The Case for Shareholder Access: A Response to the Business Roundtable

Case Western Reserve Law Review Volume 55 | Issue 3 2005 The Case for Shareholder Access: A Response to the Business Roundtable Lucian Arye Bebchuk Follow this and additional works at: https://scholarlycommons.law.case.edu/caselrev Part of the Law Commons Recommended Citation Lucian Arye Bebchuk, The Case for Shareholder Access: A Response to the Business Roundtable, 55 Case W. Res. L. Rev. 557 (2005) Available at: https://scholarlycommons.law.case.edu/caselrev/vol55/iss3/8 This Symposium is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve University School of Law Scholarly Commons. THE CASE FOR SHAREHOLDER ACCESS: A RESPONSE TO THE BUSINESS ROUNDTABLE Lucian Arye Bebchukt The Business Roundtable ("BRT"), an influential association of CEOs of leading companies, has played a key role in opposing the SEC proposal to provide shareholders with access to the corporate ballot. In response to the SEC request for public comment, the BRT filed an eighty-page letter comment, with hundreds of pages of appendices, in opposition to the proposed shareholder access rule.' According to media accounts, the BRT and its allies have also been using the considerable clout that they have to lobby against the proposed rule. While this lobbying effort has thus far been successful in discouraging the SEC from proceeding to adopt a shareholder access rule, this article concerns the merits of the BRT position: it examines whether the BRT has succeeded in putting forward good substantive reasons for opposing shareholder access. I have discussed in an earlier work the general case for shareholder access to the corporate ballot in general and the SEC proposal t William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School; Research Associate, National Bureau of Economic Research. This article was initially prepared for distribution to participants at the SEC roundtable on shareholder nomination of directors on March 10, 2004, and it was subsequently presented at the Leet Business Law Symposium at Case Western Reserve University. A version of this article will also appear in SHAREHOLDER ACCESS TO THE CORPORATE BALLOT (Lucian Bebchuk ed., Harvard University Press 2005). I am grateful to participants in the SEC roundtable and the Leet Business Law symposium for helpful reactions and suggestions. I also would like to thank Kiwi Kamara and Rob Maynes for their research assistance. For financial support, I am grateful to the Nathan Cummins Foundation, the Guggenheim Foundation, and the John M. Olin Center for Law, Economics, and Business. I Letter from Henry A. McKinnell, Chairman, The Business Roundtable, to Jonathan Katz, Secretary, Securities and Exchange Commission (December 22, 2003), available at http://www.sec.gov/rules/proposed/s7l903/s71903-381.pdf [hereinafter BRT Comment Letter]. The main arguments made in the BRT submission are also put forward in a paper by John Castellani, the President of the BRT and Amy Goodman, who participated in drafting the BRT's comment letter. See John J. Castellani & Amy L. Goodman,The Case Against the SEC Director Election Proposal, in SHAREHOLDER ACCESS TO THE CORPORATE BALLOT (Lucian Bebchuk ed., Harvard University Press forthcoming 2005) (manuscript on file with the author). CASE WESTERN RESERVE LAW REVIEW [Vol. 55:3 in particular.2 This article reconsiders the subject in light of the BRT submission, and analyzes the wide range of objections raised by the BRT. I start with an examination of the BRT's claims that there is no need for reform, and I then proceed to consider the BRT's claims that providing shareholders with any access to the corporate ballot would have severe adverse consequences. Following a detailed examination of the BRT's various claims, my analysis concludes that none of them provides a good basis for denying shareholders access to the corporate ballot. I. No NEED FOR REFORM? A. The Empirical Claim After challenging the Commission's authority to adopt the proposed rule, the BRT proceeds to argue that there is no need for reform.3 The BRT begins by suggesting that the evidence contradicts the view that reform is needed. In particular, the BRT argues that "scant evidence is given that shareholders are in fact denied meaningful participation in the proxy process under the current rules," and that "[s]ubstantial evidence in the record, in fact, suggests the opposite." 4 In claiming that the evidence suggests the opposite, the BRT relies on the statistics concerning the incidence of "withhold" votes that the Commission reported in its release. According to these statistics, the incidence of withhold votes for one or more of the directors exceeds 35 percent in only 1.1 percent of companies. The BRT interprets this low incidence of large withhold votes as evidence that shareholders are content with board performance in the vast majority of companies. Moreover, even for the small number of cases with withhold votes exceeding 35 percent, the BRT claims that (i) cases in which only 35 percent of the shareholders withhold their votes should not be viewed as a problem since incumbents still enjoy the support of a majority of the shareholders, and (ii) even if the withhold vote in such cases were viewed as reflecting the existence of a problem at the time of the vote, the large withhold vote might commonly lead to management action addressing the problem so that, again, no reform is needed. 2 See Lucian Bebchuk, The Casefor ShareholderAccess to the Ballot, 59 Bus. LAW. 43 (2003). 3 BRT Comment Letter, supra note 1, at 1-22; Castellani & Goodman, supra note 1, manuscript at 2-6. 4 BRT Comment Letter, supra note 1, at 23; Castellani & Goodman, supra note 1, manuscript at 2. 2005] CASE FOR SHAREHOLDER ACCESS Withhold votes register shareholder dissatisfaction but do not directly confront incumbents with a risk of removal. In the presence of a quorum and the absence of a competing slate, the company's slate will be elected regardless of the number of withhold votes. Incumbents face a risk of replacement only when a rival slate competes for shareholder support. The possibility of such a replacement, it is worth reminding, plays a key role in the accepted theory of the corporation. The viability of such replacement when shareholders are dissatisfied with board performance is supposed to provide a critical safety valve. The evidence that the BRT overlooks is the negligible incidence of electoral challenges outside the hostile takeover context. The BRT seems to believe that there is a meaningful incidence of such challenges. It argues that "[i]n fact, shareholders have used the Commission's existing rules to launch election contests on numerous o (...truncated)