A Response to Brian Cheffins

Many thanks to Professor Cheffins for his thoughtful response, in which he highlights an important challenge in evaluating the degree of shareholder-centrism in differing corporate governance systems—the difficulty of quantifying the impact of varying legal strategies for protecting shareholders’ interests. In this reply to the issues raised by Professor Cheffins, I distinguish various metrics of shareholder-centrism and consider the degree to which they are amenable to straightforward cross-border comparison.

Professor Cheffins agrees that U.K. shareholders possess greater governance rights than U.S. shareholders do, but rightly observes that rules of civil procedure and corporate law give U.S. shareholders greater capacity to sue. In the important empirical study cited by Professor Cheffins, he and his coauthors find that lawsuits are far more likely to be filed against U.S. directors—and that these suits produce a far greater volume of published opinions—than is the case in the United Kingdom. These findings lead him to suggest that U.S. shareholders’ capacity to sue may compensate for weaker substantive legal protections.

As Professor Cheffins notes, I address the topic briefly in my Article (at pp. 609–10), and ultimately we agree that the extent to which threat of suit may align directors’ decision-making with the shareholders’ interests is unknown. Given the inherently speculative nature of the question, it may be unknowable—though in my view there remains good reason to conclude that a substantial gap in shareholder orientation remains. While the litigation rate in the United States may vastly eclipse that in the United Kingdom, Professor Cheffins and his coauthors find that liability exposure for directors of U.S. public companies remains exceedingly low. The annual chance of a director of a NYSE- or NASDAQ-listed company facing a corporate lawsuit generating a judicial decision was found to be about 1.1 percent (at p. 706), and the total number of cases found over a seven-year period in which public company directors—inside or outside—had to make out-of-pocket payments could be counted on one hand (three and one, respectively) (at pp. 709–10). To be sure, a high degree of risk aversion, perhaps amplified by reputational considerations, might lead U.S. directors to fear such suits, but appraisal of their liability exposure would not itself seem to militate strongly toward favoring shareholders’ interests. Indeed, such findings might help explain why U.K. shareholders have not pressed harder for expanded litigation rights—particularly where those shareholders are diversified institutions that might reasonably anticipate being just as likely to pay damages awards under such a regime (indirectly, through indemnification and insurance arrangements) as to receive them.

Aside from governance powers and enforcement capabilities, however, there is another important metric of shareholder-centrism—explicit statements of corporate purpose. If strong enforcement capabilities for shareholders were intended to substitute for governance powers in the U.S. corporation—representing a functionally equivalent means of focusing directors’ minds on their interests—then we might expect to find similar expressions of commitment to shareholders in the articulation of directors’ duties. Yet, the U.S.–U.K. divergence is every bit as stark here as it is in the context of governance powers. That U.K. corporate governance places shareholders at the conceptual heart of the corporation is clear—notably in the Companies Act 2006 mandate that directors pursue the best interests of the shareholders exclusively, and in the fact that directors’ powers flow solely from the corporation’s Articles, rather than from the statute. By contrast, U.S. corporate law has remained decidedly ambivalent on issues of corporate purpose, declining invitations to define the corporate enterprise exclusively by reference to the shareholders. In this manner, U.S. corporate law has maintained the flexibility to accommodate other stakeholders’ interests at times of perceived crisis, as when a wave of leveraged hostile tender offers hit in the mid-1980s. Shareholders desiring unfettered freedom to accept such offers sued, to be sure, but the outcome—a decidedly stakeholder-centric approach to takeover regulation (through court decisions in Delaware and statutes elsewhere)—has not remotely approximated the degree of shareholder orientation reflected in the letter of the United Kingdom’s City Code on Takeovers and Mergers and the practice of the associated Panel on Takeovers and Mergers.

To reiterate, Professor Cheffins is absolutely right that the deterrent value of U.S. shareholder litigation remains unknown, and consequently that the precise extent to which shareholder-centrism in U.K. corporate governance exceeds that in U.S. corporate governance “remains at best unclear.” In my view, however, the evidence that a substantial gap exists—both in design and in practical effect—remains compelling.