Corporate Governance

The SEC's Access Proposal: Some Observations (The Myth of Private Ordering)

By J. Robert Brown

We have  been discussing the SEC's access proposal and its impact on state law. 

Some who oppose access (Commissioner Paredes for one) give as a justification the dislike for a federal requirement that imposes uniform standards on all companies (put aside that access has multiple standards depending upon the size of the company).  This goes under the rubric of "one size fits all."  Instead, managers and shareholders should be allowed to negotiate their own unique arrangements, something that results in greater efficiency.  This goes under the rubric of "private ordering."  

The problem in the end is that management and shareholders don't really negotiate.  If management wants an access bylaw that imposes severe restrictions on shareholders, it can simply adopt the requirement.  Shareholders can adopt alternative bylaws (not something possible when the management drafted provision is in the articles) but they confront enormous difficulties in altering or overturning management's decision.  As a result, private ordering in the area of corporation governance is really an invitation for the imposition of pro-management rules on shareholders.  Want evidence?  Read Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom. 

In other words, if you are going to promote private ordering as an alternative, you have to at least demonstrate that the dynamics that would facilitate private ordering are present.  Proponents, however, rarely do.

Full post as published by The Race to the Bottom on June 30, 2009 (boomark / email).