Corporate governance is facing a number of false dichotomies that both researchers and practitioners hold dear. In terms of whose interests’ regulations serve, what drives value and who has control of the firm there is a tendency to want to reduce it to: this or that, you or me, they or us. These false dichotomies limit us to choosing among two options (‘or’ language) when there are likely more (‘and’ language). In corporate governance, what we can see playing out is a set of factors that both favor shareholder perspectives and activists that have risen alongside an increasing set of pressures for stakeholder engagement.

In addition, the SEC, which regulates proxy contests, has enabled shareholders to have a greater voice with the adoption of the universal proxy card, which took effect in 2022, whereby shareholders receive a single ballot with all nominees included on the ballot in contested director elections. The universal proxy now lists all nominated directors, allowing shareholders to vote for a combination of director nominees including those nominated by activists and those by the company. In some cases, the universal proxy will make it easier for shareholders to challenge management and the board and vote for the board representative they think is best for the company. Management and shareholders also have the ability to push back on activists demands by recommending a vote against their candidate. This change has allowed greater stakeholder engagement while at the same time is shareholder and activist-friendly.

Driving Value. Since the 1930’s (e.g. the law review exchange between Merrick Dodd and Adolf Berle), there has been a long-running debate over whether the purpose of the corporation is to maximize short-term profits for shareholders or, instead, to promote long-term value in the interest of multiple stakeholders. Many in the corporate, academic and investing world have tended to view the purpose of the firm as being to create value for shareholders alone – with the Business Roundtable in its 1997 statement calling it a firm’s “paramount duty”.

Some have argued that the 2007-8 global financial crisis (GFC) exposed the drawbacks of the shareholder primacy model (i.e. that an exclusive focus on short-term maximization of shareholder value came at the expense of sustainable growth and innovation). Facing the aftermath of the GFC, business leaders, policymakers, and investors have since increasingly advocated for a broader view of corporate purpose, one that promotes the long-term value of the corporation. Recently, environmental, social and governance (ESG) issues by investors has become caught in the dichotomous stakeholder vs. stockholder thinking. One is either for or against it. As Martin Lipton argues, nowhere in corporate law does it demand such a false choice and that assuming it does, “mirrors the confusion sewn by critics of stakeholder governance who pit shareholders against other stakeholders through the misleading allure of an existential conflict that requires directors to choose between value for one versus the other.” Jamie Dimon, CEO of JP Morgan, calls this short-term focus a “treadmill to ruin” and warns against allowing competing shareholder interests taking over.

Corporate Control. Traditionally, a company’s executives have been viewed as having foremost influence on and control of strategic decision-making with a board of directors providing advice and serving as a monitor of management. However, the growth in assets under management by large institutional investors, namely index funds, has led to a concentration of ownership. Institutional investors now constitute the predominant shareholders of publicly traded companies in the US as well as in Europe.  According to legal scholar John Coates, the Big Three index investors – BlackRock, State Street Global Advisors, and Vanguard control more that 20 percent of all the votes in the S&P 500. That corporate ownership is increasingly concentrated in the hands of fewer large institutional investors has implications for corporate control. The Big Three have long used uniform voting for thousands of unique company issues, increasing their influence further. In response, pending legislation in the US Senate called the INDEX Act, would remove some of this influence by requiring them to pass through voting rights to the underlying shareholders and amend the Investment Advisers Act of 1940. All three fund managers have recently taken voluntary steps to enable the direct shareholders to have more of a say on voting.  This delegation of proxy voting choice to select fund shareholders opens the door for direct access to proxy voting for some of the firm’s investors instead of defaulting to the Big Three’s own, largely uniform, voting policies. But according to Coates, they have exploited the legal gap between “control” and “influence” and are often too deferential to management. Others note that this power is driving forward social and environmental issues that multiple public company constituents care about. Larry Fink, CEO of Blackrock, as argued that in order for companies to prosper over the long run, they “must not only deliver financial performance but also show how it makes a positive contribution to society” noting that “climate risk is investment risk”.  At the same time these funds have produced huge gains for middle-class investors and provided for easy diversification of those investments at low cost.

By looking further into whose interests’ regulations serve, what drives value and who has control of the firm, it becomes harder to reduce the governance of these vital issues to a simple dichotomy.

[1] Similar measures have been adopted by the UK’s Financial Conduct Authority and the European Union’s Corporate Sustainability Reporting Directive.