W&L Law Professor’s New Book Examines Shareholder Power and Corporate Governance
What do corporate governance and health care reform have to do with one another?
The answer lies at the core of a new book by Washington and Lee law professor Christopher Bruner. In Corporate Governance in the Common-Law World, Bruner examines the corporate governance powers possessed by shareholders in the U.S. and other common-law countries. Bruner finds, contrary to popular belief, that shareholders in the U.K. and other common-law jurisdictions are both more powerful and more central to the aims of the corporation than are shareholders in the U.S. The vexing question, explored by Bruner’s book, is why.
The question itself seems paradoxical, says Bruner, because the U.S. is widely thought to have the most shareholder-centric corporate legal system in the world. However, his close examination of corporate laws in the U.K., Australia and Canada reveals that this is not the case. Shareholders in the U.K., for example, possess the unqualified right to remove members of a corporate board at any time without cause, and to accept hostile takeovers without board interference, whereas U.S. shareholders possess neither.
“This is especially surprising given that the U.S. is correctly viewed as being more politically conservative, and more committed to a ‘free-market’ ethos, than more left-leaning countries like the U.K.,” says Bruner. “The fact that U.S. corporate law shows greater regard for other corporate stakeholders, such as employees, runs contrary to what the prevailing politics in each country would lead most to predict.”
Hostile takeovers vividly illustrate the point. In the U.K., corporate boards faced with a takeover cannot mount defenses without the consent of shareholders. But in the U.S., corporate boards have substantial discretion to implement takeover defenses to further non-shareholder interests – for example, to protect employees from job loss or to shield a local community that could be hurt by the loss of a big employer.
The resolution of this apparent paradox, Bruner argues, lies outside corporate law itself. Bruner’s theory is that relatively robust social welfare protections in countries like the U.K., Australia and Canada have freed up their corporate legal systems to focus more intently on shareholder interests without giving rise to “political backlash” – because other legal structures accommodate the interests of employees.
“Takeovers are less controversial politically and socially in these systems because employees are less vulnerable in the context of job loss,” says Bruner. “They receive substantial social welfare protections including health care outside of the employment relationship, which reduces the political and social stakes of corporate law.”
The contrast remains a stark one, but things could be heading in this direction in the U.S. as well. Bruner says the increase in recent decades of stock-based compensation for corporate directors has more closely aligned the interests of management with shareholders. This has led to a sharp rise in risk-taking within financial firms, which contributed to the most recent financial and economic crisis.
“Ironically, one of the principal reform efforts following the crisis was to give U.S. shareholders more power, apparently in the belief that they would seek to constrain reckless management,” says Bruner. “This was a bad idea because, if anything, profit-seeking shareholders tend to favor more risk, which could lead to another crisis in the financial sector.”
Notwithstanding the negative effects of shareholder-centrism in financial firms, however, Bruner concludes that simultaneous passage of the Affordable Care Act, along with enhancement of other social welfare programs in the U.S., may help render stronger shareholder powers across the universe of public companies more socially and politically stable than they would have been otherwise. “Only a shift in tandem, with greater employee protections accompanying greater shareholder powers, will be sustainable over time.”
Praise for the Book
“Christopher Bruner’s stimulating new book is a distinctive and important contribution to the burgeoning literature on comparative corporate governance. Bruner argues persuasively that within the common law world differences between countries are nearly as pronounced as the similarities and explains this pattern by way of provocative politically oriented theory.”
– Brian Cheffins, Cambridge University, Faculty of Law
About the Author
Christopher Bruner is an Associate Professor of Law at Washington and Lee University. His teaching and scholarship focus on corporate law and securities regulation, including international and comparative dimensions of these subjects. Professor Bruner’s articles have appeared in a variety of law and policy journals, and his comparative study of U.S. and U.K. corporate governance, titled “Power and Purpose in the ‘Anglo-American’ Corporation,” won the 2010 Association of American Law Schools Scholarly Papers competition.
Professor Bruner has presented his scholarship in Australia, Denmark, Mexico, Russia, Switzerland, the United Kingdom, and the United States, and has conducted research as a visitor to the law faculties of the University of Cambridge, the University of Sydney, and the University of Toronto. Professor Bruner received his A.B. in 1995 from the University of Michigan, his M.Phil. in 1997 from the University of Oxford, and his J.D. in 2001 from Harvard Law School.
School of Law Director of Communications