The latest issue of the UCLA Lawyer magazine has a series of Q&As with yours truly about my book Corporate Governance after the Financial Crisis. I'm reprinting the Q&As in this series of blog posts. As the article intro explains, the book argues "that federalizing corporate governance impinges on state sovereignty, hobbles corporate efficiency and shortchanges both investors and the American taxpayer .... Professor Bainbridge offers an incisive analysis of the landscape-altering Sarbanes-Oxley and Dodd-Frank acts, responses to the near-cataclysmic economic downturns of the last decade," which "advances a critical dialogue about the limits of crisis-driven public policy."
Q: What is the link between shareholder involvement and corporate performance? Does an increase in the former always trigger an improvement in the latter?
A: Actually, the bulk of the evidence is that shareholder involvement does not—outside a few special cases—improve firm performance. I review the evidence at length in Chapter 7 of Corporate Governance after the Financial Crisis. While there is little evidence that activism has benefits for investors as a class, there is considerable evidence for the proposition that activist shareholders can profit through private rent seeking.
This result is not surprising, of course. First, the high costs and low success rate of activism suggest that its net gains are substantially lower than many proponents of shareholder activism claim. Second, if activism increases the target firm’s stock price, all of its shareholders can free ride on the activist’s efforts. It makes no sense for an activist to expend substantial resources when the bulk of the gains from doing so will be captured by others. Instead, we would expect activists to pursue an agenda of private rent seeking rather than altruistic public service. And that’s exactly what we tend to see.