12 November 2015

The Disappointing Case For Soviet Style Democracy

I find it very hard to understand why it is at all legitimate to have a system of electing members of the board of directors of publicly held corporations in which the only candidates on the ballots are those persons nominated by the incumbent board of directors.  In other words, on ballots like those used by the Soviet Union and pre-Iraq War Iraq. Yet, there are law professors who do just that.  Basically, they argue that it would be a disaster to have a board of directors where all the votes weren't always unanimous and people sometimes offered dissenting opinions in discussions of corporate policy.

If you are going to favor the status quo, the only sensible choice, it seems to me, is to make it official and strip shareholders of any right whatsoever to vote in person or by proxy for members of the board of directors which would instead be officially self-perpetuating.   Then again, that proposal also has academic support.  This undermines even the possibility of a change in control by someone who has acquired a majority of the company's shares in the marketplace.

It is one thing to say that the sole say that shareholders should have in the management of corporations is to have a say indirectly through directors that the shareholders elect, and ending the ballot initiative process on micromanaged corporate policies.

It is quite another to say that shareholders should have no meaningful right whatsoever to control who serves on the board of directors and thereby controls the corporation, particularly in light of the minimal legal obligations that members of the Board of Directors are typically held to in litigation.

The self-perpetuating directorship concept fundamentally upends the nature of what a corporation is, particularly without the heightened prohibitions against self-dealing enforced by taxing authorities and state attorney generals that protects beneficiaries of non-profit organizations and business trusts.

Seriously, you would think that this was a case where there are barbarians at the gate, and not a case of institutional investors with multi-million dollar investments entirely run by 1%ers seeking a little bit of voice, because their huge portfolio limits as a practical matter their ability to vote with their feet.  They have so much money that they have to buy shares in pretty much every company that they are permitted by their fund charters to invest in.

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