Author: Christopher M. Bruner

by Christopher M. Bruner

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.

by Christopher M. Bruner

[Christopher M. Bruner is an Associate Professor, Washington and Lee University School of Law]

First I want to thank Opinio Juris and the Virginia Journal of International Law (VJIL) for the opportunity to discuss my Article, “Power and Purpose in the ‘Anglo-American’ Corporation.” I’d also like to express my gratitude to Professor Brian Cheffins of the University of Cambridge for providing a response to the piece.

Public corporations in the United States and the United Kingdom are—from the global perspective—so very similar that it has become a commonplace in the comparative corporate literature to treat them as if they were practically identical. Notably, large American and British corporations tend to finance their operations through public offerings of stock to passive, dispersed investors, whereas their counterparts elsewhere tend to be financed and dominated by controlling families, banks, corporate groups, or the government. Likewise, the U.S. and U.K. corporate governance systems emphasize generating returns for public shareholders more than other systems do, reflecting a relatively shareholder-centric perspective fairly described as uniquely “Anglo-American.” I argue, however, that the U.S. and U.K. corporate governance systems exhibit substantial differences that have received insufficient attention in the comparative corporate literature. Simply put, shareholders in the United Kingdom are, in fact, far more powerful, and far more central to the aims of the corporation, than are shareholders in the United States.

In this Article, I describe this divergence, offer an explanation for it, and explore its practical and theoretical implications. First, I examine methodological challenges faced in comparative corporate governance, observing in particular the tendency of recent economically oriented comparative scholarship to depict corporate governance as a means for minimizing agency costs in the firm without sufficient recognition of culturally driven dimensions of the field relating to larger social goals within a particular country. I then provide an overview of corporate governance structures reflecting the substantial divergence in shareholder orientation between the U.S. and U.K. systems—notably the greater power of U.K. shareholders to remove directors and accept hostile takeovers, and the greater emphasis placed on their interests in the formulation of directors’ duties—and develop the argument that a complete explanation of this divergence requires addressing the range of regulatory structures affecting relationships among various stakeholders within the public corporation, including employees.

Through an examination of political, social, and cultural forces at work in each country during critical periods in the development of their corporate governance systems, I argue that stronger stakeholder-oriented social welfare policies and legal structures have permitted the U.K. corporate governance system to focus more intently on shareholders without giving rise to political backlash—and conversely that weaker stakeholder-oriented social welfare policies and legal structures have inhibited the U.S. corporate governance system from doing the same. A particularly vivid example explored in the Article is the divergence between the U.S. takeover regime, giving boards of directors substantial latitude to interfere with hostile bids, and the U.K. takeover regime, in which shareholders possess unfettered discretion to determine the outcome. Whereas concerns for the social welfare of employees losing their jobs in takeovers loomed large in the minds of judges and legislators fashioning the stakeholder-centric U.S. approach in the 1980s, the more shareholder-centric U.K. approach was able to take root and remain politically stable under the Labour government of Harold Wilson in the 1960s precisely because the government believed that external regulatory structures—notably the British welfare state—could mitigate costs borne by employees in the process of corporate consolidation.

In developing this argument, I distinguish my approach from other political theories of corporate governance, which I argue fail to account for the observed U.S.–U.K. divergence—largely due to the pursuit of a holistic global theory, requiring excessive sacrifice of nuance for parsimony. I argue that the role of politics in corporate governance changes fundamentally once a country moves from a concentrated ownership system to a dispersed ownership system—as the United States did in the early twentieth century, and the United Kingdom did somewhat later. Unlike in concentrated ownership systems, where the aim is to constrain the power of controlling shareholders for the protection of other stakeholders, in dispersed ownership systems the aim is to balance protection of minority shareholders with protection of other stakeholders. My Article demonstrates that the United States and the United Kingdom have sought to strike this balance in very different ways, reflecting two different forms of political equilibrium within the dispersed ownership structure.