Academic journal article Stanford Law Review

The Shareholder Value of Empowered Boards

Academic journal article Stanford Law Review

The Shareholder Value of Empowered Boards

Article excerpt

Table of Contents  Introduction I.    The Staggered Board Debate       A.  Institutional Background       B.  The Theoretical Divide           1.  Board and shareholder power           2.  The "end of history" for staggered boards?       C.  Empirical Evidence and Corporate Practices           1.  Existing empirical studies: methodologies and               limitations           2.  Practical effects and the Harvard Shareholder Rights               Project. II.   New Empirical Evidence       A.  Data Description       B.  Staggering and Destaggering Decisions       C.  Staggered Boards and Firm Value           1.  Cross-sectional and time-series analysis           2.  Disentangled effects III.  Empowered Boards: Microeconomic Foundations       A.  General Equilibrium Theory in a Shareholder Economy       B.  Asset Pricing Theory and Shareholder Commitment           1.  Price dynamics and shareholder value.           2.  Pricing inefficiencies and ownership reconcentration       C.  Governance Tradeoffs and Priorities: A Contract Theory           Approach           1.  Dynamic contracts and renegotiation           2.  Tradeoffs and priorities           3.  Empowered boards as commitment devices IV.   The Empirics of the Shareholder Limited-Commitment Problem       A.  Transmission Mechanisms           1.  Innovation and intangible assets           2.  Stakeholder participation       B.  What Really Matters in Corporate Governance? V.    Rescuing American Corporate Law       A.  Disempowering Shareholders       B.  (Re-)Empowering Boards Conclusion  Appendix Table A  Appendix Table B 

Introduction

At the turn of the nineteenth century, America invented the most successful business model of all time: corporate capitalism. (1) At the center of that economic success was the "management corporation." (2) As the name suggests, management corporations revolved around managers--salaried, professional executives--brought in to "hire capital from the investor." (3) Underlying this arrangement was a "tacit societal consensus" that corporate growth took priority over corporate profits, (4) as long as managers could compensate their shareholders with stable dividends--a goal they successfully accomplished. (5) Corporate law accommodated the development of this business model, privileging a board-centric system under which firm insiders--directors and managers--retained virtually exclusive authority over the corporation. Unlike in capitalistic models elsewhere, such as in the United Kingdom, American shareholders have historically been relegated to the role of spectators, with only a limited capacity to intervene in corporate affairs. (6)

However, starting in the late 1970s through the early 1980s, and with increasing intensity in the 2000s, a competing corporate model has gained popularity. (7) This model is conceptually built on the idea of "shareholder empowerment," with enhanced shareholder governance rights, and correspondingly weakened board authority. (8) Economically, the case for shareholder empowerment rests on the assumption that shareholders, as the corporation's residual claimants, are better placed than boards, which may be captured by opportunistic management, to provide value-enhancing governance input. Recent changes in both the legal landscape and the marketplace have rewarded the efforts of shareholder advocates, with the result that empowered shareholders are no longer merely an aspiration but a reality in today's corporate environment. (9)

The rise of shareholder power has revitalized the debate on staggered boards, a longstanding and central issue in the confrontation between shareholder advocates and traditionalists who defend the board-centric model. With a staggered board, directors are grouped into different classes (usually three) such that each class of directors stands for reelection in successive years. Because this board structure requires challengers to win at least two election cycles to gain a board majority, a staggered board helps to protect directors from the threat of early removal by shareholders. …

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