Corporate Governance

Delaware Judges, Shareholder Rights, and the Appearance of Bias (Part 4)

By J. Robert Brown

We are discussing the article recently published by VC Strine in the Journal of Corporation Law, "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. Corpo. Law 1 (Fall 2007).  

We know he doesn't think much of independent directors (at least the post-Enron type of independent directors) or institutional investors, at least those who refuse to remain passive.  Are there others? 

VC Strine also doesn't think much of the financial press and academics.  Corporate law scholars "fetishize the agency costs that flow from the separation of ownership and control."  Putting aside the transformation of a ugly noun into an even uglier verb, he does little to support the argument except to highlight the failure of academics to take on an issue that he deems important:  the differences among institutional investors. 

• Little of it [corporate law scholarship] considers that the "empowerment" of stockholders does not empower end-user investors so much as it empowers intermediaries. . . . Most corporate law schools have not burdened their minds with the fact that undifferentiated empowerment of these so-called stockholders may disproportionately strengthen the hand of activist institutions that have short-term or non-financial objectives that are at odds with the interests of individual index fund investors. 

Why has the topic been ignored?  Because of "the relative difficulty in writing about institutional investors."  Not only that, but "let's face it, mutual and pension funds are simply not as interesting as operating companies."  And this failure has consequences.  "Academic and journalistic inertia are weakening the power of centralized management and ignoring the dangers of this new form of agency." 

As an empirical matter, VC Strine's conclusions are questionable.  There is a deep body of literature that looks at the role of institutional investors in the governance process.  A number of them, for example, have specifically challenged the active role of labor unions (in connection with their pension plans) and, of course, hedge funds.  A search of the Lexis-Nexis data base for only the last two years using a search of articles mentioning "mutual funds" at least 20 times and (in the same article), "corporate governance" at least 5 times yielded 16 articles. 

Moreover, it is startling to learn that academics would find the topic of institutional investors boring.  To the extent there is any dearth in the  literature (compared with the agency cost issue for boards), it arises in part because the era of activist shareholders really only began in the late 1980s (my recently posted piece,The SEC, Corporate Governance, and Shareholder Access to the Board Room, goes into this in some detail).  Indeed, some institutions, mutual funds leap to mind, had a long history of inactivity in the governance process and were only forced out of this torpor by rules that required them to disclose how they voted, something that only occurred in 2003. 

What is correct about VC Strine's argument, is that there are few academics who have, like he has in his article, essentially challenged the role of institutional investors as a group.  He claims he wants the debate to differentiate among institutional investors but what he really seems to want is more literature that criticizes any group of institutional investors who have an investment strategy inconsistent with those of management.  That is why he labels them throughout as short term or, in the case of pension plans, acting in response to their own investment blunders. 

But law faculty who fetishize, who are inert, and who do not burden their minds?  Not accurate.  But it is clear that those academics who do not see the world the same way as VC Strine are probably unwelcome or at least unlikely to persuade, something that should be kept in mind in hiring experts to appear in his courtroom. 

Full post as published by The Race to the Bottom on March 07, 2008 (boomark / email).