Shareholder Activism in the Obama Era

My paper, Shareholder Activism in the Obama Era, is now available to be downloaded from SSRN.

Abstract: The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington have created an environment in which proponents of expanded shareholder corporate governance rights are making considerable progress. Even before the crisis hit, of course, there had been a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The crisis, however, has given them new momentum.

The logic behind the shareholder empowerment project is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm’s performance and to make changes in the board’s composition when performance lagged.

In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not—and cannot—prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.

Keywords: corporate governance, corporation law, shareholders, voting rights, institutional investors

JEL Classifications: K22

Download here.

Comments

[Andrew Shapiro]

The esteemed professor wrote "Activist investors pursue agendas not shared by and often in conflict with those of passive investors." This is the red herring alsways tossed out by entrenched managements and their hand picked boards. It is an improper and wrong generalization to assert or assume that an investor with enough economic interest in a company to be active has less alignment with passive shareholder's than managers and boards who have purchased very few shares and who rely primarily on substantial non-performance based compensation.

Prof Bainbridge also asserts - "Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. " As an experienced and successful activist, I can tell you that all of my campaigns have been mounted as a result of boards either complicit in destroying shareholder value or more often having abdicated their central oversight role by delegating decision-making completely over to management. Activism improves a board's central decision-making ability by shifting the balance of power back from an imperial CEO into the board room and recomposing that board with independent, qualified and engaged board members.