Shareholder Democracy

Is the staff of the Securities and Exchange Commission pursuing its own activist agenda without adequate supervision by agency heads?
Many SEC observers were caught off guard yesterday when the New York Times broke the news that the SEC has been requiring major US corporations to include shareholder proposals supporting universal healthcare in official proxy materials. This seemed to be a departure from many recent decisions by the SEC’s commissioners restraining or rejecting innovative regulations favored by special interest shareholder groups. Why had the SEC suddenly embraced this radical rule favoring proposals on political issues only indirectly tied to corporate governance?
The answer may lie in the disarray at the top ranks of the SEC.
More on the SEC staff’s activist lark after the jump.

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As Opening Bell mentioned this morning, shareholder democracy took a turn for the weird recently when the Securities and Exchange Commission began telling major public corporations that they would have to subsidize shareholder proposals urging the company to take a lobbying position in favor of universal health care. Boeing, General Motors, United Technologies, Wendy’s International and Xcel Energy have all received word from the SEC that they’ll have to include these shareholder proposals in the official proxy materials, according to the New York Times.
After the jump, we explain why these proposals are useless, at best, unduly costly and possibly dangerous. Also: a law professor explains better ways to handle these things.

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The Myth of Shareholder Democracy and Other Jokes

sewergator.jpgIt’s not often that we laugh out loud at law review article. But that’s probably related to our whole “never read a law review article” policy.
But we read the abstract to this one, and it actually made us laugh because it was actually funny. We’re not bothering to read the whole thing, of course. Instead we’re assigning it to our little brother for an executive summary.

Professor Lucian Bebchuk argues that the notion that shareholders in public corporations can remove directors is a myth. The same argument was made by Berle and Means in 1932. Not only is shareholder power to remove directors largely a myth in U.S. public companies, it has been widely recognized as a myth for three-quarters of a century.
What should we conclude from this? Professor Bebchuk concludes the time has come make shareholder power a reality. But there are many myths – vampires, alligators in the sewers – we would not want to make real. Part I of this Response to Professor Bebchuk’s article argues that we should not want to make shareholder power to oust directors more real because, while board control worsens agency costs, it offers important economic benefits to shareholders as well. In particular, board control promotes efficient and informed decisionmaking; discourages intershareholder opportunism; and encourages valuable specific investment in corporate team production.

But on re-reading it we think it’s wrong on the substantive matter at hand. Who wouldn’t want alligators in the sewers and vampires to be real?
The Mythical Benefits of Shareholder Control [SSRN via Bainbridge]