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Director Primacy and Shareholder Disempowerment

Stephen M. Bainbridge

University of California, Los Angeles (UCLA) - School of Law

Harvard Law Review, Vol. 119, 2006
UCLA School of Law, Law-Econ Research Paper No. 05-25

This essay is a response to Lucian Bebchuk's recent article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements.

In response, I make three principal claims. First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights.

Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule.

Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.

Number of Pages in PDF File: 38

Keywords: corporations, corporate governance, shareholders, stockholders, institutional investors, board of directors, managers, voting

JEL Classification: K22

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Date posted: September 27, 2005  

Suggested Citation

Bainbridge, Stephen M., Director Primacy and Shareholder Disempowerment. Harvard Law Review, Vol. 119, 2006; UCLA School of Law, Law-Econ Research Paper No. 05-25. Available at SSRN: http://ssrn.com/abstract=808584

Contact Information

Stephen Mark Bainbridge (Contact Author)
University of California, Los Angeles (UCLA) - School of Law ( email )
385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-206-1599 (Phone)
310-825-6023 (Fax)
HOME PAGE: http://www.professorbainbridge.com
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