann: "the relative strength of institutional investors is evaluating stocks, not running companies"
That's why I want them to keep some distance from the policy decisions. This whole debate revolves around a relatively narrow issue: how much say should stockholders have on board composition. The traditional answer is almost no say (the Wall Street Rule that you describe), but I believe more input on board composition would be a plus.
3. Posted by Ann on June 3, 2005 @ 15:00 | Permalink
I wasn't arguing against what you propose. It sounds good. But I got the impression, from what you said elsewhere, that you might support reduced disclosure requirements for companies. I think that less disclosure but more investor say in selecting board members would be a bad tradeoff, since investors can't be effective without sufficient access to information. Granted, one can argue about what amount of information is sufficient, but we shouldn't lose sight of the primary role of investors.
4. Posted by Mike Guttentag on June 3, 2005 @ 16:01 | Permalink
No offense, Gordon, but I think you've gotten us a little off target. The are a number of major systems that the SEC's directly supervises, including a mandatory disclosure system and a fraud prosecution effort. Even if it is a topic of some current interest, I don't think the mechanics of corporate goverance, and the role of institutional investors, is that critical a theoretical issue for the SEC.
5. Posted by Brett McDonnell on June 4, 2005 @ 13:10 | Permalink
Gordon, your post is right on target. I like the second of your two options best, for reasons I explore at this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=659322. Allowing shareholders to propose their own bylaws specifying when shareholders can use the corporate proxy to nominate directors allows them to tailor their rule to the specific circumstances of individual companies. It also allows for experimentation across different companies, so we can learn what rules work best. The SEC's proposal for shareholder nominations (now completely dead, I assume), in contrast, tries to come up with one rule for everyone. That rule may be a good one, but it's hard to say. Better to let different companies try out different rules for shareholder nominations.
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