The Theory And Practice Of Corporate Voting At U.S. Public Companies
Vanderbilt University – Law School
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Vanderbilt University – Law School; European Corporate Governance Institute (ECGI)
August 25, 2015
The Research Handbook of Shareholder Power, edited by Jennifer Hill and Randall Thomas, Edgar Elgar, 2015, Forthcoming
This paper develops a comprehensive theory of corporate voting and its role in corporate governance for U.S. public corporations. We begin by addressing why shareholders should vote, and then ask why no other stakeholders vote. We finish the first part of the paper by examining what shareholders should vote on. In Section II we discuss the implications of empty voting for our theory. Section III examines the current system of corporate voting in the U.S. to see how it conforms to our theory. We finish with some brief conclusions.
The Theory And Practice Of Corporate Voting At U.S. Public Companies – Introduction
In this chapter, we develop a comprehensive theory of corporate voting and its role in corporate governance. In Section I, we begin by addressing why shareholders should vote, and then ask why no other stakeholders vote. We finish the first part of the paper by examining what shareholders should vote on and move on in Section II to discuss the implications of empty voting for our theory. Section III examines the current system of corporate voting in the U.S. to see how it conforms with our theory. We finish with some brief conclusions.
I. Theory of Corporate Voting
We will focus on public corporations with diffuse ownership since they are the most common and the most important economically. We will also assume that the company has no control shareholder, as voting in that instance is generally pro forma.1 As with all such endeavors, there will be a tension between is and ought—what a coherent theory would advise and what we see in the real world. While it is often tempting to take a Panglossian view, we will not automatically assume that extant arrangements are necessarily the most efficient, although we will at times argue that long-standing corporate arrangements be given the benefit of the doubt. In particular, we are agnostic on the questions of whether shareholder voting leads either to social or corporate efficiency.
In order to provide a theory of corporate voting, we need to answer at least three questions: 1) Why are shareholders (typically) enfranchised to vote on corporate matters?; 2) Why are other stakeholders (typically) not given voting privileges?; and 3) On what issues should shareholders vote? We will deal with each of these questions in turn.
Before we begin, it is important to remember that American corporation’s statutes place all corporate power in, or under the authority of, the board of directors.2 But the board is comprised of part time directors, many of whom have other full time jobs, and who can spend little time worrying about the problems of the corporation. These directors cannot effectively employ the control rights that the statute provides them and instead largely delegate this responsibility to the corporation’s officers to run the corporation.
3 Only in “crisis” situations will the board exercise their ultimate power to approve, or override, corporate managers’ key decisions about the corporation’s future.4 Shareholders, meanwhile, act as monitors of managers and the board, as well as information providers to boards in certain key voting situations.
A. Why should shareholders vote?
In the vast majority of public corporations, shareholders vote on any number of issues. Under state corporate law, at a minimum, they elect the members of the board of directors, they have to approve mergers or sales of all or substantially all of the assets of the corporation, they approve proposed amendments to the corporate charter and they have the right to amend the by-laws of the corporation.5 Why are these voting powers granted to shareholders? There have been a number of justifications given over time, so we begin by surveying them.
One of the earliest formal justifications for the shareholder franchise was proposed by Easterbrook and Fischel. (Easterbrook and Fischel, 1991). They argue that shareholders play the role of “gap fillers” in the incomplete contract that is the corporation. Because the shareholders hold the residual interest in the corporation, they have “the appropriate incentives … to make discretionary decisions…The shareholders receive most of the marginal gains and incur most of the marginal costs. They therefore have the right incentives to exercise the discretion.” (Easterbrook and Fischel, 1991, at 68). That is, the right to exercise discretion, through the right to vote, follows from the shareholder’s claim on the residual value of the firm. That right might be delegated to the board of directors or managers of the corporation, for practical reasons, but “managers exercise authority at the sufferance of investors.” (Easterbrook and Fischel, 1991, at 67).
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