Document Type

Article

Comments

Less is More: Making Institutional Investor Activism A Valuable Mechanism of Corporate Governance, 18 Yale Journal on Regulation 174 (2001)

Abstract

Institutional investors have increasingly engaged in corporate
governance activities, introducing proxy proposals and negotiating with
management, with a goal of improving corporate performance. As
shareholder activism has increased, financial economists have sought to
measure its effect on performance. This Article reviews the corporate
finance literature on institutional investors' activities in corporate
governance and uses the findings of the empirical literature to inform
normative recommendations for the proxy process. In brief, there is an
apparent paradox: notwithstanding the development of shareholder
activism and commentators' generally positive assessments of it, the
empirical research indicates that such activism has little or no effect on
targetedfirms' performance. This implies that activist institutions ought to
reassess their agendas, in order to use their resources more effectively.
The Article takes a two-pronged approach to furthering this aim. First, it
suggests a mechanism ofinternal control, whereby funds would engage in
periodic review of their shareholder-activism programs to identifY the
most fruitful governance objectives. Second, it seeks ways to provide
incentives to undertake such internal reevaluations, advocating
elimination or significant reduction ofthe subsidy ofproposal sponsorship
under the SEC rules unless a proposal achieves substantial voting support
or permittingfirms' shareholders to choose what level ofsubsidy they wish
to provide to proposal sponsors. The estimated savings from eliminating
the subsidy for proposals that fail to receive at least 40% of the votes
ranges from $293 million to $1.9 billion.

Date of Authorship for this Version

2001

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