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Alces on Equity Trustees

By Lawrence Solum

Kelli A. Alces (Florida State University - College of Law) has posted The Equity Trustee on SSRN. Here is the abstract:

As we reel from the effects of a recent financial disaster, it is apparent that there is a significant gap in corporate governance and accountability for management. One reason why we have experienced this financial cataclysm is the inability of shareholders to do the ?shareholder job.? Shareholders, as the putative owners of corporations, hold a venerated place in corporate governance. They are responsible for electing directors and monitoring management as well as valuing companies through trades in a vigorous market. The shareholder collective action problem and resulting rational apathy have kept shareholders from effectively fulfilling their role in corporate governance. Individual shareholders have interests that differ and, sometimes, financial interests at odds with those of the corporation. Even if the collective action problem could be overcome and some shareholders decided to take a more active role in corporate affairs, their decisions might not align with those of the rest of the shareholder class. Shareholder powers have always been weak, but, because of the enduring collective action problem, they are now virtually meaningless.

This article suggests a solution to the shareholder collective problem. It proposes the use of an ?equity trustee,? or shareholder representative, to serve as a sophisticated party to perform the shareholder job. An equity trustee would represent the equity interest as a whole, overcoming the diverging interests of individual shareholders, to do the shareholder job of monitoring management and remaining informed about corporate affairs in a manner designed to further the goal of long-term corporate wealth maximization. The use of an equity trustee may also provide a solution to some of the market failures that led to the recent financial crisis such as an unhealthy focus on short-term increases in stock price and the seeming entrenchment of corporate officers and directors. Effective performance of the shareholder job may significantly improve corporate governance and accountability.

Full post as published by Legal Theory Blog on March 08, 2010 (boomark / email).