Proxy Access and Optimal Standardization in Corporate Governance: An Empirical Analysis

By Steel, Reilly S. | Fordham Journal of Corporate & Financial Law, December 1, 2018 | Go to article overview

Proxy Access and Optimal Standardization in Corporate Governance: An Empirical Analysis


Steel, Reilly S., Fordham Journal of Corporate & Financial Law


INTRODUCTION

According to a chorus of scholars, lawmakers, and practitioners, regulators should not impose standardized corporate governance structures on firms because "one size does not fit all."1 Just as differences in waistlines imply differences in optimal belt sizes, so too do differences in firm characteristics imply differences in optimal corporate governance structures. For decades, this one-size-does-not-fit-all critique has featured prominently in corporate law debates both in the United States and abroad,2 undergirding criticisms of universal proxy access,3 dual-classshare bans,4 mandatory board structures,5 and a host of other proposed and adopted rules.6 Moreover, commentators have leveraged the critique to denounce proxy advisers for offering relatively uniform governance recommendations7 and, more generally, to question various private efforts to effect corporate governance reforms.8 Indeed, the one-sizedoes-not-fit-all argument underlies currently pending legislation that would drastically transform the regulatory framework governing proxy advisers and significantly impact the private ordering of corporate governance.9

The one-size-fits-all issue is particularly important to the debate surrounding so-called "proxy access." Proxy access refers to shareholders' rights to place a limited number of board nominees on the annual corporate ballot, at company expense, instead of undertaking the expensive process of soliciting proxies themselves.10 Proponents of proxy access point to its ability to increase directors' accountability by reducing the costs associated with challenging incumbent directors." Meanwhile, opponents decry its potential to distract directors, encourage specialinterest campaigns, and increase short-termism.12 In 2009, when the Securities and Exchange Commission (SEC) proposed a mandatory proxy access rule, critics denounced the rule as imposing one-size-fits-all corporate governance.13 In essence, critics argued that mandated, uniform proxy access is undesirable because firms' heterogeneity implies that the optimal proxy access regime, if any, must vary significantly from firm to firm. Instead, these critics supported more modest changes permitting market participants to lobby for proxy access on a firm-by-firm basis through shareholder proposals.14 This private ordering, critics posited, would allow each firm to tailor its proxy access regime to its own unique circumstances, producing an optimal heterogeneity in terms.15 The rule's defenders, by contrast, either ignored these concerns, characterized them as secondary to the core agency problems that proxy access would alleviate, or claimed that permitting firms to opt out by structuring proxy access as a "default" rule should assuage critics' one-size-fits-all worries.16 Both sides of the debate, however, seemed to accept the premise that corporate governance should vary from firm to firm-what one might call the "optimal-heterogeneity thesis."

There are plausible theoretical grounds for supposing that one size does not fit all in corporate governance. As others argue, one would expect the economic effect of a given allocation of control rights to differ by firm according to firm-specific characteristics, implying that the optimal corporate governance regime must also vary from firm to firm.17 However, as prior empirical research demonstrates, there is often uniformity in corporate contracting,18 which lies in tension with the optimal-heterogeneity thesis. …

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