The Model Business Corporation Act at Sixty: Shareholders and Their Influence

I INTRODUCTION In the sixty years since the Committee on Corporate Laws (Committee) promulgated the Model Business Corporation Act (MBCA), there have been significant changes in corporate law and corporate governance. (1) One such change has been an increase in shareholder activism aimed at enhancing shareholders' voting power and influence over corporate affairs. (2) Such increased shareholder activism (along with its potential for increase in shareholder power) has sparked considerable debate. Advocates of increasing shareholder power insist that augmenting shareholders' voting rights and influence over corporate affairs is vital not only for ensuring board and managerial accountability, but also for curbing fraud and other forms of misbehavior. (3) Corporate-governance scandals involving entities such as Enron and American International Group (AIG), as well as the recent financial meltdown, (4) have spurred efforts to enhance shareholder power because they highlight the need for greater accountability and improved safeguards against corporate malfeasance. Opponents contend that increasing shareholder power inappropriately shifts the balance of power away from boards. (5) In their view, such a shift undermines directors' ability to act independently or otherwise consider the interests of all shareholders and corporate constituents, while increasing the pressure on boards to focus on short-term financial results. (6) Opponents also insist that such a shift inappropriately enhances the power of shareholders with special or narrow agendas who may advance their personal interests at the expense of the broader shareholder class. (7) In many respects, the debate regarding the propriety of shareholder activism and increased shareholder power has been as intense as shareholder activism itself. Importantly, however, shareholder activism has culminated in considerable corporate-governance changes that challenge the board-centric model of corporate governance embedded in the MBCA. (8) These changes likely reflect a permanent shift in the dynamics between boards and shareholders. (9) Although the impact of that shift is not clear, it is clear that the MBCA must take account of that shift, and provide guidance for corporations seeking to determine how best to allocate power between shareholders and directors. Hopefully, the next sixty years will reflect such guidance. II THE "NEW" SHAREHOLDERS AND THEIR RISE TO INFLUENCE A. The Changing Shareholder Landscape It is difficult to properly appreciate increased shareholder activism without first appreciating the changes in the shareholder landscape that have occurred over the last sixty years. Ultimately, changes in shareholder composition have facilitated and accelerated shareholder activism and the resulting changes in the corporate-governance landscape. Perhaps the most noteworthy change with regard to shareholder composition has been the sharp growth of the institutional investor over the last sixty years. In 1950, institutional investors, such as pension funds, mutual funds, and insurance companies, owned less than 10% of the total U.S. equity market. (10) Institutional investors owned about 66% of the total U.S. equity market by 2006, and such investors owned more than 76% of the equity at the largest 1000 companies by the end of 2007. (11) By contrast, the percentage of public stock held by retail investors has fallen dramatically over the last sixty years. Thus, the percentage of stock held by households and nonprofits, which include individual investors and those who hold large share blocks, declined from 78% in 1970 to 36% in 2008. (12) Clearly, one of the more noteworthy changes since 1950 has been the rise in institutional ownership coupled with the decline in retail stock ownership. This change has a significant impact on shareholders' ability to influence corporate affairs. …