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2.1: Who Owns the Corporation? The Legal Debate

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    22605
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    Do shareholders own the company? To most people, this idea is so axiomatic that the question hardly seems worth asking. However, the long-simmering debate about the age-old argument over the board’s responsibilities to shareholders versus the rights of all company stakeholders flared up again recently, drawing attention once again to that central question.Bernstein (December 2007–January 2008).

    In the latest round of this debate, two leading corporate governance experts—Lucian Bebchuk, Harvard Law School professor and ardent shareholder-rights proponent, and Martin Lipton, founding partner of Wachtell, Lipton, Rosen & Katz and a stalwart defender of the view that it is management’s prerogative to do what is in the best interest of the corporation—squared off in the pages of the Virginia Law Review.See Bebchuk (2007, May), p. 675; and Lipton and Savitt (2007, May), p. 733. The central issue in this debate is whether directors of a public company owe their primary fiduciary duty to its shareholders, as Bebchuk insists, or have to consider the prerogatives of all the stakeholders, as Lipton maintains.

    Bebchuk (May 2007) cites a widely quoted 1988 ruling by the Delaware courts that “the shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests” and points out that corporate law gives boards the authority to hire and fire management and set the company’s overall direction. Next, he argues that since directors are expected to serve as the shareholders’ guardians, shareholders must have the power to replace them. Thus, the fear of being replaced is supposed to make directors accountable and provide them with incentives to serve shareholder interests.

    He continues by noting just how infrequently U.S. directors are actually challenged, much less removed, and concludes that shareholder power to replace directors in the United States is largely a myth. To make shareholder power real, he supports the proposal that directors be elected by a secret ballot open to rival candidates nominated by shareholders. What is more, to put them on an equal footing with the slate proposed by the board’s nominating committee (usually with management input), he suggests that challengers should be reimbursed by the corporation if they receive a threshold number of votes.

    Taking the opposing view and challenging the widely accepted argument that a company’s primary goal is to maximize shareholder value, Lipton challenges the very notion that corporations are the private property of stockholders: “Shareholders do not ‘own’ corporations,” he says. “They own securities—shares of stock—which entitle them to very limited electoral rights and the right to share in the financial returns produced by the corporation’s business operations.”Lipton and Savitt (2007, May), p. 733. Directors, he argues, are not merely representatives of shareholders who have a legal responsibility to put investor interests first. Instead, the role of the board is simply and dutifully to seek what is best for the company itself, which means balancing the interests of shareholders as well as other stakeholders, such as management and employees, creditors, regulators, suppliers, and consumers. He concludes that Bebchuk’s notion that a board’s primary fiduciary obligation is to shareholders is a myth of corporate law.