A Trip through the Maze of "Corporate Democracy": Shareholder Voice and Management Composition
Joo, Thomas W., St. John's Law Review
According to a common American myth, shareholders govern corporations through a process of corporate democracy. Even the Supreme Court labors under this misconception.1 In fact, corporate law gives the board of directors power to manage the corporation and authorizes them to delegate much of this power to executives whom they appoint. Moreover, corporate law also limits shareholders' ability to choose and elect directors; instead, it gives directors themselves primary control over board membership.2 This Symposium explores the intersection of race and corporate law. In light of the great power of corporate directors and executives, the lack of diversity in their ranks is a salient issue. This Article assesses the potential for shareholders to use their voice in corporate governance to increase diversity in upper management. The Article pays particular attention to corporate governance reforms proposed or enacted in response to the recent rash of corporate scandals such as the collapse of the Enron Corporation. The new measures hardly usher in a golden age of shareholder empowerment, but they may provide some useful tools for shareholder activists.
Part I of this Article discusses the lack of diversity among corporate directors and the executive officers they appoint. Although American corporations have recently made numerous pronouncements in favor of diversity, they have been slow to diversify their highest ranks. People of color make up a growing proportion of corporations' labor force but not of their directorial and executive class. Part I also introduces various arguments that diversity is not only a racial justice issue but also contributes to better management decision making and greater shareholder wealth.
The insulated, homogeneous oligarchies of corporate boards may pose special obstacles to diversity. Part II discusses the tendency of these types of institutions to perpetuate their own homogeneity. It then goes on to explain how corporate law empowers directors to control the makeup of the board. The doctrine of unilateral director power over board composition reduces the likelihood that questions will be raised about the behavioral bias toward homogeneity and thus helps perpetuate the cycle of homogeneity.
As Professor Ramirez points out in this Symposium, the governments of Norway and Israel have addressed the issue of gender imbalance on corporate boards by requiring a minimum number of women board members.3 The merits of such a system aside, it is unlikely that the United States will impose similar legal requirements in the foreseeable future. The Supreme Court's recent opinion on affirmative action specifically rejected diversity quotas as unconstitutional in public university admissions.4 Moreover, as a general matter, corporate board composition is typically characterized as a private law matter between shareholders and management. As a result, corporate law purports to limit itself to procedure rather than substance.
Against this legal and political background, government-mandated quotas for business corporations are hardly likely. Thus diversity activists cannot reasonably expect any significant legal mandates concerning corporate board composition. They will most likely have to seek change through the exercise of shareholder voice in individual corporations. Many governance reforms have been enacted or are under consideration in response to the current stock market slump, the Enron scandal, and similar disasters. Even as the political climate becomes relatively amenable to regulation, however, race remains taboo. Thus, the only realistic potential for achieving diversity lies in navigating, and perhaps reforming, the race neutral procedural rules governing the shareholder role in corporate governance.5
As Part II.B explains, the traditional corporate governance regime is heavily slanted in favor of management continuity and discourages active shareholder involvement in choosing board members. …