Mark J. Roe, The Corporate Shareholder’s Vote and Its Political Economy, in Delaware and in Washington, 2 Harv. Bus. L. Rev. 1 (2012).
Abstract: Shareholder power to effectively nominate, contest, and elect the company’s board of directors became core to the corporate governance reform agenda in the past decade, as corporate scandal and financial stress put business failures and scandals into headlines and onto policymakers’ agendas. As is well known to corporate analysts, the incentive structure in corporate elections typically keeps shareholders passive, and incumbent boards largely control the electoral process, usually nominating and electing themselves or their chosen successors. Contested corporate elections are exceedingly rare. But shareholder power to directly place their nomination for a majority of the board in the company-paidfor voting documents, as the SEC has pushed toward, could revolutionize American corporate governance by sharply shifting authority away from insiders, boards, and corporate managements. During the past decade, the SEC proposed, withdrew, and then promulgated rules that would shift the control of some corporate election machinery, to elect a minority of the board, away from insiders and into shareholders’ hands. Then, in July 2011, the D.C. Circuit Court of Appeals struck down the most aggressive of the SEC’s rules. During this decade-long process a core corporate law was up for grabs, but the action was in Washington, D.C. until the end of the decade, not the states, despite that a century of corporate law theory has focused on jurisdictional competition among states in making corporate law. In earlier work, I amended the state competition understanding with a view that many key features of American corporate lawmaking are Washington-oriented: Washington often makes corporate law directly, it did so for the central corporate controversy in most decades of the twentieth century, and it can influence state lawmaking, either directly or by establishing complements and substitutes to state corporate law. Shareholder access fits this federal-state paradigm and goes beyond it. It fits in that states were largely silent on these shareholder-power initiatives until 2009, when Delaware amended its corporate code to facilitate shareholder nominees. Indeed, it’s hard to understand Delaware passing its 2009 shareholder statute if the issue had not been on the national agenda for nearly a decade. But the interaction goes beyond the basic Washington-Delaware paradigm in that Delaware’s corporate lawmaking could have influenced the federal outcome and, quite plausibly, corporate players sought it, or used it, as a tool to dampen federal congressional, judicial, and regulatory actors’ enthusiasm for strong shareholder access. The federal-state interaction is two-way, with the strongest interest group inputs at each jurisdictional level sharply differing. Overall, the vertical interaction between states and Washington in reforming shareholder-insider voting power in the past decade is a far cry from the classical understanding of American corporate law being honed in horizontal state-to-state competition, and it implicates sharply differing political economy, interest-group dynamics.