Bogle founded Valley Forge, Pennsylvania-based Vanguard in 1974. Investors attracted to its low fees helped the firm overtake American Funds, managed by Los Angeles-based Capital Group Inc., in 2008 as the biggest U.S. stock and bond fund manager. Vanguard has $4.9 trillion in assets under management.
The power to hold to account is the power to interfere and, ultimately, the power to decide. If stockholders are given too easy access to courts, the effect is to transfer decisionmaking power from the board to the stockholders or, more realistically, to one or few stockholders whose interests may not coincide with those of the larger body of stockholders. By limiting judicial review of board decisions, the business judgment rule preserves the statutory scheme of centralizing authority in the board of directors. In doing so, it also preserves the value of centralized decisionmaking for the stockholders and protects them against unwarranted interference in that process by one of their number. Although it is customary to think of the business judgment rule as protecting directors from stockholders, it ultimately serves the more important function of protecting stockholders from themselves.1
That ignorance did not remain for long. Shortly after I arrived at the University of Southern California in the summer of 1968, I ran into Michael Levine (who is now with me at NYU Law School) in Dean Dorothy Nelson’s office, and somehow the conversation turned to the year that he had just spent as a Law and Economics Fellow at the University of Chicago. Mention of Ronald brought forth a mention of the Coase Theorem and I remember my puzzled reaction to Levine’s insistence that this was an important piece of work that everyone had to take into account in dealing with legal institutions.
My reaction, I soon discovered, was similar to that of most other people who viewed this work. Indeed, the famous story about Ronald was that when he first presented this paper to the fearless law and economics group at the University of Chicago everyone thought that he was wrong — only to be persuaded by the end of the hour that Ronald had indeed seen the world correctly. It was the first of many conversions that would break in his favor.