Letting Shareholders Set the Rules

31 Pages Posted: 17 Mar 2006  

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Abstract

U.S. corporate law has long denied shareholders the power to make rules-of-the-game decisions - that is, decisions to change the company's charter or state of incorporation. In an article published last year, The Case for Increasing Shareholder Power, I advocated providing shareholders with power to make rules-of-the-game decisions. A forthcoming exchange in the Harvard law Review will feature responses by Professor Stephen Bainbridge and Vice-Chancellor Leo Strine taking issue with my proposal. This paper, which was written for this exchange, responds to Bainbridge and Strine as well as further develops my arguments for increasing shareholder power. I discuss the significant costs arising from boards control over rules-of-the-game decisions during the often long life of public companies. Discussing the objections raised by critics, I show that giving shareholders power to make rules-of-the-game decisions would be consistent with centralized management in public companies; would not be made unnecessary by reforms in corporate elections; and should not dismissed on the grounds that it would already be offered by corporate charters or state law rules if it were beneficial. I also address concerns arising from the shortcomings of institutional investors. I conclude that there is a strong case for a serious reexamination of boards' control over the rules of the game.

Stephen Bainbridge's response is available at:
http://ssrn.com/abstract=808584

Leo Strine's response is available on SSRN at:
http://ssrn.com/abstract=883720

The earlier article to which Bainbridge and Strine respond is available at:
http://ssrn.com/abstract=631344

Keywords: corporate governance, shareholders, managers, directors, boards, centralized management, corporate law, agency costs, corporate charters, charter amendments, incorporation, state competition, IPO, proxy contests, corporate reform

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

Suggested Citation

Bebchuk, Lucian A., Letting Shareholders Set the Rules. Harvard Law Review, Vol. 119, pp. 1784-1813, 2006. Available at SSRN: https://ssrn.com/abstract=891823

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

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