The Arizona State Law Journal will soon publish an article by Kelli A. Alces. Professor Alces is an Assistant Professor at the Florida State University College of Law. This article discusses the shareholder “collective action,” entrenchment, and short-terms goal problems in depth, focusing on how they related to the recent recession. Professor Alces proposes a unique solution to this problem, the appointment of a new position to oversee the management of corporations. Professor Alces calls this new role the “equity trustee,” from which the name of the article, “The Equity Trustee” comes.
Professor Alces begins the article by describing the obstacles to the effective performance of what Professor Alces calls the “shareholder job” in the governance of corporations. Discussed in depth are the “collective action” and apathy problems preventing effective shareholder oversight of corporations. This apathy is seen as rational as the shareholder has little motive to expend his or her own resources investigating and monitoring the corporation when the shareholders as a group will split the benefits, rather than benefitting the shareholder who has expended the resources to investigate individually. This stems not only from having diverse shareholders in a single corporation, but also a shareholder having diverse investments where each individual investment may mean little to the shareholder. Additionally, the shareholder can easily sell the shares rather than engage in thorough oversight. The article goes on to discuss the lack of shareholder powers to effectively oversee the corporation and the various other problems, including short term goals and “empty voting,” the decoupling of ownership and voting interests.
Continuing, Professor Alces proposes a solution, the “equity trustee,” which would be appointed by a committee of the largest shareholders. Outlined in detail are the powers and responsibilities the equity trustee would be assigned. Among the duties assigned to the equity trustee would be informing and advising the shareholders, and advising and negotiating with the corporation’s management. The equity trustee would be paid on a flat fee or hourly basis to avoid any problems associated with other compensation methods, which have contributed to the recent short-sightedness of corporations. The equity trustee would not have any direct management control but would have a large role in decision-making largely through the communication and oversight roles.
Discussed as well are the fiduciary duties the equity trustee would owe to the shareholders themselves directly. The primary fiduciary duties would be the duties of loyalty and care. Additionally, the “equity committee,” consisting of the corporation’s seven largest shareholders, would have a veto on actions proposed by the equity trustee. Furthermore, the shareholders could file suit for breaches of the duty of loyalty, and the contract with the equity trustee would provide for removal or penalties for breaches of the duty of care. The veto and removal procedures are to be relied on for many instances where the equity committee is unhappy with the performance of the equity trustee.
Professor Alces goes on to discuss the equity trustee’s relationship with the board of directors and the safeguards in place to protect the capture of the equity trustee by management or by the equity committee. Safeguards in place include the size of the committee and the consistent reporting to shareholders.
Finally, Professor Alces compares the equity trustee position to other proposals of a similar nature. The equity trustee is unique in its role by being independent from individual shareholders and management, and the reporting duties and oversight the role has. The role is also discussed in light of the causes of the recent market failures caused in large part by the short-term goals of corporations and the entrenchment of officers and other management through their perpetual incumbency.