Shareholder Empowerment as an End in Itself: A New Perspective on Allocation of Power in the Modern Corporation

Abstract

There is currently an exciting debate underway regarding the way in which power should be allocated in the modern public corporation. A special edition of the Harvard Law Review in April 2006 was devoted to this debate.

The current debate is the result of recent proposals, both by the US Securities & Exchange Commission as well as by corporate governance commentators, to increase shareholder power.

The ironic thing about this debate, but which so far has not been addressed, is the degree of unity regarding the value of shareholder participation. Both sides (which I categorise for convenience as 'shareholder primacists' and 'director primacists') believe that the participatory rights of shareholders should be increased if this would improve corporate performance. Accordingly, there is no place for increased shareholder power if it does not strengthen the bottom line, even if shareholder empowerment is no threat to the authority of the directors, and may provide non-financial benefits to the shareholders.

This article disputes this commonly held view regarding the value of shareholder participation in the corporation. It will be argued that shareholder participation is not simply a means to an end but rather an end in itself.

A fresh look at shareholder power with the assistance of empirical research in the emerging areas of happiness studies and 'psycho-economics', suggests that shareholders would enjoy greater, longer-lasting happiness by using their shares to have a participatory role in the corporation. It seems that active participation, rather than conventional passivity, may in fact be the 'rational choice'.

Accordingly, with the support of this emerging research, it is argued that there is a strong case for increasing shareholder power.

Keywords: corporate law, corporate governance law, securities law, shareholders, law and economics

JEL Classification: G30, G32, K22, L21