Report of the Task Force of the ABA Section of Business Law Corporate Governance Committee on Delineation of Governance Roles and Responsibilities

Business Lawyer

Volumn 65, Issue 1, 2009, Pages 107-151

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EID: 76849098691     PISSN: 00076899     EISSN: None     Source Type: Journal    
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References (348)

1. Decision rights and responsibilities in the publicly traded corporation have been the subject of considerable discussion in academic literature. See, e.g., ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS (1776);
2. ADOLPH A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932);
3. William O. Douglas, Directors Who Do Not Direct, 47 HARV. L. REV. 1305 (1934);
4. R.H. Coase, The Nature of the Firm, 4 ECONOMICA 386 (1937); MYLES L. MACE, DIRECTORS: MYTH AND REALITY (1971);
5. Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976);
6. ALFRED D. CHANDLER, JR., THE VISIBLE HAND: THE MANAGERIAL REVOLUTION IN AMERICAN BUSINESS (1977);
7. Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. LEGAL STUD. 251 (1977);
8. IRA M. MILLSTEIN & SALEM M. KATSH, THE LIMITS OF CORPORATE POWER: EXISTING CONSTRAINTS ON THE EXERCISE OF CORPORATE DISCRETION (Beard Books 2d prtg. 2003) (1981);
9. FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991);
10. PAUL W MACAVOY & IRA M. MILLSTEIN, THE RECURRENT CRISIS IN CORPORATE GOVERNANCE (2003); Lucian Arye Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833 (2005);
11. Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. REV. 601 (2006);
12. Stephen M. Bainbridge, Director Primacy and Shareholder Disem- powerment, 119 HARV. L. REV. 1735 (2006);
13. Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93 VA. L. REV. 675 (2007);
14. Lynn A. Stout, The Mythical Benefits of Shareholder Control, 93 VA. L. REV. 789 (2007);
15. Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, 33 J. CORP. L. 1 (2007);
16. Iman Anabtawi & Lynn Stout, Fiduciary Duties for Activist Shareholders, 60 STAN. L. REV. 1255 (2008);
17. Frank H. Easterbrook, The Race for the Bottom in Corporate Governance, 95 VA. L. REV. 685 (2009).
18. This Report relies to a substantial degree on principles of corporate law as expressed in the General Corporation Law of the State of Delaware, DEL. CODE ANN. tit. 8, §§ 101 et seq. (2001 & Supp.2008), and related case law, since Delaware is the state of incorporation for over 60 percent of Fortune 500 companies (and a large number of other public and private corporations) and has a judiciary that is widely recognized for its sophistication concerning issues of corporate law. Delaware corporate law tends to exert a strong influence on the direction of corporate law throughout the United States. The Task Force believes that the principles for which Delaware law is cited reflect generally accepted principles of state corporate law, recognizing that other states, through adoption of a version of the Model Business. Corporation Act Annotated (4th ed. 2008) or their own unique statutory provisions, may diverge from Delaware in certain respects.
19. A broad range of corporate governance-related reforms have been proposed in response to the current financial crisis. In many instances, the reform ideas predate the financial crisis, having been long-advocated by shareholder activists (for example, requiring majority voting rather than plurality voting in uncontested director elections, providing shareholders with access to the companys proxy materials for the nomination of directors, providing shareholders with an advisory vote on executive compensation, and eliminating classified boards). Reforms proposed (or adopted) include the following: (i) limiting board discretion regarding the levels and structure of executive compensation, see TARP Standards for Compensation and Corporate Governance, 74 Fed. Reg. 28394 (June 15, 2009) (to be codified at 31 C.FR. pt. 30);
20. Excessive Pay Shareholder Approval Act, S. 1006, 111th Cong. (2009) (introduced May 7,2009);
21. Excessive Pay Capped Deduction Act of 2009, S. 1007,111th Cong. (2009) (introduced May 7, 2009);
22. Corporate and Financial Institution Compensation Fairness Act of 2009, H.R. 3269,111th Cong. (2009) (introduced July 21,2009) [hereinafter Proposed Compensation Fairness Act); (ii) increasing shareholder influence in director elections through a right of shareholders to access the companys proxy for certain shareholder nominations, see Facilitating Shareholder Director Nominations, Exchange Act Release No. 33-9046, 74 Fed. Reg. 29024 (proposed June 18, 2009) (to be codified at 17 C.F.R. pts. 200, 232,'240, 249 & 274), available at http://www.sec.gov/rules/proposed/2009/33-9046.pdf [hereinafter SEC Proxy Access Rule Proposal]; Shareholder Bill of Rights Act of 2009, S. 1074, 111th Cong. (2009) (introduced May 19, 2009) [hereinafter Proposed Shareholder Bill of Rights Act];
23. Shareholder Empowerment Act of 2009, H.R. 2861, 111th Cong. (2009) (introduced June 12, 2009) [hereinafter Proposed Shareholder Empowerment Act]; (iii) providing shareholders with an "advisory" vote on aspects of executive compensation, see Proposed Shareholder Bill of Rights Act, supra; Investor Protection Act of 2009, http7Avww.treas.gov/press/ releases/docs/tg-218IX.pdf (draft legislation delivered by the U.S. Department of the Treasury to the U.S. Congress on July 10, 2009) [hereinafter Proposed Investor Protection Act];
24. Corporate Governance Reform Act of 2009, H.R. 3272, 111th Cong. (2009) (introduced July 21, 2009) [hereinafter Proposed Corporate Governance Reform Act];
25. Proposed Compensation Fairness Act, supra; (iv) mandating majority vote standards for uncontested elections of directors, see Proposed Shareholder Bill of Rights Act, supra, § 5 (directors in uncontested elections to be elected by a majority of votes cast as to each nominee);
26. Proposed Shareholder Empowerment Act, supra, § 2 (same); (v) requiring independent board leadership or enhanced disclosure regarding the structure of board leadership, see Proposed Shareholder Bill of Rights Act, supra, § 5 (requiring chairperson of the board to meet certain director independence requirements);
27. Proposed Shareholder Empowerment Act, supra, § 2 (same); Proposed Corporate Governance Reform Act, supra, § 2 (requiring that the chairperson of the board of an issuer be independent);
28. see also MILLSTEIN CTR. FOR CORPORATE GOVERNANCE & PERFORMANCE, YALE SCH. OF MGMT. POLICY BRIEFING No. 4: CHAIRING THE BOARD-THE CASE FOR INDEPENDENT LEADERSHIP IN CORPORATE NORTH AMERICA 3 (2009), available at http://millstein.som.yale.edu/ 2009%2003%2030%20Chairing%20The%20Board.pdf (recommending that public companies appoint an independent, non-executive chairman of the board or "[i]f corporate directors choose to take a different course, either by combining the two posts or naming a non-independent chair, they should explain to their corporations shareowners why doing so represents a superior approach to optimizing long-term shareowner value"); (vi) strengthening independence requirements for compensation committee members and requiring independent compensation consultants, see Proposed Investor Protection Act, supra, § 942;
29. Proposed Compensation Fairness Act, supra, § 3; Proposed Shareholder Empowerment Act, supra, § 3;
30. and (vii) creating a risk committee comprised of independent directors, see Proposed Shareholder Bill of Rights Act, supra, § 5;
31. Proposed Corporate Governance Reform Act, supra, § 3.
32. Henry Lesser, Corporate Governance: Some Unasked Questions-A Personal Commentary, 19 PEFP. L. REV. 857, 858 (1992);
33. see also Id. at 858-59 (posing the above question seventeen years ago in a context all too familiar; "|A]s the United States enters a presidential election year with its economy in continuing recession, there are already signs that the debate over corporate governance has become increasingly politicized, with issues such as proxy reform, executive compensation, and board representation rapidly acquiring the characteristics of polemic banners.").
34. See generally JOHN MICKLETHWAIT & ADRIAN WOOLDRIDGE, THE COMPANY: A SHORT HISTORY OF A REVOLUTINARY IDEA (2003).
35. See Margaret M. Blair, Locking in Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century, 51 UCLA L. REV. 387, 388-91 (2003);
36. Margaret M. Blair & Lynn A. Stout, Specific Investment: Explaining Anomalies in Corporate Law, 31 J. CORP. L. 719, 732-42 (2006).
37. See Stephen M. Bainbridge, Independent Directors and the All Corporate Governance Project, 61 GEO. WASH. L. REV. 1034, 1053-56 (1993) (discussing rationales for and benefits of centralized board decision-making).
38. See E. Norman Veasey & Christine T. Di Guglielmo, How Many Masters Can a Director Serve? A Look at the Tensions Facing Constituency Directors, 63 BUS. LAW. 761, 774-75 (2008) ("Directors will generally be responsible for protecting the best interests of the corporation and all its stockholders, despite the directors' designation by some particular constituency, because fiduciary duties generally will trump contractual expectations in the corporate context.. .. [T]he primary basis upon which a constituency directors conduct will be measured is whether the directors decision is based upon the corporate merits of the subject before the board, rather than extraneous considerations or influences.").
39. See A. Gilchrist Sparks, III, Corporate Democracy - What It Is, What It Isn't, and What It Should Be, in WHAT ALL BUSINESS LAWYERS AND LITIGATORS MUST KNOW ABOUT DELAWARE LAW D EVELOPMENTS 279,281-85 (PLI Corp. L. & Prac, Course Handbook Series No. 1543,2006) (noting (i) shareholders are not captive in the same way that citizens are given that shareholder interest tends to be of much shorter duration; (ii) the greater lack of interest and participation by shareholders in corporate elections increases the ability of shareholders with a specific interest to exert influence; (iii) institutional investors are themselves intermediaries for others having the economic interest in the shares; (iv) many institutional shareholders outsource vote decisions to, or are otherwise influenced by the recommendations of, proxy advisors; and (v) votes may be otherwise "rented" or exercised by persons lacking any economic interest in the shares).
40. BERLE & MEANS, supra note 1, at 5.
41. See Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 VA. L. REV. 247, 260-61 (1999) (citing Stephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, 82 CORNELL L. REV. 856, 863 n.22 (1997);
42. Margaret M. Blair, Corporate "Ownership": A Misleading Word Muddies the Corporate Governance Debate, BROOKINGS REV., Winter 1995, at 16);
43. see also Stephen M. Bainbridge, The Board of Directors as Nexus of Contracts, 88 IOWA L. REV. 1,3 n.5 (2002) ("Although I follow convention in using the term 'separation of ownership and control,' ownership is not a particularly useful concept in the corporate context.");
44. Bainbridge, supra note 7, at 1052 n.104 ("[lit is more than a little misleading to speak of'ownership' in this context. The corporation is not an entity, but an aggregate of various inputs acting together to produce goods or services... [T]he firm is a legal fiction representing a complex nexus or web of explicit and implicit contracts establishing rights and obligations among the various inputs making up the firm. Because shareholders are simply one of the inputs bound together by this web of voluntary agreements, ownership is not a meaningful concept under this model.");
45. Blair & Stout, supra note 6, at 725 ("(Tlhere was at least one glaring problem with simultaneously arguing that a corporation should be regarded as a "nexus of contracts' and that corporate law should require corporate managers to act on behalf of the shareholders who 'owned' the firm. The problem was that the nexus metaphor did not support the notion that the corporation was something that could be 'owned.'");
46. Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & ECON. 395,396 (1983) ("Shareholders are no more the 'owners' of the firm than are bondholders, other creditors, and employees (including managers) who devote specialized resources to the enterprise, yet bondholders and employees do not vote at all.");
47. Lynn A. Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, 75 S. CAL. L. REV. 1189, 1192 (2002) ("From both a legal and an economic perspective, the claim that shareholders own the public corporation simply is empirically incorrect.").
48. In a principal-agent relationship, the principal has the power to give binding instructions to the agent. See RESTATEMENT (THIRD) OF AGENCY § 1.01 (2006) ("Agency is the fiduciary relationship that arises when one person (a 'principal') manifests assent to another person (an 'agent') that the agent shall act on the principals behalf and subject to the principals control, and the agent manifests assent or otherwise consents so to act."). However, directors are generally not bound to act as shareholders wish.
49. See, e.g., Paramount Commc'ns, Inc. v. Time Inc., Nos. 10866, 10670 & 10935, 1989 WL 79880, at *30 (Del. Ch. 1989) ("The corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm."), off'd, 571 A.2d 1140 (Del. 1990);
50. See also Deborah A. DeMott, Shareholders as Principals 2 (Duke Law Sch. Pub. Law & Legal Theory Working Paper Series, Working Paper No. 15, 2001), available at http://ssm.com/abstract-275049 ("Contemporary corporate law does not treat directors as shareholders' agents other than in a loose or metaphorical sense. If fully applicable to directors' relationships to shareholders, the common law of agency would destabilize the legal consequences that contemporary corporate law facilitates.").
51. See DeMott, supra note 12, at 4 (citing Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 YALE LJ. 387 (2000); RESTATEMENT (THIRD) OF AGENCY § 3.10(1) (2006)).
52. AM. LAW INST., PRINCIPLES OF CORPORATE GOVERNANCE: ANALYSIS AND RECOMMENDATIONS § 2.01(a) (1994).
53. See N. Am. Catholic Educ. Prograrruning Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) ("When a corporation is insolvent, ... its creditors take the place of the shareholders as the residual beneficiaries of any increase in value."); Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 791 (Del. Ch. 2004) ("By definition, the fact of insolvency places the creditors in the shoes normally occupied by the shareholders-that of residual risk-bearers. Where the assets of the company are insufficient to pay its debts, and the remaining equity is underwater, whatever remains of the companys assets will be used to pay creditors, usually either by seniority of debt or on a pro rata basis among debtors of equal priority.").
54. Specific shareholder rights under state law include rights to: (i) vote at stockholder meetings, including with respect to the election of directors, see DEL. CODE ANN. tit. 8, §§ 211-212 (2001 & Supp. 2008);
55. MODEL BUS. CORP. ACT ANN. §§ 7.21-7.28 (4th ed. 2008);
56. (ii) inspect the corporation's books and records, see DEL. CODE ANN. tit. 8, § 220 (Supp. 2008);
57. MODEL BUS. CORP. ACT ANN., supra, § 16.02; (iii) obtain the corporation's stockholder list, see DEL. CODE ANN. tit. 8, § 219 (Supp. 2008);
58. MODEL BUS. CORP. ACT ANN., supra, § 7.20;
59. (iv) adopt certain corporate bylaws, see DEL. CODE ANN. tit. 8, § 109(a) (2001);
60. MODEL BUS. CORP. ACT ANN., supra, § 10.20;
61. (v) authorize persons to act by proxy, thereby enabling shareholders to wage proxy contests, see DEL. CODE ANN. tit. 8, § 212 (2001 & Supp. 2008);
62. MODEL BUS. CORP. ACT ANN., supra, § 7.22;
63. (vi) attend annual and special meetings of shareholders, see DEL. CODE ANN. tit. 8, § 211 (2001);
64. MODEL BUS. CORP. ACT ANN., supra, §§ 7.01-7.02;
65. and (vii) sue directors and officers for breach of fiduciary duties, see Tooley v. Donaldson, Lufldn, & Jenrette, Inc., 845 A.2d 1031, 1036-39 (Del. 2004);
66. MODEL BUS. CORP. ACT ANN., supra, §§ 7.40-7.47. Note that under the Delaware General Corporation Law, "[t]he bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." DEL. CODE ANN. tit. 8, § 109(b) (2001);
67. see also MODEL BUS. CORP. ACT ANN., supra, § 2.06(b) ("The bylaws of a corporation may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation."). Given the broad mandate afforded to directors to manage the business and affairs of the corporation, "the shareholders' statutory power to adopt, amend or repeal bylaws is not coextensive with the board's concurrent power and is limited by the boards management prerogatives under Section 141(a)" of the Delaware General Corporation Law. CA, Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227, 232 (Del. 2008). "Rather, the shareholders' statutory power to adopt, amend or repeal bylaws under Section 109 cannot be 'inconsistent with law,' including Section 141(a)."
68. Id. at 232 n.7. In CA, the Delaware Supreme Court addressed the proposed inclusion of a bylaw on CA, Inc.'s proxy statement that would have required CA's board to reimburse the reasonable fees of any shareholder that sought to elect less than 50 percent of the board and succeeded in electing at least one director.
69. See id. at 229-30. The court held that since the underlying purpose of the bylaw related to the process of electing directors, it was in line with stockholder-adopted bylaws imposing procedural and process-related restrictions on directors that had been permitted under section 109 and, therefore, was a proper subject for stockholder action.
70. See id. at 233-37. However, the court went on to hold that the proposed bylaw, if adopted, would violate state law given the mandatory nature of the proposed bylaw'S language (i.e., "the board of directors shall"), which failed to "reserve to [the] directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all."
71. Id. at 240.
72. See DEL. CODE ANN. tit. 8, § 251 (Supp. 2008) (mergers);
73. MODEL BUS. CORP. ACT ANN. § 11.04 (4th ed. 2008) (mergers and share exchanges);
74. DEL. CODE ANN. tit. 8, § 271 (2001 & Supp. 2008) (sale of all or substantially all assets);
75. MODEL BUS. CORP. ACT ANN., supra, § 12.02 (sale of assets that would leave the corporation without a significant continuing business activity);
76. DEL. CODE ANN. tit. 8, § 242 (2001) (amendment to certificate of incorporation);
77. MODEL BUS. CORP. ACT ANN., supra, § 10.03 (same);
78. DEL. CODE ANN. tit. 8, § 275 (2001) (voluntary dissolution);
79. MODEL BUS. CORP. ACT ANN., supra § 14.02 (same).
80. See DEL. CODE ANN. tit. 8, § 251(b) (Supp. 2008) ("The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation and declaring its advisability.");
81. MODEL BUS. CORP. ACT ANN. § 11.04(a-b) (4th ed. 2008) ("The plan of merger or share exchange must be adopted by the board of directors.... [A] fter adopting the plan of merger or share exchange the board of directors must submit the plan to the shareholders for their approval.");
82. DEL. CODE ANN. tit. 8, § 271(a) (2001) ("Every corporation may at any meeting of its board of directors or governing body sell, lease or exchange all or substantially all of its property and assets, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or other property, including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors or governing body deems expedient and for the best interests of the corporation....");
83. MODEL BUS. CORP. ACT ANN., supra, § 12.02(b) ("A disposition that requires approval of the shareholders ... shall be initiated by a resolution by the board of directors authorizing the disposition.");
84. DEL. CODE ANN. tit. 8, § 275(a) (2001) ("If it should be deemed advisable in the judgment of the board of directors of any corporation that it should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution.");
85. MODEL BUS. CORP. ACT ANN., supra, § 14.02(a) ("A corporations board of directors may propose dissolution for submission to the shareholders.");
86. DEL. CODE ANN. tit. 8, § 242(b)(1) (2001) ("If the corporation has capital stock, its board of directors shall adopt a resolution setting forth the amendment [of the certificate of incorporation] proposed, declaring its advisability, and either calling a special meeting of the stockholders entitled to vote in respect thereof for the consideration of such amendment or directing that the amendment proposed be considered at the next annual meeting of the stockholders.");
87. MODEL BUS. CORP. ACT ANN., supra, § 10.03(a-b) ("The proposed amendment [of the articles of incorporation] must be adopted by the board of directors.. .. [A]fter adopting the proposed amendment the board of directors must submit the amendment to the shareholders for their approval.").
88. See Gabelli & Co. v. Liggett Group, Inc., 479 A.2d 276, 280 (Del. 1984) ("It is settled law in this State that the declaration and payment of a dividend rests in the discretion of the corporations board of directors in the exercise of its business judgment; that, before the courts will interfere with the judgment of the board of directors in such matter, fraud or gross abuse of discretion must be shown.").
89. See DEL. CODE ANN. tit. 8, § 220(c) (Supp. 2008) ("Where the stockholder seeks to inspect the corporation's stock ledger or list of stockholders and establishes that such stockholder is a stockholder and has complied with this section respecting the form and manner of making demand for inspection of such documents, the burden of proof shall be upon the corporation to establish that the inspection such stockholder seeks is for an improper purpose.");
90. MODEL BUS. CORP. ACT ANN. § 16.02(a) (4th ed. 2008) ("A shareholder of a corporation is entitled to inspect and copy, during regular business hours at the corporation's principal office, any of the records of the corporation described in section 16.01(e) if the shareholder gives the corporation written notice of the shareholders demand at least five business days before the date on which the shareholder wishes to inspect and copy").
91. See Unanue v. Unanue, No. 204-N, 2004 WL 2521292, at *8 (Del. Ch. Nov. 3, 2004) ("[D]irectors generally have a fiduciary duty to disclose all material facts when they seek stockholder action or communicate with stockholders. The fiduciary duty to disclose often overlaps the affirmative duties to disclose under the federal securities laws. Where the federal laws mandate disclosure, Delaware law requires that any disclosure made be full and fair. There need not be an affirmative disclosure requirement under federal law, however, for a fiduciary duty to disclose to arise under Delaware law." (footnotes omitted)).
92. Publicly traded corporations are subject to the disclosure requirements of the Securities Act of 1933 (codified as.amended at 15 U.S.C. §§ 77a-77aa (2006)) [hereinafter Securities Act], the Securities Exchange Act of 1934 (codified as amended at 15 U.S.C. §§ 78a-78mm (2006)) [hereinafter Exchange Act], and the rules promulgated under the Securities Act and the Exchange Act. Among other things, issuers must furnish quarterly and annual reports disclosing an ever broadening amount of information, including all material information concerning the companys financial condition and operations.
93. See Exchange Act § 13, 15 U.S.C. § 78m (2006) (mandating that all companies with equity securities subject to registration requirements set forth in section 12 of the Securities Act disclose material information on a periodic basis). In addition, the rules of stock exchanges on which the shares of public companies are traded also provide for disclosure obligations.
94. See NYSE EURONEXT. LISTED COMPANY MANUAL §§ 202.00-204.00 (2009), available at http://www.nyse.com/Frameset.html?nyseref=http%3A//www.nyse.com/regulation/ listed/1101074746736.html&displayPage=/lcm/lcm-subsection.html; NASDAQ LISTING R. 5250, available at http://nasdaq.cchwallstreet.com/ main (last visited Sept. 5, 2009).
95. The Exchange Act, the Securities Act, and other federal laws regulating securities and the securities industry were enacted in the wake of the stock market crash of 1929. In addition to imposing disclosure obligations on issuers, the federal securities laws regulate the activities of brokers and dealers and the trading of securities on national exchanges. They also created the U.S. Securities and Exchange Commission ("SEC") to enforce the federal securities laws, promulgate rules thereunder, and protect investors.
96. See supra note 22;
97. See also infra note 29; Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5 (2009) (making it unlawful to employ deceptive or manipulative devices "in connection with the purchase or sale of any security").
98. See Exchange Act Rule 14a-8, 17 C.F.R. § 240.14a-8 (2009) (providing that shareholder who has continuously held, for at least one year, the lesser of (i) $2,000 in market value or (ii) 1 percent of the companys securities entitled to be voted on the matter may include in the companys proxy materials a shareholder proposal containing a "recommendation or requirement that the Company and/or its board of directors take action"). In addition to procedural requirements, Rule 14a-8 imposes substantive limitations on the subject matter of shareholder proposals, including that a proposal must not: (i) be an improper subject for action by shareholders under state law;
99. (ii) if implemented, cause the company to violate any applicable state, federal, or foreign law; (iii) contain in the proposal or supporting statement any materially false or misleading statements or otherwise violate the proxy rules;
100. (iv) relate to the redress of a personal claim or grievance or further a personal interest or benefit not shared by shareholders at large;
101. (v) relate to operations that account for less than 5 percent of the companys total assets and for less than 5 percent of its net earnings and gross sales, and is not otherwise significantly related to the business;
102. (vi) seek an action that the company would lack the power or authority to implement; (vii) relate to the companys ordinary business operations;
103. (viii) relate to a director nomination or election; (ix) directly conflict with one of the companys own proposals to be submitted to shareholders at the same meeting;
104. (x) have been substantially implemented already; (xi) be substantially duplicative of another proposal previously submitted by another proponent for consideration at the same meeting;
105. (xii) address substantially the same subject matter as a prior proposal that did not receive a certain threshold of votes (depending on the number of times submitted within the past five years);
106. or (xiii) relate to specific amounts of cash or stock dividends.
107. See id.
108. See AMY L. GOODMAN & JOHN F. OLSON, A PRACTICAL GUIDE TO SEC PROXY AND COMPENSATION RULES § 1404[c], at 14-30 (4th ed. 2009) ("Unlike proposals that direct a board or a company to take action, binding bylaw amendments require no further action by a board or company to take effect. Once approved by shareholders, such amendments automatically amend the bylaws in the manner proposed by the proposal.")
109. See Leo E. Strine, Jr., Breaking the Corporate Governance Logjam in Washington.' Some Constructive Thoughts on a Responsible Path Forward, 63 BUS. LAW. 1079, 1088-89 (2008) (discussing SEC Rule 14a-8, which resulted in "stockholders halving], by federal mandate, the option to require a stockholder referendum on a non-binding resolution when state law gives stockholders no right to demand such a show of hands," but often operated to exclude binding bylaws);
110. see also supra note 16 (discussing the Delaware Supreme Courts recent CA, Inc. decision).
111. "Although stockholders are allowed to make mandatory proposals, '[a]fter more than four [now six] decades of experience and modification, the consensus understanding of the typical rule 14a-8 proposal is that it is advisory or precatory in nature.'" Strine, supra note 26, at 1088 n.31 (quoting Patrick J. Ryan, Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy, 23 GA. L. REV. 97,101 (1988));
112. See also Id. (citing RISKMETRICS GROUP, 2007 POSTSEASON REPORT: A CLOSER LOOK AT ACCOUNTABILITY AND ENGAGEMENT 5 (2007) (observing that "only 2 percent of the shareholder proposals that appeared on proxy statements during the 2007 proxy season were binding"));
113. JOAO DOS SANTOS & CHEN SONG, ANALYSIS OF THE WEALTH EFFECTS OF SHAREHOLDER PROPOSALS ii (2008), available at http://www. uschamber.com/publications/reports/080722wfi-shareholder.htm ("Overall, we find little conclusive evidence that shareholder proposals tangibly improve firm value. Given the costs associated with the proxy process and the unproven impact on company value, some consideration should be given to the net benefits of such initiatives.").
114. "Controlling" shareholders of publicly traded corporations - i.e., shareholders who "'own[] a majority interest in or exercise[] control over the business affairs of the corporation'" - owe duties similar to the ones owed by directors. Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1113-14 (Del. 1994) (emphasis omitted) (quoting Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987));
115. see generally Ronald J. Gilson & Jeffrey N. Gordon, Controlling Controlling Shareholders, 152 U. PA. L. REV. 785 (2003) (discussing the fiduciary duties of controlling shareholders).
116. See Exchange Act § 13(d)(1), 15 U.S. C. § 78m(d)(l) (2006); Exchange Act Rule 13d-1, 17 C.F.R. § 240.13d-1 (2009) (requiring any person or group of persons agreeing to act together who acquire beneficial ownership of more than 5 percent of a class of registered equity securities to disclose, within ten days of the acquisition, specific information-including the identity of the stockholder, the amount of the stockholder's interest in the security, and the purpose of the transaction-by filing a Schedule 13D with the SEC);
117. See also Exchange Act § 16(b), 15 U.S.C. § 78p(b) (2006)
118. According to the SECs shareholder proxy access rule proposal: If shareholders are dissatisfied with their companys performance and believe that the problem lies with the ineffectiveness of the companys board of directors, the existing proxy process provides shareholders with three principal options to attempt to effect change. First, shareholders can mount a proxy contest in accordance with our proxy rules. Second, shareholders can use the shareholder proposal procedure in Rule 14a-8 to submit proposals and have a vote on topics that are important to them. Third, shareholders can conduct a "withhold vote" or "vote no" campaign against one or more directors. Shareholders also can use options that exist outside of the proxy process.
119. For example, shareholders can sell their shares (sometimes referred to as the "Wall Street Walk"); they can engage in a dialogue with management (including recommending a candidate to the nominating committee); or they can propose a board nominee at a shareholder meeting. Each of these options has drawbacks that limit its effectiveness.
120. SEC Proxy Access Rule Proposal, supra note 3, at 29027 (footnotes omitted).
121. See supra note 16;
122. See also Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651,659 (Del. Ch. 1988) ("The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests. Generally, shareholders have only two protections against perceived inadequate business performance. They may sell their stock (which, if done in sufficient numbers, may so affect security prices as to create an incentive for altered managerial performance), or they may vote to replace incumbent board members.... [W]hether the vote is seen functionally as an unimportant formalism, or as an important tool of discipline, it is clear that it is critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own. Thus, when viewed from a broad, institutional perspective, it can be seen that matters involving the integrity of the shareholder voting process involve consideration not present in any other context in which directors exercise delegated power.").
123. See Bebchuk, The Myth of the Shareholder Franchise, supra note 1, at 688 C[E]ven when shareholder dissatisfaction with board actions and decisions is substantial, challengers face considerable impediments to replacing boards.").
124. Bainbridge, Director Primacy and Shareholder Disempowerment, supra note 1, at 1750;
125. see also Martin Upton & Steven A. Rosenblum, Election Contests in the Company's Proxy: An Idea Whose Time Has Not Come, 59 BUS. LAW. 67, 69 (2003) ("Typically an election contest is a last resort, as it should be in light of the extraordinary disruption that an election contest brings to bear on the entire organization.");
126. Id. at 83-84 (noting that an election contest "diverts large amounts of management time and attention from the operation of the business, as well as potentially imposing significant monetary costs for the printing and mailing of proxy materials and supplements and the assistance of outside advisors").
127. See DEL. CODE ANN. tit. 8, § 141(a) (2001) ("The business and affairs of every corporation . . . shall be managed by or under the direction of a board of directors . . . . ");
128. MODEL BUS. CORP. ACT ANN. § 8.01(b) (4th ed. 2008) ("All corporate powers shall be exercised by or under the authority of the board of directors of the corporation, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors . . . .");
129. Quicktum Design Sys., Inc. v. Shapiro, 721 A.2d 1281, 1291 (Del. 1998) ("One of the most basic tenets of Delaware corporate law is that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation.");
130. Spiegel v. Buntrock, 571 A.2d 767, 772-73 (Del. 1990) ("A basic principle of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation.").
131. "'It is generally recognized that the board of directors is not expected to operate the business. Even under statutes providing that the business and affairs shall be 'managed' by the board of directors, it is recognized that actual operation is a function of management. The responsibility of the board is limited to overseeing such operation.'" AM. LAW INST., supra note 14, § 3.01 cmt. a (citation omitted);
132. see also Grimes v. Donald, No. 13358,1995 WL 54441, at '8 (Del. Ch. Jan. 11,1995) ("[G]iven the large, complex organizations through which modem multi-function business corporations often operate, the law recognizes that corporate boards, comprised as they traditionally have been of persons dedicating less than all of their attention to that role, cannot themselves manage the operations of the firm, but may satisfy their obligations by thoughtfully appointing officers, establishing or approving goals and plans and monitoring performance. . . . Thus Section 141(a) of [the] DGCL expressly permits a board of directors to delegate managerial duties to officers of the corporation, except to the extent that the corporations certificate of incorporation or bylaws may limit or prohibit such a delegation."), aff'd, 673 A.2d 1207 (Del. 1996).
133. Delaware corporations are required to have officers to sign instruments and stock certificates on behalf of the corporation.
134. See DEL. CODE ANN. tit. 8, § 142(a) (2001). Subject to the corporation's governing documents and private contracts, officers are appointed and removed by the board of directors.
135. See id. § 142(b) (appointment and removal); MODEL BUS. CORP. ACT ANN. § 8.40(b) (4th ed. 2008) (election and appointment);
136. Id. § 8.43(b) (removal). Like directors, officers owe fiduciary duties to the corporation and its shareholders.
137. See Gantler v. Stephens, 965 A.2d 695, 708-09 (Del. 2009).
138. See In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 967-68, 971 (Del. Ch. 1996) (holding that failure to mplement a corporate information and reporting system such that the board would be able to reach informed judgments concerning both the corporations compliance with the law and its business performance would result in a breach of the duty of care);
139. see also Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369-70 (Del. 2006) (affirming Caremark as the appropriate standard for evaluating director oversight claims);
140. In re Citigroup Inc. Sholder Derivative Litig., 964 A.2d 106, 121-31 (Del. Ch. 2009) (applying the Caremark doctrine to directors' monitoring of business risk).
141. See infra text accompanying notes 55-57.
142. See generally AM. LAW INST., supra note 14, § 3.02(a).
143. See id. § 3.02(b);
144. see also supra note 18.
145. See supra Part II.B.
146. Smith v. Van Gorkom, 488 A.2d 858,872 (Del. 1985) (citing Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)).
147. Cede & Co. v. Technicolor Inc., 634 A.2d 345, 361 (Del. 1993);
148. See also Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) ("The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest."). Note, however, that "the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty." Stone ex rel. AmSouth Bancorporation v. Putter, 911 A.2d 362, 370 (Del. 2006).
149. See generally Veasey & Di Guglielmo, supra note 8.
150. "The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves 'prior to making a business decision, of all material information reasonably available to them." Van Gorkom, 488 A.2d at 872 (quoting Aronson, 473 A.2d at 812);
151. see also DEL. CODE ANN. tit. 8, § 220(d) (Supp. 2008) (director's right to corporate information); Intrieri v. Avatex, No. 16335-NC, 1998 WL 326608 (Del. Ch. June 12, 1998) (addressing same).
152. Listing standards mandate that a majority of a public companys board of directors be "independent," i.e., have no material relationships to the company and its management, as determined by the board of directors, within certain parameters set forth in the listing rules.
153. See NYSE EURONEXT, LISTED COMPANY MANUAL, supra note 22, § 303A.01 ("Listed companies must have a majority of independent directors."); NASDAQ LISTING R. 5605(b)(1) ("A majority of the board of directors must be comprised of independent directors as defined in Rule 5605(a)(2)."). Further, all members of a public companys audit committee are required to be independent under heightened standards of independence.
154. See Sarbanes-Oxley Act of 2002 § 301, 15 U.S.C. § 78j-l(m)(3) (2006) ("Each member of the audit committee of the issuer shall be a member of the board of directors of the issuer, and shall otherwise be independent.");
155. Exchange Act Rule 10a-3, 17 C.F.R. § 240.10a-3 (2009) (establishing heightened independence requirements for audit committee members);
156. See also NYSE EURONEXT, LISTED COMPANY MANUAL, supra note 22, § 303A.06 ("Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act.");
157. NASDAQ LISTING R. 5605(c)(2)(A) (similar). In addition to audit oversight, certain key functions-executive compensation and director nomination and governance generally-are reserved by the listing rules to independent directors.
158. See NYSE EURONEXT, LISTED COMPANY MANUAL, supra note 22, § 303A.05 (compensation committee "must... have direct responsibility to: (A) review and approve corporate goals and objectives relevant to CEO compensation, evaluate the CEO's performance in light of those goals and objectives, and, either as a committee or together with the other independent directors (as directed by the board), determine and approve the CEO's compensation level based on this evaluation");
159. NASDAQ LISTING R. 5605(d)(1) ("Compensation of the chief executive officer of the Company must be determined, or recommended to the Board for determination, either by: (A) Independent Directors constituting a majority of the Board's Independent Directors in a vote in which only Independent Directors participate; or (B) a compensation committee comprised solely of Independent Directors.");
160. NYSE EURONEXT, LISTED COMPANY MANUAL, supra note 22, § 303A.04(a) ("Listed companies must have a nominating/corporate governance committee composed entirely of independent directors.");
161. NASDAQ LISTING R. 5605(e)(1) ("Director nominees must either be selected, or recommended for the Boards selection, either by: (A) Independent Directors constituting a majority of the Board's Independent Directors in a vote in which only Independent Directors participate, or (B) a nominations committee comprised solely of Independent Directors.").
162. See Stone, 911 A.2d at 370;
163. see also supra note 37 and accompanying text (discussing the oversight duties of directors as embodied in the Caremark doctrine).
164. See supra notes 37,42-44 and accompanying text.
165. The business judgment rule "presumes that 'in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.'" In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006) (quoting Aronson, 473 A.2d at 812);
166. see also William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 BUS. LAW. 1287, 1298 (2001) ("[A] standard formulation of the business judgment rule in Delaware is that it creates a presumption that (i) a decision was made by directors who (ii) were disinterested and independent, (iii) acted in subjective good faith, and (iv) employed a reasonable decision making process.").
167. Courts generally apply the "business judgment rule" in assessing the actions of directors. The rule protects and promotes the role of the board as the primary corporate decision-maker by preventing second-guessing of the decisions of independent and disinterested directors who "'acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.'" Disney, 906 A.2d at 52 (quoting Aronson, 473 A.2d at 812). "The business judgment rule, as a standard of judicial review, is a common-law recognition of the statutory authority to manage a corporation that is vested in the board of directors." MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118, 1127 (Del. 2003). When a court invokes the business judgment rule presumption, director conduct is assessed not by looking at the outcome of a given decision, but instead by focusing on theboards process in reaching the decision. See Paramount Comm'ns Inc. v. QVC Network, Inc., 637 A.2d 34, 45 n.17 (Del. 1994). The business judgment rule thus encourages good-faith decisionmaking on matters that by their very nature entail risk taking.
168. See Gagliardi v. Trifoods lnt'l, Inc., 683 A.2d 1049, 1052-53 (Del. Ch. 1996). "Where the party challenging the boards decision does allege and prove facts sufficient to overcome the business judgment rule presumption, 'the burden then shifts to the director defendants to demonstrate that the challenged act or transaction was entirely fair to the corporation and its shareholders,'"
169. I STEPHEN A. RADIN, THE BUSINESS JUDGMENT RULE: FIDUCIARY DUTIES OF DIRECTORS 62 (6th ed. 2009) (quoting Disney, 906 A. 2d at 52). Delaware courts also have crafted other standards of review in different contexts that displace the business judgment rule.
170. See generally Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (1985) (enhanced scrutiny for defensive measures);
171. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (duties attendant to a sale of control).
172. See DEL. CODE ANN. tit. 8, § 102(b)(7) (2001) (empowering, but not requiring, shareholders to adopt charter "provision [s] eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages" except for breaches of the duty of loyalty, acts and omission not in good faith, acts that involve violations of law, or in regard to any transaction from which the director derived an improper personal benefit);
173. MODEL BUS. CORP. ACT ANN. § 2.02(b)(4) (4th ed. 2008) (permitting the articles of incorporation to include "a provision eUminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except liability for (A) the amount of a financial benefit received by a director to which the director is not entitled; (B) an intentional infliction of harm on the corporation or the shareholders; (C) a violation of section 8.33; or (D) an intentional violation of criminal law");
174. See also FLA. STAT. ANN. § 607.0831 (West 2007) (shielding directors from liability for any act or failure to act, unless the director engaged in a violation of criminal law, derived an improper personal benefit from a transaction, carelessly approved an unlawful dividend or other distribution, or (in a derivative or direct action by a shareholder) acted in "conscious disregard for the best interest of the corporation, or [engaged in] willful misconduct").
175. Delaware's General Assembly enacted section 102(b)(7) in response to the threat of unlimited liability for breaches of the duty of care arising from the Delaware Supreme Courts decision in Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985).
176. See Leo E. Strine, Jr., Lawrence A. Hamermesh, R. Franklin Balotti & Jeffery M. Gorris, Loyalty's Core Demand: The Defining Role of Good Faith in Corporation Law 39, 42 (Widener Law Sch. Legal Studies Research Paper No. 09-13, Harvard Law & Econ. Discussion Paper No. 630, 2009), available at http://ssrn. com/abstract=1349971 (acknowledging same and discussing the drafting process surrounding that section).
177. See DEL. CODE ANN. tit. 8, § 145 (2001) (indemnification and advancement); MODEL BUS. CORP. ACT ANN. §§ 8.50-8.59 (4th ed. 2008) (same);
178. DEL. CODE ANN. tit. 8, § 145(g) (2001) (director and officer insurance); MODEL BUS. CORP. ACT ANN., supra, § 8.57 (same).
179. See Bernard Black, Brian Cheffins & Michael Klausner, Outside Director Liability, 58 STAN. L. REV. 1055, 1057-58, 1062-74 (2006) (describing Enron and WorldCom settlements and finding thirteen cases of out-of-pocket payments by outside directors in a 25-year period).
180. Id. at 1056.
181. Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d 1140, 1142 n.2 (Del. 1990) (citing Beard v. Elster, 160 A.2d 731, 737 (Del. Ch. I960));
182. see also Paramount Commc'ns, Inc. v. Time Inc., Nos. 10866, 10670 & 10935, 1989 WL 79880, at *30 (Del. Ch. 1989) ("The corporation law does not operate on the theory that directors, in exercising their powers to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage to firm."), aff'd, 571 A.2d 1140 (Del. 1990).
183. anal Capital Corp. v. French, No. 11,764, 1992 WL 159008, at *2 (Del. Ch. July 2, 1992) (quoting Chapin v. Benwood Found., Inc., 402 A.2d 1205,1210 (Del. Ch. 1979));
184. see also Lehrman v. Cohen, 222 A.2d 800, 808 (Del. 1966) ("It is settled, of course, as a general principle, that directors may not delegate their duty to manage the corporate enterprise.").
185. See supra notes 55-56 and accompanying text.
186. See SMITH, supra note 1, at 264-65.
187. See BERLE & MEANS, supra note 1, at 76 (recognizing that as a consequence of unconcentrated share ownership, shareholders had relatively little incentive or power to hold the board and management accountable for their stewardship of the corporation).
188. See id. at 66, 78, 82;
189. see also LUCIAN A. BEBCHUK & JESSE FRIED, PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF ECUTIVE COMPENSATION 15 (2004) ("This diffuse ownership structure is the norm in the United States, though not in other countries." (citing Rafael La Porta, Florencio Lopez-De-Silanes & Andrei Shleifer, Corporate Ownership Around the World, 54 J. FIN. 471 (1999))).
190. See generally MACE, supra note 1;
191. Douglas, supra note 1;
192. Myles L. Mace, Directors: Myth and Reality-Ten Years Later, 32 RUTGERS L. REV. 293 (1979).
193. See HARVARD BUS. SCH., SUMMIT REPORT 2008: GLOBAL GOVERNANCE 2 (2008), available at hup://www.hbs.edu/centennia^usinesssummit/business-society/global- govemance.pdf ("While Sarbanes-Oxley mandates a certain level of board independence, true independence is often lacking. Boards often feel a certain sense of 'deference and protectiveness' toward senior executives, said Mr. [Damon A.) Silvers, clouding objective analysis of troubling situations and fostering denial.");
194. see also Laura Lin, The Ejjectiveness of Outside Directors as a Corporate Governance Mechanism: Theories and Evidence, 90 Nw. U. L. REV. 898, 913-17 (1996) (discussing how chief executive officers may dominate independent directors).
195. See supra note 37 and accompanying text.
196. See AM. BAR ASS'N COMM. ON CORPORATE LAWS, THE CORPORATE DIRECTORS GUIDEBOOK (5th ed. 2007) (originally published 1994), available at 62 BUS. LAW. 1482 (2007) (identifying boardroom practices and procedures that support and promote effective director involvement);
197. GEN. MOTORS BD. OF DIRECTORS, CORPORATE GOVERNANCE GUIDELINES (2008) (originally adopted 1994) (on file with The Business Lawyer) (board policy regarding governance practices relating to board and committee independence, independence standards, executive sessions, and board evaluation);
198. NAT'L ASS'N OF CORPORATE DIRECTORS (NACD), REPORT OF THE NACD BLUE RIBBON COMMISSION ON DIRECTOR PROFESSIONALISM (2005) (originally published 1996) (advocating that boards "establish!) a governance committee, creat[el independent leadership roles, influenc[e] board and committee agendas, determine!] effective independent selection and compensation methods, require]] stock ownership, establish]] an evaluation process, hold]] 'executive sessions' of the independent directors, and access!) independent advice");
199. TEACHERS INS. & ANNUITY ASS'N - COLL. RET. EQUITIES FUND, TIAA-CREF POLICY STATEMENT ON CORPORATE GOVERNANCE (2007) (originally released 1997), available at http://www.tiaa-cref.org/ pubs/pdf/governance-policy.pdf;
200. BUS. ROUNDTABLE, PRINCIPLES OF CORPORATE GOVERNANCE (2005) (originally published in 1997 as Statement on Corporate Governance), available at http://www.busi nessroundtable.org/initiatives/leadership/governance (similar);
201. CAL. PUB. EMPLOYEES' RET. SYS., GLOBAL PRINCIPLES OF ACCOUNTABLE CORPORATE GOVERNANCE (2009) (originally adopted in 1998 as Corporate Governance Principles and Guidelines-United States), available at http://www.calpers-govemance.org/docs-sof/rnarketinitiatives/2009-04-01- corp-govemance-pub20-final-glossypdf (similar);
202. COUNCIL OF INSTITUTIONAL INVESTORS, CORPORATE GOVERNANCE POLICIES (2009) (originally adopted 1998), available at http.//www.cii.org/UserFiles/file/ council%20policies/CII%20Full%20Corp%20Gov%20Policies%20 5-7-09.pdf (similar);
203. See generally AM. BAR ASS'N, REPORT OF THE AMERICAN BAR ASSOCIATION TASK FORCE ON CORPORATE RESPONSIBILITY 31 (2003) (the "Cheek Report"), available at http://www.abanet.org/buslaw/ coiporateresporisibiUty/finaLreport.pdf ("The board of directors of a public corporation must engage in active, independent and informed oversight of the corporations business and affairs, including its senior management.... In order to improve the effectiveness of such oversight, the board of directors of a public corporation should adopt governance principles (that, among other things,) establish and preserve the independence and objectivity of directors by eliminating disabling conflicts of interest and undue influence or control by the senior management of the corporation....").
204. For a discussion of a principles-based approach to governance best practices, See NAT'L ASS'N OF CORPORATE DIRECTORS (NACD), KEY AGREED PRINCIPLES TO STRENGTHEN CORPORATE GOVERNANCE FOR U.S. PUBLICLY TRADED COMPANIES (2009), available at https://secure.nacdonline.org/StaticContent/StaticPages/M/ NACDKeyAgreedPrinciples.pdf.
205. See generally SPENCER STUART, SPENCER STUART BOARD INDEX (2008), available at http://content. spencerstuart.com/sswebsite/pdf/lib/SSBI-08.pdf;
206. NAT'L ASS'N OF CORP. DIRECTORS ("NACD"), NACD PUBLIC COMPANY GOVERNANCE SURVEY (2008); KORN/FERRY INT'L, 34TH ANNUAL BOARD OF DIRECTORS STUDY (2008), available at http://www.kornferry.com/Publication/9955.
207. See SPENCER STUART, supra note 66, at 8.
208. See NACD, supra note 66, at 24 (reporting that 49.2 percent of respondent boards had retained a search firm to seek qualified board candidates and finding that a larger proportion of those boards who hired search firms rated their director recruitment to be effective (80.6 percent vs. 59.1 percent)).
209. See SPENCER STUART, supra note 66, at 15.
210. See id. at 11.
211. See KORN/FERRY INT'L, supra note 66, at 7.
212. See SPENCER STUART, supra note 66, at 12.
213. See NACD, supra note 66, at 32.
214. See SPENCER STUART, supra note 66, at 24 ("On average, boards meet 8.7 times per year, up from 7.8 in 2003 and 7.0 in 1998.").
215. See id.
216. See id. at 20.
217. See MILLSTEIN CTR. FOR CORPORATE GOVERNANCE & PERFORMANCE, supra note 3, at 5 ("A RiskMetrics study, expanded to include S& P Mid and SmallCap companies, shows the appointment of independent non-executive chairmen to be slightly higher at 23% and 27% respectively for 2008, a cumulative increase of 17% from 2006 for the S&P 1500." (citing RISKMETRICS GROUP, BOARD PRACTICES: TRENDS IN BOARD STRUCTURE AT S&P 1500 COMPANIES (2008))).
218. See SPENCER STUART, supra note 66, at 21.
219. See id. at 24.
220. See NACQ, supra note 66, at 47-51.
221. See Chuck Lucier, Steven Wheeler & Rolf Habbel, The Era of the Inclusive Leader, STRATEGY + BUS., Summer 2007, at 3, available at http://www.boozallen.com/media/file/Era-of-the-Inclusive- Leader-.pdf.
222. See CLAUDIA H. ALLEN, STUDY OF MAJORITY VOTING IN DIRECTOR ELECTIONS i (2007), available at http://www.ngelawcom/files/upload/ majoritystudy111207.pdf;
223. see also Annalisa Barrett & Beth Young, Majority Votingfor Director Elections - It Is Not Yet Standard Practice, ANALYST ALERT, Dec. 2008 (on file with The Business Lawyer) (noting that as of December 2008,67.9 percent of S& P 500 companies had either changed to an actual majority vote standard (49.5 percent) or, while retaining plurality voting, had adopted board polices requiring directors to resign if they did not receive a majority of votes in support of election (18.4 percent)).
224. GEORGESON, 2008 ANNUAL CORPORATE GOVERNANCE REVIEW 4 (2008), available at http://www. geOrgeson.com/usa/flash-viewer.html.
225. Id.
226. See Press Release, Pfizer Inc., Pfizer Board of Directors to Initiate Face-to-Face Meetings with Companys Institutional Investors on Corporate Governance Policies and Practices (June 28, 2007), Error! Hyperlink reference not valid. & mewsLang=en; UNITED HEALTH GROUP, INC., BOARD OF DIRECTORS COMMUNICATION POLICY (2009), available at http://www.unitedhealthgroup.com/about/2009/ BoardSrmreholderCormriunicationPolicy0209. pdf;
227. Elizabeth Judd, The Lost Art of Communication, CORP. SECV, Apr. 2008, http://www.shareholder forum.com/Reference/20080400- CorporateSecretary.htm (discussing, among other corporations, Home Depot).
228. See, e.g., Posting of Carol Bowie to RiskMetrics Group Risk & Governance Blog, http://blog. riskmetrics.com/2008/10/scheringplough-will- survey-sha.html (Oct. 29, 2008) ("Schering-Plough Will Survey Shareholders on Pay").
229. See supra note 62;
230. see also Proposed Shareholder Bill of Rights Act, supra note 3, § 2(2) ("[Wjithin too many of the Nation's most important businesses and financial institutions, both executive management and boards of directors have failed in their most basic duties, including to enact compensation policies that are linked to the long-term profitability of their institutions, to appropriately analyze and oversee enterprise risk, and most importantly, to prioritize the long-term health of their firms and their shareholders.");
231. Id. § 2(4) ("a key contributing factor to such failure was the lack of accountability of boards to their ultimate owners, the shareholders").
232. See, e.g. Addressing the Need for Comprehensive Regulatory Reform: Hearing Before the H. Comm. on Financial Servs., 111th Cong. 3 (2009) (statement of Timothy F. Geithner, Secretary, U.S. Department of the Treasury), available at http://www.house.gov/apps/list/hearing/ financiakvcs-dem/geithner032609. pdf ("The current crisis had many causes. Two decades of sustained economic growth bred widespread complacency among financial intermediaries and investors.... The rising market hid Ponzi schemes and other flagrant abuses that should have been detected and eliminated. In that environment, institutions and investors looked for higher returns by taking on greater exposure to the risk of infrequent but severe losses. A long period of home price appreciation encouraged borrowers, lenders, and investors to make choices that could only succeed if home prices continued to appreciate. We had a system under which firms encouraged people to take unwise risks on complicated products, with ruinous results for them and for our financial system. Market discipline failed to constrain dangerous levels of risk-taking throughout the financial system. New financial products were created to meet demand from investors, and the complexity outmatched the risk-management capabilities of even the most sophisticated financial institutions. Financial activity migrated outside the banking system, relying on the assumption that liquidity would always be available. Regulated institutions held too little capital relative to the risks to which they were exposed. And the combined effects of the requirements for capital, reserves and liquidity amplified rather than dampened financial cycles. This worked to intensify the boom and magnify the bust. Supervision and regulation failed to prevent these problems. There were failures where regulation was extensive and failures where it was absent. Regulators were aware that a large share of loans made by banks and other lenders were being originated for distribution to investors through securitizations, but they did not identify the risks caused by explosive growth in complex products based on these products. Investment banks, large insurance companies, finance companies, and the GSEs were subject to only limited oversight on a consolidated basis, despite the fact that many of those companies owned federally insured depository institutions or had other access to explicit or implicit forms of support from the government. Federal law allowed many institutions to choose among regulatory regimes for consolidated supervision and, not surprisingly, they avoided the stronger regulatory authority applicable to bank holding companies. Those companies and others were highly leveraged or used short-term borrowing to buy long-term assets, yet lacked strong federal prudential regulation and routine access to central bank liquidity. And while supervision and regulation failed to constrain the build up of leverage and risk, the United States came into this crisis without adequate tools to manage it effectively.");
233. RICHARD A. POSNER, A FAILURE OF CAPITALISM; THE CRISIS OF '08 AND THE DESCENT INTO DEPRESSION (2009);
234. Joseph E. Stiglitz, Capitalist Fools, VANITY FAIR, Jan. 2009, at 48;
235. Ben Steverman & David Bogoslaw, The Financial Crisis Blame Game, BUS. WK. ONLINE, Oct. 20, 2008, http://www.businessweek.com/investor/content/oct2008/pi20081017-950382. htm?chan=investing-investing4-index+page-top+stories. Congress has established a commission to explore the underlying causes of the financial crisis.
236. See Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-1, § 5(a), 123 Stat. 1617,1625-31 (to be codified at 31 U.S.C. § 3729) (creating Financial Crisis Inquiry Commission "to examine the causes, domestic and global, of the current financial and economic crisis in the United States");
237. See also John D. McKinnon & Corey Boles, Panel Set for Probe into Crisis, WALL ST. J., July 16,2009, at A5 (reporting on the appointment of members to Financial Crisis Inquiry Commission).89. A number of factors have contributed to the shift in shareholding from individuals to institutions, including the growth in pension plans and the adoption in 1974 of a requirement that private defined-benefit pension plans fund their obligations with a diversified securities portfolio, the growth of defined contribution plans, and the final repeal in 1999 of the Glass Steagall Act by the Gramm-Leach-Bliley Financial Modernization Act that ended the restrictions on direct ownership of equity by banks and insurance companies.
238. See Employees Retirement Income Security Act of 1974 § 404(a)(1)(C), 29 U.S.C. § 1104(a)(1)(C) (2006) (imposing on trustees of covered plans a duty of diversification "so as to minimize the risk of large losses");
239. see also Shlomo Benartzi, Richard H. Thaler, Stephen P. Utkus & Cass R. Sunstein, The Law and Economics of Company Stock in 401 (k) Plans, 50 J.L. & ECON. 45, 47 (2007);
240. Christopher M. Bruner, The Enduring Ambivalence of Corporate Law, 59 ALA. L. REV. 1385, 1433-34 (2008);
241. Jeffrey N. Gordon, Employees, Pensions, and the New Economic Order, 97 COLUM. L. REV. 1519, 1528 (1997);
242. Strine, supra note 26, at 1081-82 ("[M]ost Americans have become what I call forced capitalists, people who earn most of their wealth through their labor,but who are required to provide for their retirement by giving substantial portions of their income to financial intermediaries for investment in the stock market.");
243. Strine, supra note 1, at 4 ("For powerful reasons, this class of investors invests in the market primarily through intermediaries.").
244. See CAROLYN KAY BRANCATO & STEPHAN RABIMOV, CONFERENCE BD., THE 2008 INSTITUTIONAL INVESTMENT REPORT: TRENDS IN INSTITUTIONAL INVESTOR ASSETS AND EQUITY OWNERSHIP OF U.S. CORPORATIONS 202008) (Table 10) (noting, based on values of total outstanding equity from The Board of Governorsof the Federal Reserve System, that institutional investors accounted for just 6.1 percent of equityownership in 1950).
245. See id. (noting that institutional investors accounted for 66.3 percent of equity ownership in 2006).
246. See John C Bogle, Reflecfions on "Toward Common Sense and Common Ground?" 33 J. CORP. L. 31,31 (2007).
247. See INV. CO. INST., 2009 INVESTMENT COMPANY FACTBOOK 11 (49th ed. 2009), available at hup://www.icifactbook.org/pdf/2009-factbook.pdf.
248. See BRANCATO & RABIMOV, supra note 90, at 22 (Table 13). This number is up dramatically from 2.9 percent in 1980. See id. "[N]ot only are the 'activist' state and local [pension] investors increasing their relative share of total institutional and pension fund assets, but they are also devoting a relatively larger share of their assets to equities, which can be used as a basis for proxy voting to further their corporate governance agendas." Id. at 4.
249. See id. at 27 (Table 19).
250. See id. at 28 (Table 21).
251. See id.
252. See BEARLE & MEANS, supra note 1, at 277-87;
253. see also supra note 59 and accompanying text; Randall S. Thomas, The Evolving Role of Institutional Investors in Corporate Governance and Corporate Litigation, 61 VAND. L. REV. 299,300 (2008) ("Beginning in the early 1990s, institutional investor shareholder activism was praised as a promising means of reducing managerial agency costs. The theory was simple: if shareholder monitoring could limit managers' divergence from the goal of shareholder wealth maximization, then institutional shareholders were well positioned to act as effective monitors. Institutions held larger blocks of stock than most other investors and collectively held well over fifty percent of the stock of most large public companies. Acting together, these shareholders would have the power and the incentives to push for good corporate governance and to nudge managers to pursue wealth-maximizing strategies." (footnote omitted));
254. Bernard S. Black, Agents watching Agents: The Promise of Institutional Investor Voice, 39 UCLA L. REV. 811,815 (1992) ("The case for institutional oversight, broadly speaking, is that product, capital, labor, and corporate control market constraints on managerial discretion are imperfect, corporate managers need to be watched by someone, and the institutions are the only watchers available.").
255. See generally Robert C. Illig, What Hedge Funds Can Teach Corporate America: A Roadmap for Achieving Institutional Investor Oversight, 57 AM. U. L. REV. 225 (2007);
256. John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 COLUM. L. REV. 1277, 1336 (1991);
257. Alfred E Conard, Beyond Managerialism: Investor Capitalism?, 22 U. MICH. J.L. REFORM 117, 175-76 (1988);
258. Black, supra note 98, at 815; but see Bainbridge, The Case for Limited Shareholder Voting Rights, supra note 1, at 630 (collecting sources and opining that this conclusion was erroneous "[b]ecause institutional investors generally are profit maximizers, they will not engage in an activity whose costs exceed its benefits. Even ardent proponents of institutional investor activism concede that institutions are unlikely to be involved in day-to-day corporate matters. Instead, they are likely to step in only where there are serious long-term problems.").
259. See Anabtawi & Stout, Fiduciary Duties for Activist Shareholders, supra note 1, at 1276 ("Institutional investors are in a much more favorable position to play an activist role in corporate governance than dispersed individual investors are. Although many pension and mutual funds rely on relatively passive stock-picking strategies, especially when they hold highly diversified portfolios, a number of prominent institutional investors-including both mutual funds like Fidelity and Vanguard and pension funds like CalPERS-have emerged as activist investors willing to mount public relations campaigns, initiate litigation, and launch proxy battles to pressure corporate officers and directors into following their preferred business strategy").
260. See Electronic Shareholder Forums, Exchange Act Release No. 34-7172, 73 Fed. Reg. 4450 (Jan. 25,2008) (to be codified at 17 C.F.R. pt. 240), available at http://vAvw.sec.gov/rules/final/2008/34- 7172.pdf. The internet is a particularly powerful tool for shareholders to coordinate efforts and also for the delivery of information about corporate performance and governance. U.S. public corporations must file their proxy statements electronically with the SEC, post filings on a public web site, and provide shareholders with the option of "paper delivery" or "notice and access."
261. See Shareholder Choice Regarding Proxy Materials, Exchange Act Release No. 34-6135, 72 Fed. Reg. 42222 (July 26, 2007) (to be codified at 17 C.F.R. pt. 240), available at http://www.sec.gov/mles/final/2007/34-6135. pdf;
262. See also Raymond A. Be, Special Counsel, Office of Rulemaking, Div. of Corp. Fin., U.S. Sec. & Exch. Comm'n, Statement by SEC Staff: Opening Statement of the Division of Corporation Finance at the SEC Open Meeting (June 20, 2007), available at http://sec.gov/news/speech/2007/ spch062007rab. htm (discussing same). By lowering the costs associated with corporate monitoring and the adoption of certain activist strategies, particularly proxy fights, advances in information technology enable shareholders to take a more active role in matters of corporate governance.
263. See Douglas R. Cole, E-Proxies/orSale? Corporate Vote-Buying in the Internet Age, 76 WASH. L. REV. 793,812-13 (2001);
264. Jeffrey N. Gordon, Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy, 61 VAND. L. REV. 475, 487-90 (2008);
265. Henry T. C. Hu & Jay Lawrence Westbrook, Abolition of the Corporate Duty to Creditors, 107 COLUM. L. REV. 1321, 1387 n.242 (2007);
266. Ethan G. Stone, Business Strategists and Election Commissioners: How the Meaning of Loyalty Varies with the Board's Distinct Fiduciary Roles, 31 J. CORP. L. 893, 917 n.106 (2006);
267. see generally Donald C. Langevoort, Information Technology and the Structure of Securities Regulation, 98 HARV. L. REV. 747 (1985).
268. Regulations adopted in 2003 obligate certain funds to disclose publicly how they vote in corporate elections and also require funds to adopt written policies and procedures to help ensure that proxies are voted in the best interests of clients. See 17 C.F.R. § 270.30bl-4 (2009) (requiring registered management investment companies to file an annual report "containing the registrant's proxy voting record for the most recent twelve-month period ended June 30");
269. Id. § 275.206(4)-6 (requiring investment advisors to "[a]dopt and implement written policies and procedures that are reasonably designed to ensure that you vote client securities in the best interest of clients," "[dlisclose to clients how they may obtain information . . . about how you voted with respect to their securities," and "[djescribe to clients your proxy voting policies and procedures and, upon request, furnish a copy of the policies and procedures to the requesting client"). In addition, ERISA long has been interpreted to impose fiduciary obligations on ERISA trustees to vote proxies for stocks held by ERISA retirement and pension plans.
270. See Letter from Alan D. Lebowitz, Deputy Assistant Sec'y, U.S. Dep't of Labor, to Helmuth Fandl, Chairman of the Ret. Bd., Avon Prods., Inc. (Feb. 23, 1988), reprinted in 15 PENSION REP. (BNA) 391,391 (1988).
271. See 17 C.F.R. § 275.206(4)-6(c) (2009) ("[djescribe to clients your proxy voting policies and procedures and, upon request, furnish a copy of the policies and procedures to the requesting client").
272. Many institutional investors purchase advice from proxy advisory services, such as RiskMetrics/ISS, Glass Lewis, and Proxy Governance. See Lucian Arye Bebchuk, The Case for Shareholder Access: A Response to the Business Roundtable, 55 CASE W. RES. L. REV. 557, 564 (2005) ("Confronting the need to make voting decisions in numerous companies, such institutional investors do not make case-by-case decisions. Rather, they largely follow voting guidelines that they develop either on their own or by using the guidelines of Institutional Shareholder Services (ISS) or some other proxy advisory service."). Proxy advisory services are perceived as having significant influence over the voting practices of institutional investors.
273. See Id. ("ISS, the currently leading proxy advisory service, is viewed as having pervasive influence on the voting decisions of many institutional investors.");
274. See also Letter from Henry A. McKinnell, Chairman, BUS. Roundtable, to Jonathan Katz, Sec'y, U.S. Sec. & Exch. Comm'n 29 (Dec. 22, 2003), available at http://www.sec.gov/rules/proposed/s71903/ s71903-81.pdf ("Benefit plans and other institutional investors rely heavily on these proxy voting guidelines, often refusing even to discuss the merits of particular proposals with management. These investors typically do not review individual shareholder proposals on a company-by-company basis and do not consider the effectiveness or ineffectiveness of a companys proxy process when casting their vote. In fact, they seldom deviate from ISS or other voting guidelines regardless of a companys position, circumstances, or responsiveness to shareholders.").
275. See supra notes 24 & 26.
276. See generally Executive Compensation Disclosure, Exchange Act Release No. 33-962, 57 Fed. Reg. 48126 (Oct. 16,1992) (to be codified at 17 C.F.R. pts. 228, 229,240 & 249), available at hup://content. lawyerlinks.com/default.htm#http://content.la wyerlinks.com/library/sec/sec- releases/33- 962.htm.
277. Delaware and many other states provide that directors shall be elected by a plurality of the vote unless otherwise provided in a corporations certificate of incorporation or bylaws.
278. See DEL. CODE ANN. tit. 8, § 216(1) (Supp. 2008) ("Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors."); MODEL BUS. CORP. ACT ANN. § 7.28(a) (4th ed. 2008) ("Unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present."). Under a plurality system, a candidate is elected to a board seat if he or she receives the largest number of votes cast for that seat. In uncontested elections in which the only candidates on the ballot are those proposed by the corporation, a director can be elected even if only a small percentage of the shares are voted in his or her favor. In recent years, a number of shareholder groups have persuaded corporations to amend their certificates of incorporation or bylaws and/or to adopt policies to require that individuals must receive a majority of the votes cast in order to be elected as directors. A number of shareholder groups also recently have persuaded corporations and state legislatures to adopt provisions that would require director nominees to receive a majority of the votes cast (or a majority of all the votes that could be cast by all outstanding voting securities) in order to be elected.
279. See Proposed Shareholder Empowerment Act, supra note 3, § 2;
280. E. Norman Veasey, The Stockholder Franchise Is Not a Myth: A Response to Professor Bebchuk, 93 VA. L. REV. 811, 814 (2007) (citing, inter alia, ALLEN, supra note 82, at i-x);
281. Posting of Rosanna Landis Weaver to RiskMetrics Group Risk & Governance Blog, http://blog.riskmetrics. com/2007/01/2007-preview-board- electionssu.html#more (Jan. 17, 2007) ("2007 Preview: Board Elections") (citing as examples from the 2007 proxy season Bank of America, Deere, General Electric, Kimberly-Clark, Lehman Brothers Holdings, Textron, Walt Disney, First Data, Schering-Plough, Zimmer Holdings, Chubb, Pitney Bowes, Humana, Qwest Communications, AT&T, Bristol-Myers Squibb, Lexmark, Cummins, and McKesson);
282. ALLEN, supra note 82, at i (observing that states that have addressed majority voting include California, Delaware, Nevada, North Dakota, Ohio, Utah, Virginia, and Washington, and noting that states that permit such contingent, irrevocable resignations include Delaware, Maine, Texas, Utah, and Virginia).
283. See Self-Regulatory Organizations, Exchange Act Release No. 34-0215, 74 Fed. Reg. 33293 (July 1, 2009), available at http7Avww.sec.gov/rules/sro/nyse/2009/34-0215.pdf.
284. See David J. Berger & Kenneth M. Murray, As the Marhet Turns: Corporate Governance Litigation in an Age of Stockholder Activism, 5 N.Y.U. J.L. & BUS. 207, 211 (2009) ("[H]edge funds and stockholder activists have also developed sophisticated public relations strategies to express their views to stockholders and to challenge boards. For example, Carl Icahn maintains a blog, and many of the most active hedge fund managers have developed relationships with the media, earning well-deserved reputations for giving colorful, newsworthy quotes." (footnote omitted)).
285. See DANIEL A. NEFF, TAKEOVER LAW AND PRACTICE 2008, at 15 (Fifth Annual Inst, on Corporate, Sec. & Related Aspects of Mergers & Acquisitions, New York, N.Y., 2008) ("[S]hareholder proposals to repeal staggered boards have become common in recent years, and the vast majority receive the support of a majority of the votes cast.... Currently only 35% of S& P 500 companies have a staggered board, according to SharkRepellent.netfigures, down from almost 60% earlier this decade.");
286. See also Id. at 70 ("[R]ecent trends in shareholder activism, as well as the ability of a board to adopt a rights plan on short notice in response to a specific threat, have led to a marked decrease in the prevalence of [shareholder rights] plans. Today, perhaps 1,400 companies, including less than one-third of the S& P 500, have shareholder rights plans in effect.").
287. See generally Internet Availability of Proxy Materials, Exchange Act Release No. 34-5146, 72 Fed. Reg. 4148 (Jan. 29, 2007) (to be codified at 17 C.F.R. pts. 240, 249 & 274), available at http://ww.sec.gov/rules/ final/2007/34-5146fr.pdf.
288. See Ira M. Millstein & Paul W MacAvoy, The Active Board of Directors and Performance of the Large Publicly Traded Corporation, 98 COLUM. L. REV. 1283,1297-98 (1998) (opining that "ambivalent results from empirical studies to date concerning the link between structural aspects of governance and corporate performance do not disprove a link between board activism and increased investor returns. Even in the face of ambiguous studies, we would conclude, without more, that Darwin's logic still carries-the performing board is the grain in the balance of survival in the long run, but significant quantitative effects have not yet been experienced. . . . [Our] hypothesis [is] that independent board activities are now working to enhance corporate performance.");
289. ANDREW JUNKIN & THOMAS TOTH, WILSHIRE ASSOCS. INC., THE "CALPERS EFFECT" ON TARGETED COMPANY SHARE PRICES 1 (2008), available at http://www.calpers-governance.org/docs-sof/focuslist/wilshire-rpt.pdf ("For the five years prior to the 'initiative date,' the Focus List companies produced returns that averaged 84.2% below their respective benchmarks on a cumulative basis, which is equivalent to an excess return of -30.9% per year on an annualized basis. For the first five years after the Initiative date,' the average targeted company produced excess returns of 15.4% above their respective benchmark return on a cumulative basis,, or about 3% per year on an annualized basis. The five year cumulative excess return of 15.4% is impressive, and is roughly the same as since-inception results presented last year. The data strongly show that CALPERS' involvement has generally stopped the rapid erosion of performance results.");
290. See also Jennifer Ralph Oppold, The Changing Landscape of Hedge Fund Regulation: Current Concerns and a Principle-Based Approach, 10 U. PA. J. BUS. & EMP. L. 833, 870 (2008) ("One study indicated that hedge fund activism may help the target companys operating performance in the long run, rather than hurt it; Brave [sic] et al., found that on average target companies experienced a 7% increase in stock price during the four weeks around the announcement that a hedge fund acquired a 5% stake, that the stock kept pace with the market for the next year, and that the stocks operating performance improved over the next two years." (citing Alon Brav, Wei Jiang, Frank Partnoy & Randall Thomas, Hedge Fund Activism, Corporate Governance, and Firm Performance, 63 J. FIN. 1729, 1730 (2008));
291. See also Larry E. Ribstein, Partnership Governance of Large Firms, 76 U. CHI. L. REV. 289, 301 n. 54 (2009) (collecting studies analyzing impact of activist shareholders on returns).
292. But See Sanjai Bhagat, Brian Bolton & Roberta Romano, The Promise and Peril of Corporate Governance Indices, 108 COLUM. L. REV. 1803, 1814-15 (2008) ("There have been innumerable studies examining the impact of board composition on performance, and the decisive balance of studies has found no relation between director independence and performance, whether measured by accounting or stock return measures. Similarly, most studies seeking to measure the impact on performance of shareholder activism through shareholder proposals find no significant stock price effect from that activity." (footnote omitted));
293. John E Olson, Reflections on a Visit to Leo Strine's Peaceable Kingdom, 33 J. CORP. L. 73, 76 (2007) ("'Notwithstanding commentators' generally positive assessment of the development of such shareholder activism, the empirical studies suggest that it has an insignificant effect on targeted firms' performance. Very few studies find evidence of positive impact, and some even find a significant negative stock price effect from activism." (quoting Roberta Romano, Less Is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance, 18 YALE J. ON REG. 174,177 (2001)).
294. Strine, supra note 1, at 6-7 ("What I mean by this is that the equity of public corporations is often owned, not by the end-user investors, but by another form of agency, a mutual fund, or other institutional investor. It is these intermediaries who vote corporate stock and apply pressure to public company operating boards. I daresay that more American stockholders own equity in Fidelity- and Vanguard-controlled mutual funds than own stock in Microsoft or GE. But corporate law scholarship does not reflect that reality").
295. See infra notes 119-35 and accompanying text.
296. See Anabtawi & Stout, Fiduciary Duties for Activist Shareholders, supra note 1, at 1258 ("Increasingly, the economic interests of one shareholder or shareholder group conflict with the economic interests of others. The result is that activist shareholders are using their growing influence not to improve overall firm performance, as has generally been assumed, but to profit at other shareholders' expense.");
297. Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. REV. 561, 564-65 (2006) ("Once we recognize that shareholders have significant private interests, it becomes apparent that they may use any incremental power conferred upon them to pursue those interests to the detriment of shareholders as a class. As a result, transferring power from boards to shareholders will not necessarily benefit all shareholders. Indeed; it could reduce overall shareholder welfare. This outcome, of course, is the opposite of that predicted by proponents of increasing shareholder power.").
298. See DEL. CODE ANN. tit. 8, § 203 (2001 & Supp. 2008) (precluding would-be acquirors absent approval from the target's board from entering into business combinations with the target unless the acquirer obtains 85 percent or more of the target's stock in a first-step transaction); Coaxial Commc'ns, Inc. v. CNA Fin. Corp., 367 A.2d 994, 998 (Del. 1976) ("The statute does not distinguish between large and small stockholders, nor between those in accord with and those in opposition to existing management.");
299. Merrier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 814 (Del. Ch. 2007) ("I am reluctant to premise an injunction on the notion that some stockholders are 'good' and others are 'bad short-termers.'").
300. See Bernard S. Black, Shareholder Passivity Reexamined, 89 MICH. L. REV. 520, 595-604 (1990) (describing conflicts of interests among various institutional shareholders).
301. Id. at 595-96.
302. See Anabtawi, supra note 115, at 580.
303. See Strine, supra note 1, at 4 ("These forced capitalists-in whose number I count myself- invest primarily for two purposes, both of which are long-term in focus: to send their children to college and to provide for themselves in retirement. This class of investors has no interest in quarter- to-quarter earnings fluctuations or gimmicks that deliver quick bursts of cash at the expense of sustainable growth.").
304. "In 'Flying With The Fundamentals,' which appeared in Better Investing Magazine in January 2006, [John C.] Bogle is quoted as saying that when he got into finance in 1951, mutual fund turnover hardly varied from 16% per year, representing an average holding period of six years. However, Bogle noted that in more recent years, the average holding period has fallen to between 11 and 13 months, representing a 92% turnover rate." Richard Loth, Portfolio Turnover, INVESTOPEDIA, http://www.investopedU. corrVumversity/quality-mutual-fund7chp7-fund-activity/ponfolio-turnover.asp (last visited Sept. 5,2009);
305. Marcel Kahan & Edward Rock, The Hanging Chads of Corporate Voting, 96 GEO. L.J. 1227,1232 (2008) (average annual share turnover for a public company is approaching 100%).
306. See Anabtawi, supra note 115, at 580 ("Investors in mutual funds can readily liquidate their shares at the market price of the funds' holdings. This liquidity, coupled with widespread availability of information on fund performance, has led to pressure on mutual fund managers to maximize short-term returns at the expense of any longer-term focus in order to attract and retain investors." (footnote omitted));
307. See also William B. Chandler III; On the lnstructiveness of Insiders, Independents, and Institutional Investors, 67 U. CIN. L. REV. 1083, 1093 (1999) (noting competition among mutual fund managers based on short-term ratings).
308. See Bainbridge, The Case for Limited Shareholder Voting Rights, supra note 1, at 629-30 (noting that "[e]ven the most active institutional investors spent only trifling amounts on corporate governance activism" and that "[blecause institutional investors generally are profit maximizers, they will not engage in an activity whose costs exceed its benefits");
309. see also Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Securities Act Release No. 33-188,68 Fed. Reg. 6564,6574 (Feb. 7,2003) (to be codified at 17 C.F.R. pts. 239,249,270 & 274), available at http://www.sec.gov/rules/final/ 33-188.htm (adopting rules requiring a mutual fund "to disclose in its registration statement... the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities").
310. Shortly after Berle and Means wrote their treatise, mutual funds turned their portfolios over at an approximate annual turnover rate of 15 percent. Recently, however, the annual turnover rate has reached 100 percent. See Bogle, supra note 92, at 33;
311. Loth, supra note 121.
312. See Anabtawi, supra note 115, at 579-80 (exploring short-term perspective and strategies of hedge funds); Strine, supra note 1, at 5 (same).
313. Damon Silvers, Commentary on "Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance" by Leo E. Strine, Jr., 33 J. CORP. L. 85,87 (2007).
314. See Anabtawi, supra note 115, at 581-83 (describing specific investment strategies employed by hedge funds);
315. William W Bratton, Hedge Funds and Governance Targets, 95 GEO. L.J. 1375, 1379 (2007) (same);
316. Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, 155 U. PA. L. REV. 1021,1092 (2007) ("The interests of hedge funds sometimes diverge from those of their fellow shareholders, and activism creates stress fractures for the regulatory system. The most serious accusation leveled against activist funds, however, is that activism is designed to achieve a short-term payoff at the expense of long-term profitability.");
317. Martin Lipton 6i William Savitt, The Many Myths of Lucian Bebchuk, 93 VA. L. REV. 733, 746-47 (2007) (noting short-term perspective of hedge funds, and resulting conflict with longer-term growth and perspective of the corporation);
318. See also Letter from Mary Schapiro, Chairman, U.S. Sec. & Exch. Comm'n, to Hon. Edward E. Kaufman 1 (Sept. 2009), available at http://kaufman.senate.gov/imo/media/doc/9-10-09%20Schapiro%20 Response.pdf ("The interests of long-term investors and professional short-term traders in fair and efficient markets will often coincide. Indeed vigorous competition among professional short-term traders can itself lead to very important benefits for long-term investors, including narrower spreads and greater depth. If, however, the interests of long-term investors and professional short-term traders conflict, the ... Commission's focus must be on the protection of lorig-term investors.").
319. See generally supra note 88.
320. See ASPEN INST. , LONG-TERM VALUATION CREATION: GUIDING PRINCIPLES FOR CORPORATIONS AND INVESTORS §§ 1-3 (2007), available at http://www.asperanstitute.org/siteVdand%20society%20program/ FINALPRINCIPLES.pdf. Accord ASPEN INST.,
321. OVERCOMING SHORT-TERMISM: A CALL FOR A MORE RESPONSIBLE APPROACH TO INVESTMENT AND BUSINESS MANAGEMENT 3-5 (2009), available at http://wvw.aspeninstitute.org/sites/default/files/content/docs/pubs/ overcome-short-state0909-0. pdf (advocating (1) changes in tax policy to encourage longer-term share ownership; (2) enhanced fiduciary duties for financial intermediaries and investment advisers to encourage longer-term investments consistent with the interests of beneficiaries and clients; and (3) greater transparency regarding the positions and plans of investors).
322. The assumption that all shareholders will exercise their voting rights to enhance corporate value is under question. See Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786,815 (Del. Ch. 2007) (addressing possibility that special committee may have put shares in the hands of short sellers, and potential consequences of same upon an evaluation of whether fiduciary duties were fulfilled);
323. Anabtawi, supra note 115, at 590-91 (describing differences in hedged versus unhedged shareholders, and citing the example of Mylan Laboratories' acquisition of King Pharmaceuticals);
324. Kahan & Rock, supra note 127, at 1070-71 ("Although hedge funds hold great promise as active shareholders, their intense involvement in corporate governance and control also raises some concerns. Hedge funds are set up to make money for their investors without regard to whether the strategies they follow benefit shareholders generally.");
325. Stout, The Mythical Benefits of Shareholder Control, supra note 1, at 794 (describing the "especially troubling situation" of an "investor who takes a position in a stock and uses his voting power to push for business strategies that increase the value of another security the investor also holds," and citing the example of Perry Capitals pressuring of the board of directors of Mylan Laboratories to acquire King Pharmaceuticals).
326. See K.A.D. Camara, Classifying Institutional Investors, 30 J. CORP. L. 219, 241 (2005) ("Corporate pension funds are concerned not only with maximizing shareholder value, but also with all those things with which corporate management is concerned. For example, corporate pension funds can be expected to prefer managerial insulation from the market for corporate control, large managerial compensation packages, costly acquisitions over which managers will then enjoy control, and so forth. Sympathy, understanding, and reciprocal voting encourage this concern when the shares a corporate pension fund votes are those of an unrelated corporation. Senior management feels enough of a connection and has enough hope of reciprocation to look out for other members of the group.");
327. Black, supra note 117, at 596-98 (describing pressure on corporate pension funds and their managers to vote pro-manager).
328. See Anabtawi, supra note 115, at 590 ("Union pension funds, however, often also have an interest in furthering the special labor interests of union members, even at the expense of shareholder wealth.
329. For example, a union pension fund might be seeking union recognition or desire concessions in collective-bargaining negotiations." (citing Marleen O'Connor, Labor's Role in the American Corporate Governance Structure, 22 COMP. LAB. L. & POL'Y J. 97, 114 (2000)));
330. Leo E. Strine, Jr., Toward a True Corporate Republic: A Traditionalist Response to Bebchufe's Solution for Improving Corporate America, 119 HARV. L. REV. 1759,1765 (2006) ("Those institutions most inclined to be activist investors are associated with state governments and labor unions, and often appear to be driven by concerns other than a desire to increase the economic performance of the companies in which they invest.").
331. See Anabtawi, supra note 115, at 588-89 ("The combination of the broad investment discretion accorded to, and the composition of, their boards of trustees, makes public pension funds vulnerable to pressure by other state officials. As Roberta Romano has argued, there is widespread political pressure on public funds to engage in 'social investing'-investments that foster in-state economic development." (quoting Roberta Romano, Public Pension Fund Activism in Corporate Governance Reconsidered, 93 COLUM. L. REV. 795,801,803 (1993))).
332. See Ronald J. Gilson & Curtis J. Milhaupt, Sovereign Wealth Funds and Corporate Governance: A Minimalist Response to the New Mercantilism, 60 STAN. L. REV. 1345, 1351 (2008) ("The other face of foreign sovereign equity investments is the source of the controversy. Viewed from this side, national security concerns anchor one end of a continuum of issues concerning when the interests of a foreign government may differ from those of an ordinary shareholder.");
333. See also Bob Davis, U.S. Pushes Sovereign Funds to Open to Outside Scrutiny-Treasury Has Talks with Abu Dhabi, Seeks Set of Rules, WALL ST. J., Feb. 26, 2008, at Al (discussing U.S. Treasury Assistant Secretary Clay Lowerys suggestion that "sovereign-wealth funds that choose to vote their shares when they take noncontrolling stakes in U.S. companies should disclose how they voted").
334. But See Matthew A. Melone, Should the United States Tax Sovereign Wealth Funds?, 26 B.U. INT'L L. J. 143, 169-70 (2008) (noting that "there is little evidence to date that would suggest sovereign wealth funds have actively sought to pursue a political agenda").
335. See American Clean Energy and Security Act, H.R. 2454,111th Cong. (2009);
336. Over-the-Counter Derivatives: Modernizing Oversight to Increase Transparency and Reduce Risks: Hearing Before the Subcomm. on Securities, Insurance & Investment of the S. Comm. on Banking, Housing & Urban Affairs, 111th Cong. (2009) (statement of Mary L. Schapiro, Chairman, U.S. Sec. & Exch. Comm'n), available at http://www.sec.gov/news/testimony/ 2009/ts062209mls.htm (discussing regulation of over-the-counter derivatives);
337. Letter from Timothy E Geithner, Sec'y, U.S. Dep't of the Treasury, to Hon. Harry Reid, U.S. Senator (May 13, 2009) (same), available at http://www.financialstability.gov/docs/OTCletter.pdf.
338. See Proposed Shareholder Bill of Rights Act, supra note 3, § 5 (requiring each issuer to "provide in its governing documents that each member of the board of directors of the issuer shall be subject to annual election by the shareholders");
339. see also supra note 3 (discussing other recently proposed reforms).
340. See NACD, supra note 66, at 8 ("A variety of structures and practices may support and further effective governance. Boards should tailor governance structures and practices to the needs of the company in a pragmatic search for what is most effective and efficient. Governance best practices should be adopted thoughtfully, and not by rote reliance on the recommendations posited by any entity or group.").
341. "Critics of proxy advisory firms, including certain industry associations and academics, contend that the proxy advisory industry suffers from significant conflicts of interest and a lack of competition and that these firms have a disproportionate influence on proxy voting. Others counter that the firms provide a valuable service for institutional investors and note that such clients are sophisticated market participants that are free to choose whether and how to employ the services of proxy advisory firms." U.S. GOV'T ACCOUNTABILITY OFFICE, CORPORATE SHAREHOLDER MEETINGS-ISSUES RELATING TO FIRMS THAT ADVISE INSTITUTIONAL INVESTORS ON PROXY VOTING 2 (2007), available at http7Avww.gao.gov/new.items/d07765.pdf;
342. See also Strine, supra note 1, at 5-6 (discussing the business model of the proxy advisory industry including economic pressures for continued governance reforms).
343. See 29 U.S.C. § 1104(a) (2006) (imposing fiduciary duties, including those of loyalty and prudence, on fiduciaries of employee benefit plans subject to ERISA);
344. supra note 89; Proxy Voting by Investment Advisers, Securities Act Release No. 33-188,68 Fed. Reg. 6585, 6586 (Jan. 31, 2003) (to be codified at 17 C.F.R. pt. 275), available at http7Avww.sec.gov/rules/finaIAa-2106. htm#P44-4185 ("The federal securities laws do not specifically address how an adviser must exercise its proxy voting authority for its clients. Under the Advisers Act, however, an adviser is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client's behalf, including proxy voting. The duty of care requires an adviser with proxy voting authority to monitor corporate events and to vote the proxies. To satisfy its duty of loyalty, the adviser must cast the proxy votes in a manner consistent with the best interest of its client and must not subrogate client interests to its own." (footnotes omitted));
345. ASPEN INST., OVERCOMING SHORT-TERMISM, supra note 129, at 5 ("greater shareholder power as encapsulated in legislative proposals under consideration in the 2009 legislative session ... should be accompanied by greater investor and intermediary responsibility").
346. See ASPEN INST., supra note 129, § 1.2 ("In pursuit of long-term value creation, companies and investors should ... [rlecognize that firms have multiple constituencies and many types of investors, and seek to balance these interests for long-term success.").
347. See ORG. FOR ECON. CO-OPERATION & DEV., OECD PRINCIPLES OF CORPORATE GOVERNANCE 37 (2004), available at http://www.oecd.org/dataoecd/ 32/18/31557724.pdf (advocating disclosure of corporate governance and voting policies of institutional investors acting in a fiduciary capacity);
348. INT'L CORPORATE GOVERNANCE NETWORK, ICGN STATEMENT OF PRINCIPLES ON I NSTITUTIONAL SHAREHOLDER RESPONSIBILITIES 4 (2007), available at http://www.icgn.org/filesAcgn-main/pdfs/best-practice/inst- share-responsibilities/2007-principles-on-institutional-shareholder- responsibilities.pdf (setting forth ICGN's "view of the responsibilities of institutional shareholders both in relation to their external role as owners of company equity, and also in relation to their internal governance").