The Future of Shareholder Democracy in the Shadow of the Financial Crisis
69 Pages Posted: 27 Jan 2013 Last revised: 4 Apr 2013
Date Written: August 1, 2012
This Article argues that the UK regulatory response to the financial crisis in the form of “stewardship” and shareholder engagement is an error built on a mistaken understanding of the key active role shareholders played in the enormous corporate governance failure that the banking crisis represented. As a result shareholders’ passivity rather than activity has characterized the reform perception of their role. This lead to the conclusion that if only they were more active they would be more responsible “stewards” of the corporation. Unfortunately if activity was part of the problem in the banks as this article would argue, then encouraging increased shareholder action and exporting it outside the banks, as we have subsequently done in the United Kingdom, risks a wider systemic corporate governance failure. In short, we have learned the wrong lesson about shareholders from the banking crisis. Technical solutions may instead lie in removing key problematic agency-cost-reduction measures such as the takeover panel, and allowing a judicial balance to re-emerge in the development of directors’ discretion to manage the company. These solutions will not, however, fix the systemic flaw in a corporate governance system designed around current shareholders with a diminished role for the board of directors, the employees, and the community. A rebalancing is needed, whereby both the board and the state are reinvigorated in terms of their influence on a rematerialized corporation.
Keywords: financial crisis, company law, corporate law, shareholder power, board power, passivity, institutional investors, bank corporate governance, Merton, Jensen, Bainbridge, Blair, Stout, short termism, leverage, stewardship, Kay Review, directors duties, takeover panel, agency cost, Embattled CEOs
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