Deconstructing the myth of corporate democracy: The case of the equal access proposal
One of the key roles of a board of directors is to monitor management. An inde pendent board of directors is, therefore, viewed as one of the cornerstones of good corporate governance practices, and crucial to the protection of shareholder value. The absence of board independence has been widely cited as one of the chief reasons for the Enron-style debacles of the early 2000s (MacAvoy and Millstein, 2004). The architects of the SOX sought to correct lacking or weak board independence by creating and uniformly imposing high levels of external monitoring of directors in all publicly traded companies in the US (Babajide, 2007). Many observers and practitioners have been critical of the effectiveness of this solution, arguing that the mere requirement that the majority of a com pany’s board members be independent from management does not guarantee that this will translate into rigorous accountability efforts in practice. Various, highprofile institutional investors and shareholder groups have suggested that a pos sible solution to the lack of board independence would be to revise the SEC rules to allow for an easier process for shareholders to nominate candidates for a com pany’s board of directors. This mechanism is formally known as the Proposed Election Contest Rules (hereafter: equal access proposal or equal access). Not everyone is supportive of the equal access proposal. Corporate execu tives, who collectively represent a highly influential lobby group in the US, have been vehemently opposed to equal access (Business Roundtable, 2004). The SEC has also continued to make it difficult for shareholders to nominate and remove directors (Pensions & Investments, 2007a). In July 2007, for example, the SEC offered two primary proposals to resolve the disputes around equal access, both of which had the effect of reducing shareholder voice. First, the SEC proposed that a minimum of 5 per cent ownership in a corporation would be required if a shareholder wished to sponsor proxy resolutions. To put this number in perspective, according to ownership data of the top 25 publicly listed corporations, only a handful of major financial corporations, such as Berkshire
Hathaway Inc., Barclays Global Investors, Fidelity Management & Research and so forth, hold over 5 per cent of shareholdings (The Conference Board, 2007a). Second, the SEC proposed that shareholders either be limited or prohibited ‘to nominate members of corporate boards’ (Social Investment Forum, 2006). The Social Investment Forum (SIF), a formidable alliance of 500 shareholders and shareholder groups in the US,1 vehemently opposed these proposals, suggesting that they represented a further violation of shareholders’ rights and interests in public corporations. The SEC was originally expected to reach a resolution regarding equal access during the 2008 proxy season. Aside from clarifying its position regarding rules permitting management’s exclusion of certain share holder proposals related to the election of directors (SEC, 2007), the SEC has not, at the time of writing, undertaken any major ruling on the equal access pro posal. For all intents and purposes, the ruling of this highly controversial pro posal seems to have been indefinitely deferred. Whatever decision is to be reached, if any, the struggles for equal access will continue to represent a fertile battleground, given the Hobson’s Choice inherent in the two proposals put forward by the SEC. Given its significance to shareholder activism and its ability to shed critical light on the constitution of corporate power in neoliberal-led capitalism, the equal access proposal demands close and critical analysis. That said, there are two specific and overlapping objectives in this chapter. First and foremost, I analyse the political and social meaning of the equal access proposal by re opening questions about a cornerstone assumption upon which the corporate governance doctrine stands – the pluralist and democratic nature of relations within publicly listed corporations, an issue introduced in Chapter 3. Second, I examine more deeply the basic premise upon which corporate democracy rests by critically exploring the separation of ownership from control. Taking both objectives together, this discussion will serve to further underscore the limita tions to shareholder power in the Ownership Society (see Chapter 2), as well as critically enhancing our awareness of the corporate governance doctrine. My main argument is that the equal access proposal, and its underlying premises linked to the separation between ownership and control, not only distorts and masks the capitalist nature of the corporation, but also depoliticizes the power relations therein by recasting them in democratic and classless terms. The pro posal represents an overly optimistic framework that is antithetical to meaning ful change within the corporation. In fact, it serves as a vehicle for the capitalist state (via the SEC) to continue its strategy of curbing shareholder activism (see Chapter 3), especially ‘anti-value’ activism such as public and labour pension funds. We discuss this in more detail later in the chapter. I develop my argument through four main sections. The first section lays out the case for equal access to the corporate ballot and the importance of an inde pendent board as a function of good corporate governance. The discussion high lights key issues raised by proponents and detractors of equal access. The second section concentrates on the main premises of managerial theory by exploring a chief assumption underpinning the equal access debates and, more generally,
the cornerstone of corporate governance theory and practice: a belief in the sepa ration of ownership from control. This section draws on The Conference Board’s database of the landscape of ownership of the largest (financial and nonfinancial) publicly listed corporations in the US, in conjunction with analytical insight from the long-ignored ‘class-fractionalist’2 perspective to critically examine the managerial model. The third section highlights the relevance of understanding public corporations, and the uneven relations of power therein, as integral features of capitalist society by revisiting two common-sense assump tions discussed in Chapter 3: (1) the pluralist and democratic nature of social relations within corporations; and (2) the neutral state. The fourth and final section concludes by restating the argument and main points of the chapter.