Accountable Strategies blog

A blog about accountability issues in the public, private, and nonprofit sectors

The power of corporate shareholders and stakeholders

Posted by David Kassel on May 15, 2007

Do the shareholders really have the power most people think they do to affect a company’s strategies and decisions?

Lucian Bebchuk maintains that the power of company shareholders to replace the boards of directors of poorly performing companies is largely nonexistent.

In “The Myth of the Shareholder Franchise” (March 2007), a discussion paper of the Program on Corporate Governance at Harvard Law School, Bebchuk states that the number of challenges mounted by shareholders to replace boards of directors between 1996 and 2006 was very low: There were only 118 challenges mounted of incumbent board members during the 1996–2005 decade, or an average of about 12 per year. The number of challenges was even less for the largest corporations. What’s more, those challenges were successful in only 45 cases in the entire decade.

What may be especially striking to proponents of corporate social responsibility initiatives is that Bebchuk doesn’t even extend his argument to include the view that directors should also serve stakeholders other than shareholders, such as citizens, workers, policy makers, and even the environment. His paper talks strictly about shareholders. This could well leave it to others to debate a number of interesting implications. One is that it’s a bad sign for corporate social responsibility that even a company’s shareholders can’t really influence or remove the board of directors. In that case, what influence could other stakeholders have? On the other hand, this may be a good sign for stakeholders in that it signals that there may be other ways to exert the influence that shareholders lack.

Looking at the matter purely from the point of view of the shareholders and directors, Bebchuk notes that under the rules of corporate law, the power to run corporations is vested in the boards of directors, under whose direction the business and affairs of the corporations are supposed to be managed.

The importance of having directors held accountable to the shareholders is enhanced because directors are largely insulated from legal liability for their decisions. Yet, Bebchuk notes that the mailing, legal and other costs of mounting shareholder challenges to boards of directors is very high. Moreover, challengers cannot seek reimbursement for those costs if they lose a challenge, whereas incumbent board members can charge the company for their expenses regardless of the outcome.

Bebchuk proposes that companies hold elections for the entire board every two to three years; that shareholders be allowed to select directors via secret ballots and majority votes; and that those candidates that receive at least one third of the votes cast would be able to get their campaign expenses reimbursed.

Bebchuk does maintain that increasing shareholder influence on boards will not hurt the prospects of other stakeholders to influence boards. Protecting boards of directors from removal could well be costly to both shareholders and stakeholders, he argues, because “such insulation makes boards accountable to no one.”


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