Replying to: Two Cheers for Sarbanes Oxley

I refer to Schumpeter’s measured piece Two Cheers for Sarbanes Oxley (The Economist 3 July 2010). In what is otherwise a sensible and realistic assessment of the overall benefits of Sarbox I am nevertheless struck by the myth of shareholder ownership which, it is argued, Sarbox has strengthened. This is surely a mistaken inference. Sarbox is a response to the failure of shareholders to act as responsible owners - not a mechanism designed to strengthen their ownership rights. There is more in this than meets the eye!

The fact, in law, is that the shareholders do not own the corporation. One direct consequence of limited liability is that the assets of the corporation are owned by the corporation – a fictional legal entity – and not the shareholders. The granting of limited liability in the 19th Century and the landmark Salomon versus Salomon judgement [British House of Lords] 1897 establishes this legal principle. The subsequent evolution of common law mostly supports this conclusion in Anglo American jurisdictions.

Misunderstandings about these matters continue to hold back the debate about the governance, especially of publicly traded corporation. Shareholders own shares but the shares only represent claims on the profits of the corporation. They confer no rights of ownership, except in narrowly defined circumstances. In Anglo American jurisdictions they confer no significant ex ante supervisory rights - a sine qua non of meaningful ownership.

What proprietary rights shareholders may have are further weakened by the fact that shares in many publicly traded corporations are held today by a wide number of dispersed short-term profit seeking institutional investors who are not, in reality, committed shareholders. This compromises still further any meaningful concept of ownership.

Our collective failure to address this reality continues to hold back the debate on effective reform of both the ownership arrangements of publicly traded corporations and their governance. Sarbox does not alter this reality.

Richard Tudway

Principal

The Centre for International Economics