The Wizard of Oz, the United States Constitution, and Corporate Governance

Abstract

Article II Section 2 of the United States Constitution requires that a majority of the Senate confirm Presidential nominees. It forces the President to negotiate with the Senate in order to obtain the necessary Senatorial approvals. A similar advice and consent mechanism can be replicated in corporate America. Shareholders can be cast in the role of the Senate. The incumbent board can be cast in the role of the Executive. The board can be required to obtain approval of a majority of the shareholder base before a director is allowed to serve. Indeed, there are at least eight substantial reasons to prefer such a system of advice and consent to the variety of proxy access proposals currently advocated by many shareholder rights organizations.

Significantly, at least 63 percent of the S&P 500 have already adopted bylaws or board guidelines that either implement or come reasonably close to implementing just such a regime. The SEC can, if it desires, and consistent with the D.C. Circuit's decision in Business Roundtable v. SEC, adopt regulations that impose additional disclosure requirements and filing liabilities on corporations that fail to implement effective advice and consent regimes. These regulations would provide an incentive for all publicly traded corporations to adopt irrevocable advice and consent mechanisms that conform to minimal SEC requirements. These regulations could also serve as an effective substitute for the two controversial proxy access proposals that the Commission now recognizes as ineffective solutions to the battle over proxy access.

Keywords: Corporate governance, advice and consent, directors, boards, shareholders, shareholder rights, shareholder voting, shareholder franchise, corporate elections, corporate ballot, proxy fights, access to the ballot

JEL Classification: D70, G30, G32, G34, G38, K22