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Smith, D. Gordon --- "The Role of Shareholders in the Modern American Corporation" [2012] ELECD 459; in Hill, A. Claire; McDonnell, H. Brett (eds), "Research Handbook on the Economics of Corporate Law" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on the Economics of Corporate Law

Editor(s): Hill, A. Claire; McDonnell, H. Brett

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848449589

Section: Chapter 4

Section Title: The Role of Shareholders in the Modern American Corporation

Author(s): Smith, D. Gordon

Number of pages: 16

Extract:

4. The role of shareholders in the modern American
corporation
D. Gordon Smith*



1. INTRODUCTION

Shareholders participate in the governance of the modern American corporation in three prin-
cipal ways: they vote, they sell, and they sue (Thompson 2000). Large shareholders also exert
informal influence in public corporations (Smith 1996). In closely held corporations, share-
holders often exercise control through contracts (Easterbrook & Fischel 1986).1 This chapter
describes the evolving governance role of shareholders in the modern American corporation,
focusing on public corporations.
The ability of shareholders to participate in corporate governance depends partly on the
legal rules defining shareholder rights and partly on the transaction costs of collective action.
For most of the past century, corporate law and corporate scholarship in the United States
were based on a stylized view of the corporation in which shareholders were widely dispersed
(Berle & Means 1932). Under this traditional conception of corporations, shareholders were
passive investors who relied on directors and officers to manage the corporation's assets and
on various market forces to provide the directors and officers with incentives for good behav-
ior (Bebchuk 2007). The `Wall Street Rule' dictated that dissatisfied shareholders `vote with
their feet' by selling their shares, rather than attempting to participate in governance of the
corporation.
State corporate laws and federal securities laws impose obligations on directors and offi-
cers to be honest, diligent, and loyal in discharging their responsibilities. When they stray,
shareholders may pursue a remedy through litigation, either in the form of a ` ...