One of the major developments in corporate law over the last generation has been the resurgence of shareholder power. Shareholders were once largely passive, prevented by the small size of their holdings from having much of an impact on corporate management. But of late, management has been described as “embattled,” constantly challenged by new kinds of institutional shareholders, most notably hedge funds. Even managers at the nation’s largest and best-established firms are not safe from their shareholders, as shown by the narrow victory DuPont’s management just won over a group of insurgent shareholders led by Nelson Peltz’s Trian Fund.
But is this the whole story of shareholder power in America? In my new article, A Long View of Shareholder Power, forthcoming in the Florida Law Review, I turn back to the beginnings of the business corporation in America, in the years after 1800, to understand better the dynamic of shareholders fighting for a voice in corporate governance. It turns out that shareholder power is not a recent concern; while business corporations only appeared in the U.S. in significant numbers after 1800, by the 1820s we can find shareholders fighting over control of corporations in New York’s courts.
Yet shareholder power in that era, and for most of the nineteenth century, differed from shareholder power today. The fight in the 19th century wasn’t between shareholders and managers—there were almost no non-owner managers before the twentieth century—but between minority and majority shareholders, with minority shareowners trying to prevent controlling shareholders from siphoning off the corporation’s assets. To encourage minority shareholding, the law provided tools that are today either vestigial or utterly abandoned, such as the ultra vires doctrine, which prevented a corporation from engaging in activity not specified in its charter, to the requirement that a change in corporate purpose gain unanimous shareholder approval. The power of majority shareholders was often limited as well by voting rules; many corporations adopted “prudent-mean voting,” which capped a large shareholder’s votes, or even the rule of one shareholder, one vote—something almost unimaginable today.
It turns out that shareholder power is not a recent concern; while business corporations only appeared in the U.S. in significant numbers after 1800, by the 1820s we can find shareholders fighting over control of corporations in New York’s courts.
But as corporations grew, such rules made them difficult to manage and so slowly fell by the wayside. By the turn of the twentieth century, minority shareholders had few legal protections left against controlling shareholders, though they could invoke managers’ fiduciary duties in cases of particularly blatant self-dealing. Even as this occurred, though, the very nature of shareholder power began to change. In the 1920s, the middle class first began buying shares. Such a dispersal of ownership could lead one firm to have thousands or tens of thousands of small shareholders, leaving power in the hands of those actually running the businesses—managers, many of whom had little or no ownership stake in their corporations. So appeared the “separation of ownership and control” that characterized the American corporation during much of the century. “Shareholder power” in this era meant not the power of minority shareholders to block a majority, but the power small shareholders had against managers—and for much of the century, that power was practically nonexistent.
This state of affairs lasted for more than fifty years, from the 1930s to the 1980s, and managerial power and shareholder powerlessness began to seem the natural order of things. Yet it was ultimately undermined by larger social and economic changes. As governments and corporations promised pensions to workers, and individuals began saving for their retirements, money poured into new institutional investors, ranging from union pension funds to state retirement plans such as CALPERS to mutual funds. In the 1980s, these new institutional investors began to flex their muscles, demanding a voice in corporate policy. By the turn of this century, when hedge funds appeared on the scene, a range of powerful shareholders were ready to follow the funds’ lead and push for new corporate policies and management and, in some cases, for the sale of the corporation itself. Shareholder power, which would have been ordinary in the 1800s, but ridiculous in 1960, was again a force with which to be reckoned.