It’s one of the thorniest questions in corporate law. Shareholders as a group own a corporation, but shareholders may have conflicting interests. A majority shareholder may be willing to throw the minority under a bus to obtain control of the company. Some shareholders may have differing views on whether the corporation should operate in Sudan or Libya. And union-controlled pension funds may be more interested in leveraging their holdings to force job creation than in pursuing long-term share value.
These potential conflicts are one reason we (generally) limit shareholders’ direct voting to only a few issues: who will sit on the board of directors, and whether a company may be sold. A board of directors that owes fiduciary duties to all shareholders oversees most questions of corporate policy.
But this approach to corporate governance is under pressure from those who consider it insufficiently democratic, including those who would like to see a shareholder vote concerning all corporate political spending – even where much greater amounts are invested in charitable giving, or politically-charged investment decisions, by company management without shareholder approval.
The Federal Court of Appeals for the District of Columbia recently reminded us that there are real costs to expanding the role of shareholders in corporate governance.
The case, Business Round Table v. SEC, challenged an SEC regulation requiring companies to circulate election materials for board elections, including not only the company’s nominees but also those of certain shareholders. The court called the rule “arbitrary and capricious,” and struck it down.
Why? All else being equal, more democracy sounds like a good thing – and unlike a shareholder vote on political spending, a miniscule element of the corporate budget, director elections are a central part of classic shareholder democracy.
The court gave several reasons, but one goes to the heart of the conflicts of interest present in today’s economy. In striking down the SEC’s regulation, the court noted that the Commission:
failed to respond to comments arguing that investors with a special interest, such as unions and state and local governments whose interests in jobs may well be greater than their interest in share value, can be expected to pursue self-interested objectives rather than the goal of maximizing shareholder value, and will likely cause companies to incur costs even when their nominee is unlikely to be elected.
Put simply, sometimes the private interests of some shareholders are contrary to those of the corporation as a whole. And if that is true for board elections, a central component of corporate accountability, might it not also be true for votes on political spending?