The wave of corporate scandals following on the heels of Enron’s collapse nearly a decade ago helped propel shareholder activism into a populous movement. This movement has gained momentum from the more recent subprime lending crisis, which introduced such terms as “bailouts” and “toxic assets” into the common vernacular. Boards of directors who used to enjoy insulation from shareholders now face growing pressure to increase corporate accountability to the owners of the companies. But as shareholders raise their voice, boards push back. Over the past decade, this struggle has taught many shareholders of public companies the hard way that corporate democracy, shareholder rights and what should be a healthy balance in the management of a company between executives, boards and shareholders are more effervescent ideas than reality. Corporations often resemble autocratic regimes in which shareholders suffer.
Under the modern corporate model, shareholders generally have three options to effectuate corporate change: (1) elect new members to the board of directors; (2) propose and adopt shareholder proposals; or (3) litigate. Efforts to influence a company by the director election process have largely failed due to the difficulties in unseating an incumbent board. Moreover, shareholders still have almost no power to pass resolutions that actually bind the board to act. Indeed, on several occasions, corporate boards have ignored clear mandates from shareholders, such as say-on-pay resolutions and proposals to eliminate a company’s staggered board. There is little reason for shareholders to believe that boards will suddenly start taking nonbinding resolutions more seriously. In contrast to board elections and shareholder proposals, litigation stands out as a reliable vehicle for change.
