Letting Shareholders Set the Rules

Abstract

U.S. corporate law has long denied shareholders the power to make rules-of-the-game decisions - that is, decisions to change the company's charter or state of incorporation. In an article published last year, The Case for Increasing Shareholder Power, I advocated providing shareholders with power to make rules-of-the-game decisions. A forthcoming exchange in the Harvard law Review will feature responses by Professor Stephen Bainbridge and Vice-Chancellor Leo Strine taking issue with my proposal. This paper, which was written for this exchange, responds to Bainbridge and Strine as well as further develops my arguments for increasing shareholder power. I discuss the significant costs arising from boards control over rules-of-the-game decisions during the often long life of public companies. Discussing the objections raised by critics, I show that giving shareholders power to make rules-of-the-game decisions would be consistent with centralized management in public companies; would not be made unnecessary by reforms in corporate elections; and should not dismissed on the grounds that it would already be offered by corporate charters or state law rules if it were beneficial. I also address concerns arising from the shortcomings of institutional investors. I conclude that there is a strong case for a serious reexamination of boards' control over the rules of the game.