The Mythical Benefits of Shareholder Control

Abstract

In 'The Myth of the Shareholder Franchise', Professor Lucian Bebchuk argues that the notion that shareholders in public corporations can remove directors is a myth. The same argument was made by Berle and Means in 1932. Not only is shareholder power to remove directors largely a myth in U.S. public companies, it has been widely recognized as a myth for three-quarters of a century.

What should we conclude from this? Professor Bebchuk concludes the time has come to make shareholder power a reality. But there are many myths - vampires, alligators in the sewers - we would not want to make real. Part I of this Response to Professor Bebchuk's article argues that we should not want to make shareholder power to oust directors more real because, while board control worsens agency costs, it offers important economic benefits to shareholders as well. In particular, board control promotes efficient and informed decisionmaking; discourages intershareholder opportunism; and encourages valuable specific investment in corporate team production.

Because board control has costs and benefits, theory cannot tell us whether we should make it easier for shareholders to oust directors. We must look to the evidence. Part II concludes the evidence does not support Bebchuk's proposal. To the contrary, it suggests shareholders in public firms reap net benefits from board control.

Why then do so many observers believe shareholders need more power over boards? Part III argues that calls for shareholder democracy appeal to the media and many observers not because they are based on evidence, but because of emotion. The emotional appeal of shareholder power can be traced to three sources; the common but misleading metaphor that shareholders own corporations; the opportunistic calls of activists seeking leverage over boards for self-interested reasons; and a strong but unfocused sense that something (anything!) should be done in the wake of recent corporate scandals. The result has been widespread propagation of a second myth - the myth that shareholder control of public companies benefits shareholders. The Response concludes by reminding readers of the dangers of policymaking based on myth rather than evidence, using the cautionary case of stock options.

Keywords: corporate governance, shareholder control, board of directors, public corporations