The modern corporate form owes its success as much to the separation of management from shareholders, and the imposition of fiduciary obligations on managers (rather than on shareholders), as it does to separate personality and limited liability. The ensuing functional separation between managers and shareholders, with boards as monitors, has given rise to a robust debate on the accountability and responsibility of these players to the corporate entity.
Some recent developments in these relationships have prompted a shift in the debate, away from concerns about the hyperactivity of managers, effete boards and absentee shareholders. Instead, the focus has switched to the nature and role of shareholders, in the face of practices such as the renting of voting and dividend rights, and the use of rented voting rights by blockholders (hedge funds and the like) to facilitate transfers of corporate control. Alongside this, there has also been a debate on a by-product of these developments, namely corporate short termism and the role of managers in this regard, to the exclusion of a consideration of the pressures imposed on managers by blockholders.
While expressions such as “strong managers and weak owners” and “pay without performance” serve to reveal the dominance of managers over shareholders and boards, and measures such as “say on pay” and “the two strike rule” (enabling board spills) may make managers more accountable, some unintended consequences appear to have resulted. These include the boost to blockholder power and the emergence of new forms of managerial opportunism where managers act in cahoots with blockholders in order to deliver and share in the private gains sought by blockholders at the expense of the rest of the shareholder body and workers generally.
These developments give rise to hard questions, such as whether the purveying of control should be subject to greater scrutiny by the shareholder body generally, independent of blockholders. Suggestions made to restore the shareholder-manager balance of power, while also preserving the integrity of the concept of shareholders, include the sharing of any premiums received in the process of effecting a control change, imposition of fiduciary obligations on controllers and potential controllers, a vote by the shareholder body exclusive of blockholders, and a prohibition on severance of the voting and dividend rights attached to a share.
My paper, available here, canvasses some of these issues. The argument made is that “say on pay” and the “two strike rule” have had the unintended effect of encouraging a form of transient governance with no accountability, responsibility, or transparency to the general shareholder body. Overall, the paper suggests that a wedge needs to be driven between blockholder-manager coalitions to ensure the accountability of managers to the shareholder body generally rather than to the special interests of blockholders.
Razeen Sappideen is Foundation Professor of Law at the University of Western Sydney.