A Trip Through the Maze of 'Corporate Democracy': Shareholder Voice and Management Composition

Abstract:     
This paper describes and analyzes the role of shareholders in determining the composition of corporate management. Prepared for a symposium on race and corporate law, the paper explores shareholder voice using the example of shareholder activists seeking to increase the racial diversity of boards and officers. Board composition must balance the collegiality and trust that accompanies homogeneity with the creative spark offered by heterogeneity.

The paper examines the use of shareholder proposals, voting in board elections, and litigation as methods of diversifying management. The paper pays particular attention to the recent flurry of post-Enron corporate governance reforms, such as the Sarbanes-Oxley Act and proposed changes in SEC proxy rules and NYSE listing requirements. A recurring theme of post-Enron reform is director independence, which may require substantial turnover on boards in coming years.

Although shareholders nominally elect directors, in fact they have very limited ability to determine board composition directly through the exercise of voting power. While shareholders can theoretically nominate alternative candidates, this option is severely limited by the daunting logistics and costs of running a proxy campaign. The SEC's recent proposal to give shareholder-nominated board candidates access to the corporate proxy is meant to address this problem. Proxy access under the proposed rule change is subject to significant limitations, however, and thus will affect board composition in only the most extreme circumstances.

The paper concludes that the current wave of corporate governance reform has produced only marginal increases in shareholders' opportunity to influence the composition of corporate management.

Number of Pages in PDF File: 40

Keywords: corporations, corporate governance, shareholders, directors, boards, director independence, elections, proxy regulation, proxy reform, Sarbanes-Oxley Act, race, diversity

JEL Classification: G3, K2

Accepted Paper Series