27 September 2007
Democratic Corporations
There is more to the controversy over shareholder rights than the rivalry between management-selected boards of directors and activist hedge fund shareholders regarding control over long-term investment decisions. The 19th and 20th Century corporations that Lynn Stout limns in the Wall Street Journal of September 27, 2007, undertook huge sunk-cost investment projects mainly because of the vision of their founders, the controlling shareholders. Their shares became broadly owned through the market only because of the success of their decisions, and the desire of public shareholders to invest in their furtherance.
On the other hand, shareholders have always had and continue to have the right to sell their shares on the stock market if they lose that desire or their belief in the vision of the leaders of the corporations in which they have invested. The true determinant of the success of U.S. corporations compared to those of other countries, and in particular the U.K., is not the method of corporate governance but the serendipity of America’s endowment in natural and human resources. Moreover, the aggrandizement of corporate power is precisely not the objective of the shareholder democracy movement, but its opposite.
Advocates of the SEC’s “proxy access” rule are mistaken, nevertheless, because they ignore the much more effective mechanism that exists for protecting the value of shares traded publicly. If a board of directors refuses to compel corporate management to adhere to the vision that gave value to the corporation’s shares in the first place, then the public should sell their shares. Even activist hedge fund shareholders have to rely on the market for the ultimate value of the assets they trade.
There is more to the controversy over shareholder rights than the rivalry between management-selected boards of directors and activist hedge fund shareholders regarding control over long-term investment decisions. The 19th and 20th Century corporations that Lynn Stout limns in the Wall Street Journal of September 27, 2007, undertook huge sunk-cost investment projects mainly because of the vision of their founders, the controlling shareholders. Their shares became broadly owned through the market only because of the success of their decisions, and the desire of public shareholders to invest in their furtherance.
On the other hand, shareholders have always had and continue to have the right to sell their shares on the stock market if they lose that desire or their belief in the vision of the leaders of the corporations in which they have invested. The true determinant of the success of U.S. corporations compared to those of other countries, and in particular the U.K., is not the method of corporate governance but the serendipity of America’s endowment in natural and human resources. Moreover, the aggrandizement of corporate power is precisely not the objective of the shareholder democracy movement, but its opposite.
Advocates of the SEC’s “proxy access” rule are mistaken, nevertheless, because they ignore the much more effective mechanism that exists for protecting the value of shares traded publicly. If a board of directors refuses to compel corporate management to adhere to the vision that gave value to the corporation’s shares in the first place, then the public should sell their shares. Even activist hedge fund shareholders have to rely on the market for the ultimate value of the assets they trade.
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