Wednesday, February 14, 2007
Staggered Boards and Our Staggered Senate
Guhan Subramanian is arguing the virtues of staggered boards in corporate governance. He concedes that staggered boards have "anti-takeover" effects that shareholders do not like -- but believes that there is a way to preserve them without the effects shareholders dislike. In short, he thinks they are worth preserving because they provide "greater stability, improved independence . . . and a longer-term perspective" than unitary boards.
All of this led me to think about why we stagger our Senate elections, electing only about 1/3 of our Senators in a given two-year cycle. The very justification of the Senate and its members' six-year terms altogether involves a similar invocation of stability, independence, and a longer-term perspective. But why do we stagger? Why not just consider the body in total every 6 years? The anti-takeover effects are clear and aren't they as undesireable as they are in the corporate context? I think there are reasonable answers -- but it is worth taking a moment to consider.
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As much as I made Guhan's argument in the past in defending our staggered board (which we eliminated with no effect whatsoever on board continuity), I think his column wholly confuses the form and the substance. There's no reason at all for a staggered board other than anti-takeover defense.
You can have a unitary board (elections every year), but have a contract or understanding with the director that he/she agrees to be renominated at least two times. The fear that a director won't be re-elected because he/she doesn't get a majority of votes cast is a red herring - that would only happen when a company is in the kind of trouble that provokes a proxy fight anyway.
The problem is with the assumption of an analog between an institution the essence of which is the democratic election of its wholly accountable members under a constitution by which those members derive their powers from the electorate, and an institution for which shareholder voting is merely a means to address the appropriate balance between management authority and accountability where ownership is separate from control of the corporation. In the latter case, there really isn't the problem of the political instability about which the drafters of the Constitution were no doubt concerned, unless of course we transform corporations from economic, profit-oriented entities into political institutions in which each year's election pits a union slate against a management slate.
Posted by: Jeff Lipshaw | Feb 14, 2007 5:23:05 PM
For additional comment on the substance of Professor Subramanian's proposal, see my post at Legal Profession Blog.
Posted by: Jeff Lipshaw | Feb 14, 2007 7:19:28 PM
It seems to me that the Senate's place in the original constitutional design stood on three principal legs.
First, it represented the states in the process of making federal legislation, thereby providing a safeguard against federal aggrandizement and encroachment. That leg was kicked away by the Seventeenth Amendment, after the passage of which it ceased to be rational to accord broad deference to Congress when it "make[s] inroads into the states' autonomy" on the theory that "'[t]he political process ensures that laws that unduly burden the States will not be promulgated'" (A. Althouse, The Alden Trilogy: Still Searching for a Way to Enforce Federalism, 31 Rutgers L.J. 631, 636 (2000) (quoting Garcia, 469 U.S. at 556)).
Second, even after the adoption of the Seventeenth Amendment, the Senate continued to serve the useful purpose (useful in a federal republic, that is) of checking the power of the numeric majority, ensuring that the needs of smaller states are not entirely ignored by (or set aside in favor of those of) larger states. But that leg is under seige as well: Misha Tseytlin, for example, would abolish it in all but name, transforming it into little more than a smaller version of the House of Representatives (see M. Tseytlin, The United States Senate and the Problem of Equal State Suffrage, 94 Geo. L.J. 859 (2006)), and with all the criticism of the undemocratic nature of the electoral college, if the antifederalists should prevail on that project, then logically, the Senate ought to be the next target for their bulldozer.
And the third leg, which you call into question here, is that by staggering its rotation of membership, the Senate provided an effective check on the passions of the moment, as explained in Federalist 63.
The operative question has to be, what is the rationale for keeping a Senate once you've cut away the core aspects of its purpose in the federal system? You'd be down to the very broadest, most general philosophical principal of bicameralism, that it's sensible to divide legislative power between two bodies, no matter what their characteristics. It threatens to reach the point where the Senate has been abolished in all but name: there may still be a body meeting in the north wing of the capitol that bears the designation "the United States Senate," but it will not be the United States Senate as it was envisioned and as it has existed heretofor.
Posted by: Simon | Feb 14, 2007 8:36:47 PM
What Jeff said. Most companies have dropped the whole stability and continuity defense in recent years and have conceded that the staggered board is intended and functions as a takeover defense. I don't believe there is any empirical evidence to the effect that annually elected boards are less stable than staggered boards, except of course that annually elected boards may experience more takeovers.
Posted by: Beth Young | Feb 15, 2007 7:26:40 PM
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