Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 22 Issue 2

In addition, Professor Bebchuk studied proxy contests conducted by all listed companies between 1996 and 2004, finding that only seventeen corporations, with a market capitalization over $200 million, experienced proxy contests to replace management outside of the takeover context. Of these, only two of the insurgents won. “A plausible interpretation of the evidence is that, even when shareholder dissatisfaction with board actions and decisions is substantial, challengers face considerable impediments to replacing boards.” (Bebchuk 2005, 13) Thus, we can conclude that the shareholders’ power to designate board membership is negligible. This conclusion has implications for the second question involving the degree to which shareholders have the power to limit board discretion over corporate assets. The negligible power to designate board membership confers a similarly negligible threat to board discretion. Even so, shareholders hold political influence of the board, conferring some control over the firm-assets. At a higher political level, shareholder groups and advocates can lobby the SEC for more influence over board decisions. The only other threat shareholders have over board discretion stems from their power to file derivative lawsuits against the board. But like to the right to vote, this power to sue has only a negligible affect over board discretion. First, the board has a fiduciary duty not to its shareholders, but to the corporation itself. 26 For this reason, shareholders do not file lawsuits for fiduciary breaches on their own behalf, but on that of the corporation, and recovery is typically for the sole benefit of the corporation. 27 to describe the situation of the American shareholder in 2006." (Bob Monks quoted in The Economist , Second, the “business judgment Mar 09, 2006). 24 Even in contested elections, the proxy regulatory regime discourages even large shareholders from conducting proxy fights. (See Bainbridge 2002, footnote 92). 25 “[W]hile shareholders nominally have the right to elect directors, their limited power over the nominating process and the corporate proxy machinery prevent shareholders from using their voting rights.” (Frisch 2004, 16). 26 Under the Standard of Conduct for Directors: “Each member of the board of directors, when discharging the duties of a director, shall act: (1) in good faith, and (2) in a manner the director reasonably believes to be in the best interests of the corporation.” (RMBCA §8.30 (a)). “Under Delaware law, the board of directors owes the corporation the fiduciary duties of care good faith, and loyalty.” (Bainbridge 2002) 27 “A stockholder seeking redress for a wrong done to the corporation as of which the directors fail to act may bring suit derivatively in the name of the corporation. In addition to the real defendants (i.e., the alleged wrongdoers), the corporation is included as a nominal defendant. Yet, the suit proceeds on its behalf, and ordinarily recovery is solely for the benefit of the corporation.” […] “A derivative action is the functional equivalent of a suit by a stockholder to compel the corporation to sue plus a suit by the corporation, asserted by the stockholder on its behalf, against those liable to it. Since a derivative action asserts a right belonging to the corporation, the recovery belongs to the corporation.” (Bork 2005 p. 6) Also, see Blair & Stout, (1999, 294-95 footnote 48) stating, “management’s fiduciary duty to shareholders is payable, not to those shareholders, but to the rule” makes it difficult for shareholders to win suits against the board for breaches in fiduciary duties. 28 The business judgment rule shifts “…the duty of care from negligence to gross negligence: violations are found only where there is ‘reckless indifference’ to or a deliberate disregard of the interests of the whole body of stockholders." 29 (Dibadj 2006, 485) Third, constituency statutes, adopted by the majority of states since the early 1980’s, authorize the board to consider the interests of other corporate constituents. Frisch (2004, 16) notes that “[i]n many cases, the statutes explicitly provide that directors will not be required to regard the effects of a corporate decision on any particular group – including shareholders – as a dominant factor.” 30 Fourth, corporations may include in the articles of incorporation provisions that, in effect, insulate directors from monetary damages for breaching the director’s duty of care. 31 corporation itself, where its benefits “accrue to all the corporation’s stakeholders.” 28 The Delaware Supreme Court states that it "will not substitute its own notions of what is or is not sound business judgment" if "the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." The first quote is Aronson v. Lewis , 473 A.2d 805, 812 (Del. 1984) and the second, Sinclair Oil Corp. v. Levien , 280 A.2d 717, 720 (Del. 1971). Also, according to the business judgment rule, “…courts must defer to the board of directors’ judgment absent highly unusual exceptions.” (Bainbridge 2008, 6). 29 “[I]n the rare instance where the Delaware Supreme Court found directors to have behaved in a grossly negligent manner, the Delaware legislature subsequently permitted corporations to contract out of even gross negligence, at least as to monetary liability…” [Moreover], “…directors invariably have indemnification rights and insurance, and courts have limited the ability of shareholders to obtain discovery in derivative actions alleging director misconduct.” (Dibadj 2006, 486, quoting Loewenstein 2004, 377). Also, see Solomon & Palmiter (1994 §9.1.1). 30 Corporate constituency statutes are, “…laws that either required or allowed corporate management to exercise their fiduciary duties with regard to the effects on employees, customers, and larger communities of interest. (Winkler 2004, 123) “As the court explained in GAF v. Union Carbide Corp., the board must balance investors interests, on the one hand, and the legitimate concerns and interests of employees and management . . . on the other.” (Frisch 2004, 17). “While most of these laws are permissive—allowing but not requiring directors to take into account the non-shareholder constituencies—at least one state, Connecticut, obliges management consideration of ‘interests of the corporations employees, customers, creditors and suppliers, and … community and societal considerations including those of any community in which any office or other facility of the corporation is located.’” (Winkler 2004, 123) 31 “Following the court's decision in Smith v. Van Gorkom, and in reaction to it, the Delaware General Assembly enacted Del. Gen. Corp. Laws Section § 102(b)(7). Section 102(b)(7) permits a corporation to include in its articles of incorporation a provision, which states, in essence, that no director shall be liable in monetary damages for a breach of the director's duty of care. Section 102(b)(7) was intended to eliminate director liability for conduct that, at worst, involved mere breaches of the duty of care. Importantly, though, it was also intended to protect directors from protracted, expensive and time-consuming litigation.” (Bodner 2005, 6) “Daines and Klausner have even found cases in which corporations in states that lacked statutory non- shareholder constituency provisions, such as Delaware, adopted such provisions in their charters.” (Frisch 2004, 18) The Effects of Entity Shielding on Claims to Assets: Implications for Financial Reporting 27 Global Journal of Management and Business Research Volume XXII Issue II Version I Year 2022 ( )D © 2022 Global Journals