September 15, 2008
Shareholder proposals: what are corporate managers afraid of?
Posted by Gordon Smith

Bebchuk v. Electronic Arts is the latest battle in Lucian Bebchuk's war on behalf of shareholder participation in corporate governance. What's at stake? Why would anyone want to deprive shareholders of the opportunity to participate in the governance of the firms in which they own shares?

Steve Bainbridge takes a shot at these questions in his criticism of the Bebchuk proposal. Steve's main issue: gadflies.

How much money, time, and effort will be soaked up to deal with a special interest proposal with almost no chance of passing?

Before you tell me this is a bogus problem, reflect on the long history of social activists using shareholder proposals to advance their pet causes even though the proposals routinely went down to defeat. Bebchuk’s proposal will simply encourage this sort of thing.

Steve also worries that some wrong-headed proposals will actually pass, or that shareholder proponents would not need to obtain majority support of shareholders to have "blackmail" power. All of these fears seem legitimate to me, but Steve's post displays the classic error of single institutional analysis. That is, he surveys the potential costs associated with a system of shareholder participation as if we should compare that imagined dystopia with a world in which corporate managers make decisions for all of the right reasons. But, of course, Steve knows full well that the a system of "director primacy" carries its own costs. Thus, the appropriate analysis here would compare a system of shareholder participation with a system of "director primacy."

I know that Steve knows all of this; I know that I am attacking a blog post, not a fully developed article or book; and I know that Steve would come down the same way after doing the comparative institutional analysis. But for those who read our blogs, I think it's important to make the point that the case against shareholder participation is not so one-sided.

So what would that more balanced argument look like? Well, this post is already getting too long, but consider another take on this issue from my friend Larry Hamermesh, who comments on Steve's post:

Interesting post.  Lots of good arguments why the substance of the Bebchuk proposal is a bad idea.  Less clear to me is why federal law should be the exclusive gatekeeper to determine whether the proposal goes forward.

Unlike Prof. Bainbridge, who righteously indignant over not having been invited to join the amicus brief, I was invited but declined the opportunity to join a truly impressive list of supporters.  As I told Prof. Bebchuk, I am not inclined to lend support to the use of federal law to force an issuer to put to a stockholder vote what is purely a precatory proposal.

Well, I am not sure what the game is here. The fact is that federal law is the "exclusive gatekeeper to determine whether the proposal goes forward," at least if you think that getting on the ballot is the prerequisite for going forward. As noted in my prior post on the Bebchuk bylaw, I like Larry Ribstein's proposal to "revise 14a-8 so that it just requires disclosure of agenda items permitted by state law," and I gather that Larry Hamermesh would like this result, too, despite the obvious potential for gadflyism.

Why are so many corporate law professors seemingly deaf to Steve's concerns about gadflyism? Perhaps because we believe that what would happen under such a system is that shareholders and managers would collaborate in devising their own regulation of shareholder proposals, one that attempts to balance the desire of shareholders to participate in corporate governance with the needs of managers to be free of gadfly distractions. Of course, many of these systems would be subject to review by the Delaware courts, and like the one proposed in the Bebchuk shareholder proposal that launched this argument, they would displace the SEC's clumsy attempts to act as gatekeeper of the corporate proxy ballot. Is that what incumbent managers are afraid of?

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