| You think public elections are distorted by the Supreme Court's Citizens United decision? Well, corporate law is worse. It's so loosey-goosey that boards of directors can ignore "no" votes. That's right. Corporate law allows plurality voting, which means top vote-getters win regardless of how many people vote against them. For example, just last month shareholders voted 2-to-1 against a Sirius XM director candidate, but plurality rules let him win anyway. |  The chancellor and vice chancellors of Delaware's Court of Chancery |
Making matters worse, corporate law does not give shareholders the right to nominate candidates, or call for votes on critical issues. But, it explicitly gives this right to boards of directors. So most of the time, shareholders only vote on candidates listed by the board, or on proposals presented by the board. Lacking legal pressure to do otherwise, board members usually nominate their buddies, and they almost always make proposals they strongly favor. Candidates who might shake things up on the board rarely see the light of day, and the same goes for proposals that might cut CEO pay, increase rank-and-file wages, or help restore the environment.
How did it get this bad? It's called the "race to the bottom." Early in the 1900's Delaware started competing for corporate revenue by creating a very biased legal code, called Title 8. It grants generous liability protection to shareholders and directors, and does not tax out-of-state sales. As frosting on the cake, it totally ignors the rights of employees, local communities, or the environment. Corporations flocked to Delaware, which is now corporate home to almost a million corporations and almost two-thirds of the Fortune 500. Isn't it ironic, that the second smallest state in the Union is number one in corporate law? (For details, see Deep Economics Part 2, Beware of Delaware.)
The real secret to Delaware's success has been favoring directors over shareholders. Why? Because directors make the decision about where to incorporate. If Delaware does not keep them happy, they just leave for a more director-friendly state. Delaware relies on corporate revenue more than any other state, so director satisfaction is more important in Delaware than any other state.
Since corporate law tilts in favor of executives, is it any wonder their pay is so high? Since corporate law ignores employees, is it any surprise that executives send jobs overseas, or pay non-viable wages? Since corporate law ignores the environment, is it any surprise that corporations do so much environmental damage?
The solution starts with federalizing corporate law. Now conservatives would have you believe this is tantamount to declaring war on freedom and America itself. But in truth, the only risk is that executive pay might decline, and boards might become more accountable to the people. Sounds like a risk worth taking to me.
For an entertaining puppet show on Delaware's Court of Chancery, watch the video below:
How did it get this bad? It's called the "race to the bottom." Early in the 1900's Delaware started competing for corporate revenue by creating a very biased legal code, called Title 8. It grants generous liability protection to shareholders and directors, and does not tax out-of-state sales. As frosting on the cake, it totally ignors the rights of employees, local communities, or the environment. Corporations flocked to Delaware, which is now corporate home to almost a million corporations and almost two-thirds of the Fortune 500. Isn't it ironic, that the second smallest state in the Union is number one in corporate law? (For details, see Deep Economics Part 2, Beware of Delaware.)
The real secret to Delaware's success has been favoring directors over shareholders. Why? Because directors make the decision about where to incorporate. If Delaware does not keep them happy, they just leave for a more director-friendly state. Delaware relies on corporate revenue more than any other state, so director satisfaction is more important in Delaware than any other state.
Since corporate law tilts in favor of executives, is it any wonder their pay is so high? Since corporate law ignores employees, is it any surprise that executives send jobs overseas, or pay non-viable wages? Since corporate law ignores the environment, is it any surprise that corporations do so much environmental damage?
The solution starts with federalizing corporate law. Now conservatives would have you believe this is tantamount to declaring war on freedom and America itself. But in truth, the only risk is that executive pay might decline, and boards might become more accountable to the people. Sounds like a risk worth taking to me.
For an entertaining puppet show on Delaware's Court of Chancery, watch the video below:
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