Corporate governance United States corporate law

1 corporate governance

1.1 corporate constitutions
1.2 shareholder rights
1.3 investor rights
1.4 employee rights

corporate governance


the new york stock exchange, along federal , state laws, significant regulator of corporate governance listed corporations, particularly on shareholder voting rights , board structures.

corporate governance, though used in many senses, concerned balance of power among main actors in corporation: directors, shareholders, employees, , other stakeholders. combination of state s corporation law, case law developed courts, , corporation s own articles of incorporation , bylaws determine how power shared. in general, rules of corporation s constitution can written in whatever way incorporators choose, or subsequently amended, long comply minimum compulsory standards of law. different laws seek protect corporate stakeholders different degrees. among important voting rights exercise against board of directors, either elect or remove them office. there right sue breaches of duty, , rights of information, typically used buy, sell , associate, or disassociate on market. federal securities , exchange act of 1934, requires minimum standards on process of voting, particularly in proxy contest competing groups attempt persuade shareholders delegate them proxy vote. shareholders have rights amend corporate constitution, call meetings, make business proposals, , have voice on major decisions, although these can constrained board. employees of corporations have had voice in corporate management, either indirectly, or directly, though unlike in many major economies, express codetermination laws allow participation in management have far been rare.

corporate constitutions

in principle, corporation s constitution can designed in way long complies compulsory rules set down state or federal legislature. state laws, , federal government, give broad freedom corporations design relative rights of directors, shareholders, employees , other stakeholders in articles of incorporation , by-laws. these written down during incorporation, , can amended afterwards according state law s procedures, place obstacles amendment simple majority of shareholders. in 1819 case of trustees of dartmouth college v woodward supreme court held majority there presumption once corporate charter made, corporation s constitution subject no other control on part of crown expressly or implicitly reserved charter itself. on facts, meant because dartmouth college s charter not amended new hampshire legislature, though subsequent state corporation laws subsequently included provisions saying done. today there general presumption whatever balance of powers, rights , duties set down in constitution remain binding contract would. corporation statutes start presumption (in contrast old ultra vires rules) corporations may pursue purpose lawful, whether running profitable business, delivering services community, or other objects people involved in corporation may choose. default, common law had historically suggested decisions taken majority of incorporators, , default board removed majority of shareholders reason determined. these default rules take subject constitution incorporators define, in turn take subject state law , federal regulation.

the nasdaq second biggest stock in us, after new york stock exchange. specializes in sector, saw first major crash dot-com bubble of 2000.

although possible structure corporations differently, 2 basic organs in corporate constitution invariably general meeting of members (usually shareholders) , board of directors. boards of directors have been subject in modern regulation growing number of requirements regarding composition, particularly in federal law public corporations. particularly after enron scandal, companies listed on major stock exchanges (the new york stock exchange, nasdaq, , amex) required adopt minimum standards on number of independent directors, , functions. these rules enforced through threat of delisting exchange, while securities , exchange commission works ensure ultimate oversight. example, nyse listed company manual rule 303a.01 requires listed companies have majority of independent directors. independence in turn defined rule 303a.02 absence of material business relationship corporation, not having worked last 3 years corporation employee, not receiving on $120,000 in pay, or having family members are. idea here independent directors exercise superior oversight of executive board members, , decrease likelihood of abuse of power. specifically, nominations committee (which makes future board appointments), compensation committee (which sets director pay), , audit committee (which appoints auditors), required composed of independent directors, defined rules. similar requirements boards have proliferated across many countries, , exchange rules allow foreign corporations listed on american exchange follow home jurisdiction s rules, disclose , explain how practices differ (if @ all) market. difficulty, however, oversight of executive directors independent directors still leaves possibility of personal relationships develop conflict of interest. raises importance of rights can exercised against board whole.

shareholder rights

while board of directors conferred power manage day-to-day affairs of corporation, either statute, or articles of incorporation, subject limits, including rights shareholders have. example, delaware general corporation law §141(a) says business , affairs of every corporation... shall managed or under direction of board of directors, except may otherwise provided in chapter or in certificate of incorporation. however, directors accountable general meeting through vote. invariably, shareholders hold voting rights, though extent these useful can conditioned constitution. dgcl §141(k) gives option corporations have unitary board can removed majority of members without cause (i.e. reason determined general meeting , not court), reflects old default common law position. however, delaware corporations may opt classified board of directors (e.g. third of directors come election each year) directors can removed cause scrutinized courts. more corporations have classified boards after initial public offerings few years after going public, because institutional investors typically seek change corporation s rules make directors more accountable. in principle, shareholders in delaware corporations can make appointments board through majority vote, , can act expand size of board , elect new directors majority. however, directors control candidates can nominated appointed board. under dodd-frank act of 2010, §971 empowered securities , exchange commission write new sec rule 14a-11 allow shareholders propose nominations board candidates. act required sec evaluate economic effects of rules wrote, when did, business roundtable challenged in court. in business roundtable v sec, ginsburg j in dc circuit court of appeals went far sec had “acted arbitrarily , capriciously” in rule making. after this, securities , exchange commission failed challenge decision, , abandoned drafting new rules. means in many corporations, directors continue have monopoly on nominating future directors.

the securities , exchange commission has statutory duty regulate aspects of director elections , shareholder voting rights, though rule-making authority has continually been challenged business roundtable.

apart elections of directors, shareholders entitlements vote have been protected federal regulation, either through stock exchanges or securities , exchange commission. beginning in 1927, new york stock exchange maintained 1 share, 1 vote policy, backed securities , exchange commission 1940. thought necessary halt corporations issuing non-voting shares, except banks , other influential corporate insiders. however, in 1986, under competitive pressure nasdaq , amex, nyse sought abandon rule, , sec drafted new rule 19c-4, requiring 1 share, 1 vote principle. in business roundtable v sec dc circuit court of appeals struck rule down, though exchanges , sec subsequently made agreement regulate shareholder voting rights proportionately . today, many corporations have unequal shareholder voting rights, limit of ten votes per share. stronger rights exist regarding shareholders ability delegate votes nominees, or doing proxy voting under securities , exchange act of 1934. provisions introduced combat accumulation of power directors or management friendly voting trusts after wall street crash. under sec rule 14a-1, proxy votes cannot solicited except under rules. generally, 1 person soliciting others proxy votes requires disclosure, although sec rule 14a-2 amended in 1992 allow shareholders exempt filing requirements when communicating 1 another, , therefore take collective action against board of directors more easily. sec rule 14a-9 prohibits false or misleading statements being made in soliciting proxies. matters in proxy contest, or whenever shareholders wish change board or element of corporate policy. speaking, , under delaware law, remains difficult. shareholders have no rights call meetings unless constitution allows, , in case conduct of meetings controlled directors under corporation s by-laws. however, under sec rule 14a-8, shareholders have right put forward proposals, on limited number of topics (and not director elections).

ratio of average pay of ceos , production workers within corporation 1965 2009, not taking account outsourced workers, or supply chains.

on number of issues seen significant, or directors have incurable conflicts of interest, many states , federal legislation give shareholders specific rights veto or approve business decisions. state laws give right shareholders vote on decision corporation sell off or substantially assets of corporation. fewer states give rights shareholder veto political contributions made board, unless in articles of incorporation. 1 of contentious issues right shareholders have on pay of directors. executive pay has grown beyond inflation, while average worker wages remained stagnant, seen important enough regulate in dodd-frank act of 2010 §951. provision, however, introduced non-binding vote shareholders, though better rights can introduced in articles of incorporation. while institutional shareholders, particularly pension funds, have been active in using shareholder rights, asset managers regulated investment advisers act of 1940 have tended mute in opposing corporate boards, disconnected people money voting upon.

investor rights

most state corporate laws require shareholders have governance rights against boards of directors, fewer states guarantee governance rights real investors of capital. investment managers control voting rights in economy using other people s money . investment management firms, such vanguard, fidelity, morgan stanley or blackrock, delegated task of trading fund assets 3 main types of institutional investors: pension funds, life insurance companies, , mutual funds. these substitutes save retirement. pensions important kind, can organized through different legal forms. investment managers, subject employee retirement income security act of 1974, delegated task of investment management. on time, investment managers have vote on corporate shares, assisted proxy advice firm such iss or glass lewis. under erisa 1974 §1102(a), plan must merely have named fiduciaries have authority control , manage operation , administration of plan , selected employer or employee organization or both jointly. these fiduciaries or trustees, delegate management professional firm, particularly because under §1105(d), if so, not liable investment manager s breaches of duty. these investment managers buy range of assets (e.g. government bonds, corporate bonds, commodities, real estate or derivatives) particularly corporate stocks have voting rights.

the largest form of retirement fund has become 401(k) defined contribution scheme. individual account employer sets up, named after internal revenue code §401(k), allows employers , employees defer tax on money saved in fund until employee retires. individual invariably loses voice on how shareholder voting rights money buys exercised. investment management firms, regulated investment company act of 1940, investment advisers act of 1940 , erisa 1974, take shareholder voting rights. contrast, larger , collective pension funds, many still defined benefit schemes such calpers or tiaa, organize take voting in house, or instruct investment managers. 2 main types of pension fund labor union organized taft-hartley plans, , state public pension plans. major example of mixture tiaa, established on initiative of andrew carnegie in 1918, requires participants have voting rights plan trustees. under amended national labor relations act of 1935 §302(c)(5)(b) union organized plan has jointly managed representatives of employers , employees. many local pension funds not consolidated , have had critical funding notices department of labor. more funds beneficiary representation ensure corporate voting rights cast according preferences of members. state public pensions larger, , have greater bargaining power use on members behalf. state pension schemes disclose way trustees selected. in 2005, on average more third of trustees elected employees or beneficiaries. example, california government code §20090 requires public employee pension fund, calpers has 13 members on board, 6 elected employees , beneficiaries. however, pension funds of sufficient size have acted replace investment manager voting. no federal law requires voting rights employees in pension funds, despite several proposals. example, joint trusteeship bill of 1989, sponsored peter visclosky in house of representatives, have required single employer pension plans have trustees appointed equally employers , employee representatives. there no legislation stop investment managers voting other people s money, in way securities exchange act of 1934 §78f(b)(10) bans broker-dealers voting on significant issues without instructions.

employee rights



louis brandeis, testimony commission on industrial relations (1916) vol 8, 7659-7660

while investment managers tend exercise voting rights in corporations, bought pension, life insurance , mutual fund money, employees exercise voice through collective bargaining rules in labor law. increasingly, corporate law has converged labor law. united states in minority of organization economic cooperation , development countries that, yet, has no law requiring employee voting rights in corporations, either in general meeting or representatives on board of directors. on other hand, united states has oldest voluntary codetermination statute private corporations, in massachusetts since 1919 passed under republican governor calvin coolidge, enabling manufacturing companies have employee representatives on board of directors, if corporate stockholders agreed. in 1919 both procter & gamble , general ice delivery company of detroit had employee representation on boards. in 20th century, labor law theory split between advocated collective bargaining backed strike action, advocated greater role binding arbitration, , proponents codetermination industrial democracy . today, these methods seen complements, not alternatives. majority of countries in organization economic cooperation , development have laws requiring direct participation rights. in 1994, dunlop commission on future of worker-management relations: final report examined law reform improve collective labor relations, , suggested minor amendments encourage worker involvement. congressional division prevented federal reform, labor unions , state legislatures have experimented.

the united auto workers @ chrysler corporation made collective agreement in 1980 have employee directors on board. shareholding institutions tend monopolize voting rights in corporations.

corporations chartered under state law, larger in delaware, leave investors free organize voting rights , board representation choose. because of unequal bargaining power, historic caution of labor unions, shareholders monopolize voting rights in american corporations. 1970s employees , unions sought representation on company boards. happen through collective agreements, historically occurred in germany or other countries, or through employees demanding further representation through employee stock ownership plans, aimed voice independent capital risks not diversified. corporations included workers attempted secure board represented included united airlines, general tire , rubber company, , providence , worcester railroad. however, in 1974 securities , exchange commission, run appointees of richard nixon, rejected employees held shares in at&t entitled make proposals include employee representatives on board of directors. position reversed expressly dodd-frank act of 2010 §971, subject rules securities , exchange commission entitles shareholders put forward nominations board. instead of pursuing board seats through shareholder resolutions, example, united auto workers sought board representation collective agreement @ chrysler in 1980, , united steel workers secured board representation in 5 corporations in 1993. however, clear employee stock ownership plans open abuse, particularly after enron collapsed in 2003. workers had been enticed invest average of 62.5 per cent of retirement savings 401(k) plans in enron stock, against basic principles of prudent, diversified investment, , had no board representation. meant, employees lost majority of pension savings. reason, employees , unions have sought representation investment of labor, without taking on undiversifiable capital risk. empirical research suggests 1999 there @ least 35 major employee representation plans worker directors, though linked corporate stock.