Corporate Governance, Federal Preemption, and the 2008 Presidential Race

We have talked a great deal on this Blog about the weakness and bias of the Delaware system of corporate governance and surmised that it will lead to greater federal preemption.  SEC control over audit committees, something in SOX, is the most recent example of actual preemption.  Say on Pay, put forth by Barney Frank, and introduced in the Senate by Barak Obama, is an example of preemption in the works.  Preemption in SOX affected only exchange traded companies.  Say on pay applies to public companies.  In both cases, the Commission received a role in ensuring execution.  As we have discussed in a paper, the Commission has increasingly become involved in the corporate governance process. 

On Wednesday, Jan. 2, John Edwards, the second place finisher last night in the Iowa caucuses on the Democratic side, wrote an editorial in the WSJ (no doubt trying to raise enthusiasm among corporate governance supporters at the Iowa caucuses) discussing assorted reforms, including corporate governance.  Unsurprisingly, he emphasized executive compensation, although rather than focus on anecdotal examples, he noted the increase in compensation as a multiple of the average worker's salary.  "In 1960, the average CEO made 41 times what the average worker made. But in 2005, the average CEO made over 400 times the average worker's salary. The share of corporate profits going to CEO pay has doubled since the 1990s. Meanwhile, the value of the minimum wage has plummeted 30% since 1979."

As for specific proposals, he had a number, including improved health care and universal retirement accounts.  With respect to executive compensation, he would cap the amount of untaxed deferred compensation.  With respect to governance, however, he would "give shareholders new rights and responsibilities so that they can call shareholder meetings, remove directors who aren't acting responsibly, and have a say on executive pay."  Other than presumably favoring say on pay, there isn't much in the editorial that explains how he would accomplish these goals.

With respect to the removal of directors, the RMBCA allows directors to be removed with or without cause by shareholders but allows the articles to restrict this authority to "for cause," a type of provision that is very common.  As a result, shareholders effectively cannot remove directors.  One way to change this would be to impose federally a provision providing that the right to remove directors cannot be limited in the articles or bylaws.  With respect to calling meetings, most states limit the authority to 10% shareholders, then allow the percentage to be increased in the articles.  Federal law could, for example, lower the percentage and prohibit limitations in the articles and bylaws.

Other possibilities would be to guarantee shareholders access to the company's proxy statement and granting shareholders the authority to initiate amendments to the articles of incorporation. 

We will follow throughout the campaign the positions by the various candidates on governance.  What is interesting so far is how matter of fact the federalization of some aspects of governance has become.  Say on Pay already passed the House, and the main contenders for the democratic nomination seem to favor other federally mandated governance provisions.  It reflects a growing strength of shareholders and a growing frustration with the "race to the bottom" attitude of Delaware, something not helped by the use of decisions and speeches by the Delaware judges to interject themselves needlessly into the governance process.  It likewise reflects a growing frustration with the Commission, particularly the failure to provide access, a decision that was not in the best interests of shareholders, not consistent with their state law rights, and motivated by a political agenda.  With the decisions of the Commission and Delaware, federalization becomes increasingly likely.   

Comments

[James McRitchie]

A vague statement form Edwards, included in his program of Restoring Corporate Responsibility and Rebuilding the Middle Class, contains the following:

Strengthening shareholder rights: Edwards will give shareholders the right to render an advisory vote on executive compensation, call a shareholders' meeting, recall a limited number of directors at a time and have proxy access to the candidate slate for boards of directors. To ensure that these policies facilitate accountability, not hostile takeovers, Edwards will require the participation of long-term investors in these efforts.