Piercing the Corporate Eyebrow: Shareholder Values in Corporate Governance

There is both confusion and tragedy in the structure of American corporate law. The confusion arises because the basic purpose of modern corporations is broad, debatable, and in any event hard to enforce through law. Corporations are usually said to exist for the benefit of their shareholders, but state corporate-governance statutes provide for the broad possibility that corporations can serve other goals, and in any event corporate directors and managers usually have extremely broad discretion to set corporate policy. Moreover, even to the extent that promoting shareholder value does drive corporate policy, shareholders do not speak with one voice: they often have different perspectives on the time-frame for their investments, different politics, and different financial status. Existing law's solution is to allow corporate managers to speak with one voice, ostensibly for the shareholders' benefit.The tragedy arises because corporate law, in seeking to serve shareholders, rarely tries to determine what shareholders in fact want, instead assuming that their preferences are simple and uniform. The result is a tendency toward reductionistic abstractions that happen to match those that prevail among economic analysts of law. For example, shareholders, it is said, seek (perhaps exclusively) to maximize personal wealth. One this assumption is made, views like Milton Friedman's -- that "the social responsibility of business is [more or less exclusively] to increase its profits" -- become seemingly inevitable. In turn, corporate law charters entities that may well harm the very groups that they are meant to serve, and it entrenches the academic rational-actor model in subtle but inappropriate ways.This paper has a straightforward goal: to decrease the confusion and tragedy in corporate law, and thereby appropriately limit managers' discretion, by describing a new mechanism by which shareholders' preferences can be aggregated. My goal is not somehow to capture shareholders' preferences perfectly; indeed, the aggregation of multiple parties' preferences always requires some abstraction, reduction, and compromise. Nor is my goal here to eliminate all need for managerial discretion, to excessively cabin managers, or to vastly increase the regulation of corporations. Instead, this paper aims to outline a new mechanism by which shareholders can express several kinds of preferences at little cost and with little danger of encountering the problems from which existing means for empowering shareholders supposedly suffer.The mechanism I propose is simple, at least in form: shareholders should be able to vote on matters of general import, rather than only on individual, company-specific propositions. To implement this voting, shareholders should have access to a standardized menu-through their brokers, mutual funds, pensions, and similar accounts-of potential specific restrictions on corporate conduct, as well as the opportunity to specify certain advisory preferences (like those concerning the timeframes of their investments). With the opportunity to cast "standing orders" for an entire investment portfolio at once, shareholders would have less of an incentive to ignore their opportunities to help govern corporations; they would not need to acquaint themselves with the features and special problems of each company whose shares they own, to read lengthy proxy solicitations or shareholder policy proposals, or otherwise to devote an amount of time on an individual company that is disproportionate to their relatively small stake in the company. Similarly, the general voting I describe (in contrast with company-specific voting) reduces the risks that proponents of managerial power assign to shareholder ballot proposals and other mechanisms that empower shareholders-the risk of undue influence by self-interested groups of shareholders. General voting on the level of whole brokerage or mutual-fund accounts, too, need have little detrimental effect on corporate efficiency, because it need only enforce significant prohibitions and socially salient policies, of the kind that regulatory agencies are already sensitive to in reviewing shareholder ballot measures; it does not threaten to bog down corporate boards in operational debates with shareholders or to undermine corporate managers' abilities to discharge their duties.