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Director Primacy and Shareholder Disempowerment

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Abstract

This essay is a response to Lucian Bebchuk's recent article The Case for Increasing Shareholder Power, 118 Harvard Law Review 833 (2005). In that article, Bebchuk put forward a set of proposals designed to allow shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements. In response, I make three principal claims. First, if shareholder empowerment were as value-enhancing as Bebchuk claims, we should observe entrepreneurs taking a company public offering such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may reasonably conclude investors do not value these rights. Second, invoking my director primacy model of corporate governance, I present a first principles alternative to Bebchuk's account of the place of shareholder voting in corporate governance. Specifically, I argue that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule. Finally, I suggest a number of reasons to be skeptical of Bebchuk's claim that shareholders would make effective use of his proposed regime. In particular, I argue that even institutional investors have strong incentives to remain passive.

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... In other words, the theoretical debates regarding the benefits and drawbacks of allowing shareholders to exert stronger impacts on board election are not settled (Cai et al., 2013). On the one hand, agency theorists who advocate for shareholder empowerment (e.g., Bebchuk, 2005;Aggarwal, Dahiya, & Prabhala, 2019) would champion for the implementation of the majority voting rule; on the other hand, legal and management scholars who support director supremacy argue that the costs of shareholder over-monitoring might outweigh the benefits (Bainbridge, 2006;Goranova & Ryan, 2014;Kahan & Rock, 2011). ...
... Establishing the two premises is important because prior research did not reach unanimous agreement both empirically (Cai et al., 2013;Ertimur et al., 2014;Chung & Lee;2020;Sjostrom & Kim, 2007) and theoretically (Bebchuk, 2005;Bainbridge, 2006;Kahan & Rock, 2011) regarding the relationships. For example, extant empirical research from the agency theory perspective does document different degrees of impact of the majority voting rule on directors (e.g., Cai et al., 2013). ...
... On the one hand, Cai and Colleagues (2013) call the majority voting rule a "paper tiger" because they claim that the rule exerts little real impact on the firm; on the other hand, Chuang and Lee (2020) show that institutional investors favor firms which have adopted the majority voting rule. Previous theoretical debates about shareholder empowerment and director supremacy further complicates the arguments for the perceived benefits of the majority voting rule (e.g., Bebchuk, 2005;Bainbridge, 2006). Proponents of shareholder empowerment (e.g., Bebchuk, 2005;Goranova & Ryan, 2014;Campbell, Campbell, Sirmon, Bierman, & Tuggle, 2012) should advocate for the majority voting rule because the rule strengthens the power of shareholders against boards of directors. ...
... In this context, there are many new achievements on the impact of small and medium shareholders in enterprise governance. According to the existing literature, this paper puts forward the following speculations on the impact of small and medium shareholders online voting on enterprise innovation: firstly, as minority shareholders lack the necessary information for making decisions, their active participation will distract management's attention and prevent management from effectively executing decision (Bainbridge, 2006) [18] . Thus it hinders the normal implementation of corporate innovation activities. ...
... In this context, there are many new achievements on the impact of small and medium shareholders in enterprise governance. According to the existing literature, this paper puts forward the following speculations on the impact of small and medium shareholders online voting on enterprise innovation: firstly, as minority shareholders lack the necessary information for making decisions, their active participation will distract management's attention and prevent management from effectively executing decision (Bainbridge, 2006) [18] . Thus it hinders the normal implementation of corporate innovation activities. ...
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Minority shareholders are important stakeholders of the company, which could influence the corporate innovation to a certain extent. This paper studies the impact of online voting by minority shareholders on corporate innovation, which could enrich the research and expand the theoretical mechanism of the voting role of small and medium shareholders. Taking the 2008-2020 years of China's A-share listed companies as a sample and using the relative proportion of minority shareholders to attend the general meeting to measure the online voting of minority shareholders and the rate of R&D investment to operating income to measure corporate innovation, we found that:(1)the degree of online voting participation of small and medium shareholders is significantly negatively associated to corporate innovation;(2) the degree of online voting participation of minority shareholders reduces the voice of the management , weakening the management's constraint on the interests of large shareholders (3) With the improvement of the shareholding balance, the impact of online voting participation of minority shareholders on enterprise innovation decreases significantly; the more the stake of the largest shareholder , the stronger the inhibitory effect of minority shareholders' online voting participation on enterprise innovation is.
... It is used to argue that shareholders are the party best to take major decisions on behalf of the company through the pro-cess of voting [125]. This is sometimes explained as the residual claim meaning that the other constituencies would pick to have such rights if the law reflected party's wishes, and so shareholders deciding such rights would reflect the 'hypothetical bargaining' that all would pick if they decided the matter from a blank canvas [126]. That law mandates shareholders as the sole constituency to vote on major matters therefore does not actively influence anything under this model-it just saves time, and therefore cost, to achieve what the parties would want to do anyway, making matters more efficient generally [127]. ...
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The dominant conceptual approach in Anglo-American corporate law literature is to represent the company as a series of voluntary bilateral arrangements. Under such a contractarian approach, the role for company law is to facilitate private bargaining and transactions. This representation is far from uncontroversial, and is frequently challenged on both descriptive grounds (that it does not accurately describe company law) and normative grounds (that its claims as to what the law should be are unfounded). Yet it remains the primary analytical paradigm within corporate law. It presents as an internally coherent representation, which can adequately defend itself from external challenges. The purpose of this article is to explore tensions within the internal argumentation structure of certain claims of this representation. Specifically, this article identifies and unpacks tensions of logical coherence within two key moves advanced within this representation. First, hasty generalisations are provided, extrapolating from unrepresentative samples. Second, there is a circularity in normative claims as to the allocation of corporate rights: the fact that rights are currently provided is frequently used as a reason to justify such rights being initially allocated. This commits the logical fallacy of ‘begging the question’. These two main weaknesses of contractarianism undermine its claim to be an inevitable result of logic. Instead, it is best seen as a series of rhetorical moves: they arise as a result of pre-existing value judgments, and therefore cannot be utilised to justify such value judgments.
... Technological and legal advancements have empowered minority shareholders with better information access, encouraging their active participation. While some studies highlight the benefits of such involvement, like reduced appropriation of interests by large shareholders and enhanced long-term company performance [11][12][13][14], others caution against potential negative impacts due to information asymmetry and the risk of hindering a company's long-term growth [15]. This body of work underscores the complexity of minority shareholder participation in corporate governance, reflecting a balance between safeguarding their interests and ensuring the sustainable development of corporations. ...
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Based on the analysis of data from listed enterprises in China between 2011 and 2022, we investigate the influence of digital transformation on the governance efficiency for minority shareholders. The results show that the extent of digital transformation exert a negative effect on the agency costs incurred from related-party transactions. The mechanism examination elucidates that digital transformation augments the governance efficiency for minority shareholders by boosting attendance at shareholders’ meetings and enhancing the exit threat for minority shareholders. Subsequent analysis reveals that non-state-owned enterprises, compared to state-owned enterprises, exhibit a more pronounced effect in diminishing the second type of agency costs through digital transformation. Furthermore, the impact of digital transformation in curtailing agency costs is more significant in the eastern regions than central and western regions. The better the equity checks and balances in listed enterprises, the more effective digital transformation is in reducing agency costs. This study offers valuable insights for bolstering the governance capacity of minority shareholders in the context of digital transformation.
... At the same time, some empirical literature questions the effectiveness of shareholders' activism supervision. Bainbridge (2005) studies the ability of shareholders' activism to hinder effective execution by distracting management. Minority shareholders are limited by their short-sighted decision-making and irrational participation in governance, which will increase the possibility of the company manipulating financial data to cater to minority shareholders (Kong & Liu, 2017). ...
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Promoting corporate digitalization is necessary to ensure the high-quality development of the digital economy, whose transformation is often decided by enterprise management. In the Internet age, network interactive platforms such as “e Interaction in Shanghai Stock Exchange” and “Easy Interaction in Shenzhen Stock Exchange” provide minority shareholders with the right to speak and functions including external supervision and governance that they do not have in traditional corporate governance. Based on the sample data of A-share and non-financial listed companies from 2011 to 2021, this paper adopts the panel data fixed effect model to investigate the influence and mechanism of minority shareholders’ activism on corporate digital transformation. It is found that the attention paid to digitalization by minority shareholders significantly promotes corporate digital transformation, which is still valid after a series of robustness tests. Further research proves that minority shareholders’ activism improves corporate digital transformation by alleviating the intermediary effect between managerial myopia and corporate financing constraints. According to the results of the adjustment effect test, compared with predictable economic policies, the increasing uncertainty of economic policies weakens the promotion of minority shareholders’ activism. Besides, compared with the corporate decentralized power, the centralized management power stimulates the full play of minority shareholders’ activism to perform the supervision and governance. This study provides inspires an in-depth understanding of how to play the role of minority shareholders in the digital transformation and corporate upgrading up against the digital economy.
... Minority shareholders will use their increased power to engage in more opportunistic behavior and reduce activities that are conducive to the long-term development of enterprises, such as innovation. Bainbridge (2006) found that due to severe information asymmetry between minority shareholders and controlling shareholders, their direct participation in company decision-making can actually reduce company value due to judgment bias. Research on typical cases has found that the participation of minority shareholders in decision-making may cause confusion in the enterprise and its operations. ...
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China’s listed companies have serious Principal-agent problem of the second kind. Large shareholders have violated the rights and interests of minority shareholders in an endless stream of cases. However, the voice of encouraging minority shareholders to actively participate in enterprise decision-making is growing day-by-day. However, there is no consensus on whether the enthusiasm of minority shareholders in decision-making can have a positive impact on enterprises. Therefore, this article takes China’s A-share listed companies from 2016 to 2020 as the research sample, and from the perspective of green innovation, discusses whether the minority shareholders’ active participation in enterprise decision-making can improve the level of green innovation of enterprises. The study found that the minority shareholders’ active participation in enterprise decision-making can improve the level of green innovation. Moreover, the minority shareholders’ “hand voting” improves the green innovation level of enterprises by influencing the media attention; A higher level of legal environment is conducive to strengthening the role of minority shareholders’ participation in the shareholders’ meeting in green innovation. Based on the property right nature, regional and industrial level, further research found that the minority share-holders’ role in improving green innovation capacity is more significant in non-state-owned enterprises, eastern regions and heavy pollution industries. The research results show that minority shareholders, as an important force to monitor the senior executives’ behavior and enhance corporate value, actively participate in corporate decision-making, can not only improve corporate governance, but also benefit the sustainable development of enterprises.
... But in reality, the appointment of managers by shareholders in making decisions often faces problems or commonly referred to as agency. This conflict of interest will naturally occur in the ownership structure of the company [2,3]. The ownership structure is a mechanism that can reduce conflicts between management and shareholders so that agency costs can be reduced, with the ownership structure. ...
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This study aims to determine the effect of Employee Stock Options (ESOs) on Abnormal Returns with Corporate Governance as a moderating variable. Corporate Governance proxies are independent commissioners, managerial ownership, and institutional ownership. The population in this study were companies listed on the Indonesia Stock Exchange. Based on the purposive sampling method, 20 samples were obtained and the regression method used was Moderate Regression Analysis (MRA). The results of this study indicate that Employee Stock Options (F-SOs) have a significant effect on Abnormal Returns and Corporate Governance is a moderating variable in the relationship between employee stock options (ESOs) and abnormal returns.
... Shareholders retain a modicum of control in terms of their sole voting rights for the board. But such control is very limited and "shareholder voting is properly understood not as a primary component of corporate decision-making structure, but rather as an accountability device of last resort" (Bainbridge, 2006(Bainbridge, , p. 1750. 13 Although it is colloquially common to refer to shareholders as "owners", technically shareholders do not own the corporation, they own shares as a separate form of property (Hansmann, 2000;Stout, 2007). ...
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Business ethics can be regarded as a field dealing with corporate self-regulation as it relates to the treatment of stakeholders. However, a concern for corporate stakeholders need not take a corporate-centric perspective, as shown by recent efforts (especially Singer in Bus Ethics Q 25(1):65–92, 2015) to situate corporate conduct within Rawls’ political theory. Although Rawls was largely mute on the subject himself, his theory has implications for business ethics and corporate governance more specifically. Given an understanding of a “Rawlsian society” as a whole—where corporations as associations are a part—this paper addresses how a Rawlsian perspective would safeguard against corporate harms in society. We argue that a Rawlsian society would primarily regulate corporate conduct through exogenous constraints in the form of legislation. To the extent that business ethics is concerned with endogenous constraints in the form of corporate-centric self-regulation regarding stakeholders, to adopt a Rawlsian perspective is to assume instead a society-centric perspective and to impose exogenous constraints on corporate conduct in the form of legislation for the benefit of citizens. In the context of Rawls’ political liberalism, normative concerns in business are accounted for through legislation and the system of background justice. In a clear departure from Singer (Bus Ethics Q 25(1):65–92, 2015, Bus Ethics J Rev 6(3):11–17, 2018a), we further develop our argument to propose that Rawls' theory can be interpreted as providing a rule for corporate governance. The rule—which is imposed exogenously for the good of society—states: After choosing the corporate constraint mechanism (exogenous vs. endogenous) that best promotes the Liberty Principle, choose the corporate control regime (shareholder vs. stakeholder) that maximizes economic efficiency.
... Some scholars believe that minority shareholders can play an active role when they have a voice [18], that the direct participation of minority shareholders in decision making can reduce agency problems [19], and reject schemes that damage enterprise value [20], leading to a steady growth in performance [21]. However, some scholars believe that the participation of minority shareholders in decision making may be biased due to information asymmetry [22], and simply changing the size of shareholder power without changing other governance mechanisms cannot lead to changes in corporate governance [23]. It may also encourage managers to participate in "Pandering behavior" and engage in earnings management to a greater extent [4]. ...
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The era of big data has changed the traditional data science based on mathematical statistics, and promoted the innovation of data analysis methods. This paper takes China state-holding holding enterprises as the research object, uses game theory as the method, uses top management team (TMT) knowledge hiding degree as the background to construct a minority shareholder governance information database, and discusses the feasibility of using minority shareholders’ active governance to break through and increase earnings management costs. The findings indicate, firstly, by optimizing enterprise information disclosure and reducing TMT knowledge hiding, the cost of minority shareholders’ participation in governance can be reduced and the enthusiasm of minority shareholders’ participation in governance can be promoted. Secondly, the presence of minority shareholders actively engaged in corporate governance can discourage two kinds of earnings management practices of managers in China state-holding enterprises. Finally, for the companies with weak state-holding and unannounced dividend policy, the active governance of minority shareholders has a more prominent restraining effect on the two types of earnings management. With an eye on strengthening the corporate micro-governance mechanism, this paper provides guidance for minority shareholders to strengthen their participation in the governance of China’s state-holding enterprises.
... Shareholder activism found to have a favorable impact on organizational performance in several types of research (Artiga González & Calluzzo, 2019;Stathopoulos & Voulgaris, 2016;Kedia, Starks, & Wang, 2016). Conversely, other studies argued that shareholder activism has a detrimental effect (Bainbridge, 2006;Guimaraes, Leal, Wanke, & Morey, 2019;Bliss, Molk, & Partnoy, 2019;Edmans, Fang, & Zur, 2013). While the little empirical study has been done on how shareholder activism affects corporate success (Shingade & Rastogi, 2019). ...
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The paper aims to review the literature on the influence of Shareholder Activism on firm performance including share price, financial performance, corporate governance, and innovation. Many studies have been reviewed to find the relationship between the identified constructs. For this purpose, the review methodology has been used to go through the literature relating to the impact of Shareholder Activism on Firm Performance over the period ranging from 2000 to 2021. Furthermore, the study concludes that shareholder activism significantly affects how well a company performs. However, studies claim that shareholder activism has a favorable impact on a company's performance, while other scholars claim that it has a detrimental effect. However, some researchers have found that the influence is minimal. Moreover, firm performance can be enhanced if a firm's management works in collaboration with activist investors.
... Both anecdotal 5 and academic (Clarke et al. 2020;Jia et al. 2020) evidence indicates that there are some falsehoods on social media for investors. Therefore, they might not act as an effective external governance mechanism (Bainbridge 2005) but push managers to manage earnings. Collectively, managers could engage more in earnings management under the pressure of investors' social media criticisms. ...
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This paper investigates the impact of social media criticisms on financial reporting quality. Analyzing data from the leading Internet stock message board in China, we demonstrate that postings on stock message boards could promote earnings management, i.e. reducing financial transparency. This finding is further enhanced by employing the instrumental variable approach and the difference-in-differences approach and is explained by the cognitive evaluation theory. Additional analysis suggests that the positive relation between social media criticisms and earnings management cannot be attributed to a deterioration in operating performance or internal governance and is more pronounced in postings from senior users.
... In this approach, it is suggested that shareholder participation in company decision-making processes should be increased (e.g., Bebchuk, 2005). However, this logic can be countered by the opposite argument, namely, that management has more information than shareholders to make decisions designed to achieve satisfactory economic performance (e.g., Bainbridge, 2006). In fact, empirical evidence from the U.S. confirms that, on average, 82.5% of votes in AGMs are in favour of management proposals and that, on average, these proposals are approved in 98.5% of the cases (Maug and Rydqvist, 2009). ...
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This paper intends to investigate the relationship between the attendance of annual general meetings (AGMs) and company performance in terms of profitability. In particular, it is intended to highlight some elements that can be interpreted as constituting attendance at the shareholder meetings, for example, the number of shareholders present at the shareholder meeting, the share of authorized capital attending the shareholder meeting, and the duration of the shareholder meeting. Following this analysis, attention is devoted to the relationship between corporate performance and shareholder meeting participation (one of the possible governance mechanisms available to monitor the activity carried out by company management). We analyse the AGMs convened for the adoption of financial statements. Empirically, the study uses the minutes of the meetings of a sample of Italian listed companies held in 2017 and 2018 on the occasion of the adoption of financial statements for the 2016 and 2017 fiscal periods, respectively. The main results show a positive relationship between the share of authorized capital attending annual shareholder meetings and the level of corporate profitability of Italian listed companies.
... In this approach, it is suggested that shareholder participation in company decision-making processes should be increased (e.g., Bebchuk, 2005). However, this logic can be countered by the opposite argument, namely, that management has more information than shareholders to make decisions designed to achieve satisfactory economic performance (e.g., Bainbridge, 2006). In fact, empirical evidence from the U.S. confirms that, on average, 82.5% of votes in AGMs are in favour of management proposals and that, on average, these proposals are approved in 98.5% of the cases (Maug and Rydqvist, 2009). ...
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The condition of the COVID-19 pandemic has caused all destinations to experience a decline in visitors, so the government has created programs such as destination branding so that destination managers and tourism business actors can take many ways to survive. Three things will be a strategy to increase tourist visits after the Covid-19 pandemic at Uluwatu Temple as a main consideration for tourists who want to travel to tourist attractions. The three are health, hygiene and safety. Therefore, this study was conducted to determine the effect of destination branding and tourism safety on revisit intention. The hypothesis tested with a purposive random sampling technique with the total number of 250 respondents. The finding indicates visitor really pay attention to the influence of sustainability in the way they examine revisit intention. This study has six hypotheses and the results of all hypotheses support the intention to revisit and recommend.
... Dual-class share structure is a control-enhancing mechanism that divides ordinary shares into two classes: one class, issued to ordinary investors, with one-share onevote, and the other class, issued to founders, with super-voting rights. 27 Dual-class shares concentrate corporate control rights and thus immunise a firm from the threat of takeovers to focus on innovation and long-term value creation (Bainbridge, 2005;Bratton & Wachter, 2010;Stout, 2012). Dual-class share structure is a contractual design written in the corporate charters and binds all shareholders. ...
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Human capital plays a crucial role in today’s knowledge-based economy and is vital to economic growth and technological innovation. While studies of human capital are abundant in economics and management research, legal studies tend to neglect the impact of legal institutions on the preservation and development of human capital. This article contributes to the existing literature by linking legal developments with the human capital and management literature using the concept of “firm-specific human capital” to understand the various legal mechanisms developed in legal practice. By exploring how major legal institutions—property, contract and organisation—help firms secure key human capital, this article provides a new lens through which to understand the legal means that facilitate the development of firm-specific human capital in the knowledge economy.
... For example, some research finds that firms experience financial performance benefits from shareholder activism (e.g., Clifford, 2008;Klein & Zur, 2009), but other research finds no performance benefits (e.g., Black, 1998). In addition, activism may lead to greater shareholder power, improved board oversight, and reduced managerial entrenchment (Bainbridge, 2005), all positive outcomes from a shareholder primacy perspective; however, scholars have also argued that activism promotes corporate social performance (e.g., David et al., 2007), a deviation from shareholder primacy. ...
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Many management theories have descriptive and normative elements, and no management theory used to generate prescriptions can be totally devoid of normative assumptions. Yet, there remain few useful models for assessing the relative strength or utility of the normative frameworks that inform most management theorizing. In this essay, we offer a model from a field of art rather than science. We introduce the poetry of early twentieth century American writer Hart Crane as providing such a model. Crane uses a panorama of consequences to examine modern social phenomena and subject them to normative evaluation. We argue that management theorists can use a similar panorama of consequences method to “test” normative theories by assessing the directional consistency of the normative evaluations the theories generate about an empirical phenomenon or relationship, as well as how extensively the theories’ normative evaluations cover the full scope of a phenomenon’s or relationship’s impact. We explicate an exemplar poem of Crane’s, and then demonstrate how his method might be used to study shareholder activism, a normatively ambiguous management practice, in a way that illuminates the strengths and weaknesses of the relevant normative frameworks.
... Some legal authors even argue that shareholder proposals may be even harmful for firms and that there has to be a higher hurdle to submit a proposal (see e.g. Bainbridge, 2006). Multiple empirical studies show there are no positive abnormal returns associated with submission of shareholder proposals (e.g. ...
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In this article, we analyse the impact of business digitalisation on the principal-agent conflict. While there are several studies of impact of digitalization on corporate governance, the empirical evidence has so far been relatively scarce. We examine the principal-agent conflict from several angles: the number of shareholder-sponsored proposals submitted for the shareholder meetingsб the level of support for management-sponsored proposals and the frequency of proxy contests. As a proxy for the active digitalisation of a firm, we use the blockchain technology that has the potential to fundamentally change the distribution of power within an organisation, potentially mitigating the principal-agent conflict. We analyze a sample of 2813 NYSE, Nasdaq and AMEX-traded firms for the year 2018, during which rapid blockchain adoption was exhibited. Our results suggest that firms active in business digitalisation overall have a lower level of principal-agent conflict. We find that such firms generally have shareholders that are more active, which indicates an environment less prone to the principal-agent conflict. While on average, proposals submitted by the management receive less support during voting, the share of approved proposals does not change for the digitising firms. Proxy contests appear relatively rare among the firms active in digitalisation, however, there is not yet enough data to confirm this.
... Hence, studying stock prices means that the positive and negative effects 1 Critics of staggered boards argue that insulating firms from the market for corporate control leads to entrenchment of the incumbent managers and reduces firm value (see, e.g., Bebchuk and Cohen 2005;Faleye 2007;Masulis, Wang, and Xie 2007;Bebchuk 2013;Cohen and Wang 2013). In contrast, proponents of staggered boards argue that staggered boards originate from value-maximizing governance choices and increase firm value through board independence, management stability, and increased resistance to hostile or opportunistic takeovers (see, e.g., Blair and Stout 1999;Koppes, Gankse, and Haag 1999;Bainbridge 2006;Larcker, Ormazabal, and Taylor 2011;Cremers, Litov, and Sepe 2017). Recently, a few studies have argued that staggered boards have insignificant value effects (see, e.g., Amihud and Stoyanov 2017;Amihud, Schmid, and Solomon 2018) or that the effect of staggered boards on firm varies across firms and/or over the firm's lifetime (see, e.g., Johnson, Karpoff, andYi 2015, 2018;Field and Lowry 2020). ...
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This paper examines the impact of staggered boards on the value of voting rights (i.e., the voting premium) estimated using option prices. We find companies with staggered boards have a higher voting premium. Exploiting plausibly exogenous court rulings, we confirm that weakening the effectiveness of staggered boards decreases the voting premium. Given that the voting premium reflects private benefits consumption and associated managerial inefficiencies, our findings are consistent with the entrenchment view of staggered boards. Analyzing the cross-sectional heterogeneity in our sample, we find the entrenchment effect of staggered boards to be particularly pronounced for firms in noncompetitive industries and for mature firms. (JEL G13, G30, G34, K22)
... In favour of empowering shareholders, see Bebchuk (2005). Against this empowerment, however, see Bainbridge (2006). 85 Lund (2019). ...
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Dual-class shares have become one of the most controversial issues in today’s capital markets and corporate governance debates. In the past years, academics, regulators, policymakers and stock exchanges from all over the world have been discussing whether companies should be allowed to go public with dual-class shares and, if so, which restrictions should be imposed. After analysing the regulatory approach to dual-class shares existing in several jurisdictions around the world, this article shows that countries seem to have adopted three primary models to deal with dual-class share structures: (i) the imposition of bans traditionally existing in the United Kingdom, Australia and several jurisdictions in Asia, Europe and Latin America; (ii) the permissive model allowing dual-class structures without any significant restrictions, as it happens in the United States, Sweden, and the Netherlands; and (iii) the restrictive approach implemented in Singapore, Hong Kong, Canada, India and Mainland China. It will be argued that, despite the global nature of the debate on dual-class shares, regulators should be careful when analysing foreign studies and approaches since the optimal regulatory model to deal with dual-class shares depends on a variety of local factors. Namely, this article argues that, in countries with sophisticated markets and regulators, strong legal protection for minority investors, and low private benefits of control, regulators should allow companies to go public with dual-class shares with no restrictions or minor regulatory intervention. By contrast, in countries without sophisticated markets and regulators, high private benefits of control, and weak legal protection for minority investors, dual-class shares should be prohibited or subject to higher restrictions. Finally, intermediate solutions should be adopted for countries with mixed features. Therefore, the key question to be addressed from a policy perspective is not whether companies should be allowed to go public with dual-class shares, as many authors and regulators have been discussing in the past years, but whether dual-class class shares should be allowed and, if so, under which conditions, taking into account the particular features of a country.
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Research Question/Issue Common ownership research has rapidly expanded across multiple disciplines—economics, finance, law, accounting, and others. Limited attention, however, has been paid to the implications of shareholders investing in multiple competing firms for corporate governance. The purpose of this review is to integrate the literature on common ownership with a particular focus on corporate governance inferences. Research Findings/Insights This review focuses on the implications of common ownership for corporate governance and the shareholder value maximization paradigm, and specific governance facets such as shareholder activism, managerial accountability and executive compensation, board of directors, and stakeholder governance. Theoretical/Academic Implications Common ownership scholars debate whether common ownership reduces competition in order to increase industry profitability or promotes better governance that could reduce negative externalities imposed by portfolio companies on society at large. This review identifies points of contention in analyzing and assessing the impact of common ownership, synthesizes the implications for the field of corporate governance, and provides a roadmap of questions for future empirical and theoretical research. Practitioner/Policy Implications Increasing concerns by regulatory agencies regarding the impact of common ownership—shareholders concurrently investing in rival firms—on competitive actions and incentives to compete have largely ignored the implications of common ownership for corporate governance. In the context of common ownership, how does shareholder primacy embedded in governance reforms affect the pursuit of firm‐specific competitive advantage and competition for essential stakeholders and, subsequently, the long‐term viability, resilience, and competitiveness of the firm?
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Research Question/Issue Do firms that release 10‐K reports with lower readability receive a higher number of shareholder proposals on corporate governance? Research Findings/Insights Using the passage of the Plain Writing Act of 2010 as an exogenous source for an increase in 10‐K readability within a difference‐in‐differences framework, we find that firms with poor 10‐K readability prior to the Act experienced a decline in the likelihood of receiving corporate governance proposals. This effect is primarily concentrated in proposals sponsored by retail investors and is most pronounced in firms with entrenched management, those actively engaging in earnings management through discretionary accruals, and proposals related to executive compensation and disclosure. Theoretical/Academic Implications By providing evidence on the differential impact of 10‐K readability on retail versus institutional investors, we shed light on the varying information processing capabilities and engagement strategies across investor types. Our findings also illuminate the interplay between disclosure readability, managerial entrenchment, and earnings management, offering insights into the mechanisms through which poor 10‐K readability influences the initiation of shareholder proposals. Practitioner/Policy Implications Our findings underscore the effectiveness of the Plain Writing Act of 2010 in enhancing transparency and highlight the role of disclosure readability as a tool for shareholder engagement, particularly for retail investors. Further, we show that the Plain Writing Act achieved more than its original goal of promoting clear and transparent communication between the government and the public; it also achieved an unintended outcome by prompting firms to adopt clear writing norms.
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Bu çalışma, şirketler hukuku ve sermaye piyasası hukuku bağlamında, kurumsal yatırımcıların pay sahibi aktivizmini incelemeyi amaçlamaktadır. Çalışmada, pay sahibi aktivizmi kavramı tanımlanmakta; aktivist kurumsal yatırımcıların ve hedef alınan şirketlerin öne çıkan nitelikleri detaylı bir şekilde ele alınmaktadır. Bununla birlikte, kurumsal yatırımcılar tarafından uygulanan çeşitli aktivist stratejiler arasında bir ayrım yapabilmek için, pay sahibi aktivizminin farklı biçimlerine iki temel kategori altında genel bir bakış sunulmaktadır. Performans odaklı aktivizm, şirketin mali yapısını iyileştirme ve piyasa değerini artırma gibi hedefler taşıyabilirken; kurumsal yönetim odaklı aktivizm, daha etkin bir yönetim anlayışının geliştirilmesine odaklanmaktadır. Bu bağlamda, çalışma özellikle aktivist kurumsal yatırımcı stratejilerinin hedef şirketler için hem faydalar hem de riskler barındırabileceğini tartışmaktadır. Bununla birlikte, kısa vadeli stratejilerin uzun vadeli sürdürülebilirlik üzerindeki olumsuz etkilerine dair tespit edilen araştırma bulguları da analiz edilmektedir.
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This study examines whether and how negative online postings (NOPs), a prevalent form of minority shareholder activism, influence corporate innovation input. Using data from Chinese investor interactive platforms, we find that NOPs negatively impact corporate R&D investment, particularly when these postings are short‐term focused. Channel tests suggest that this effect is driven by pressures regarding stock price decline, takeover possibility, and management turnover. The negative relationship is more pronounced when NOPs represent stronger pressure, when board secretaries are in more influential positions, and when CEOs are more susceptible to short‐term pressure. Our findings suggest that NOPs increase managers' perception of pressure and drive managers to prioritize immediate returns over strategic risk‐taking. This study advances the understanding of minority shareholder activism by revealing its detrimental impact on R&D investment.
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Chinese stock exchanges have launched two investor interactive exchange platforms (IIEPs) to facilitate communication between retail investors and listed companies. Using retail investor posts on the IIEPs as a proxy for monitoring by minority shareholders, we show that minority shareholders can play an active monitoring role in corporate governance and improve earnings quality. We identify coordination among minority shareholders and increased regulatory scrutiny as key mechanisms through which IIEPs exert their influence. This form of monitoring proves critical, especially in the absence or ineffectiveness of traditional oversight bodies like institutional investors, auditors and government regulators. Our findings underscore the constructive role of minority shareholders in corporate governance, challenging the notion of them as passive free riders. Implementing IIEPs could be a valuable model for other nations looking to bolster minority shareholder rights.
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Research Questions/Issue In this bibliometric review of shareholder activism literature spanning 1983–2021, we pursue two objectives. Firstly, we investigate the degree of interdisciplinarity in the field, and second, we scrutinize publication trends, foundational knowledge, core topics, and emerging thematic trends, exploring the trajectory of shareholder activism research over time and providing a roadmap for future scholars. Research Findings/Insights Systematic analysis of 1055 scholarly works reveals significant growth and a trend toward interdisciplinarity, though disciplinary silos persist. Shareholder activism is evolving beyond traditional, firm‐level financial motivations to include sustainability‐oriented goals, blending environmental, and social objectives with corporate governance concerns and financial interests. This shift signals broader engagement by diverse activist actors, strategies, and motivations, with a heightened emphasis on the long‐term impact of shareholder activism. To capture this complexity, we advocate for research that emphasizes the intricate interrelationships among actors, objectives, strategies and outcomes, encouraging a redefinition of theoretical and methodological approaches. Theoretical/Academic Implications Our analysis underscores the need for greater interdisciplinary engagement in shareholder activism research and highlights an expanding scope of topics, regions and theories. With growing scholarly interest in sustainability‐oriented shareholder activism, jurisdictional nuances, and the emergence of new activist actors like index funds and individual investors, we anticipate continued theoretical and methodological diversity. Practitioner/Policy Implications Policymakers and practitioners should adopt a holistic approach to shareholder activism, considering the multifaceted actors, objectives, and strategies involved. Evaluations of activist outcomes should account for both financial and non‐financial impacts at the firm‐, market‐, and macro‐levels.
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This discourse is aimed at assessing the provisions of sections 261 and 263 especially regarding the judicial input in the process of derivative claims. The court is equipped with wide discretionary powers in determining the course of a derivative claim, and as this paper seeks to demonstrate, the judge's discretion may inhibit or foster the continuation of a derivative claim. The tragedy is that with the wide discretion to determine the course of derivative claims, judges are in a position where they are not able to go against the decisions of directors especially in matters of a commercial nature.
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El Plan Nacional de Desarrollo 2022-2026 posibilita a la sociedad por acciones simplificada a cotizar en la bolsa de valores en su artículo 261, el cual modifica el artículo 4 de la Ley 1258 de 2008, por lo tanto, resulta relevante analizar, la conveniencia o no de mantener ciertas prerrogativas de este tipo societario en el mercado de capital. En este caso, se hará un análisis de las acciones de voto múltiple y las condiciones que han propiciado un régimen de regulación permisivo o prohibitivo, de acuerdo con la experiencia de Estados Unidos y de Europa, con el fin de identificar las ventajas, desventajas y las condiciones de diferente índole que, de acuerdo con la experiencia, han demostrado ser indispensables para considerar su viabilidad en las sociedades que negocian sus participaciones en el mercado público de valores.
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This Article empirically investigates the impacts of the board’s rejection of shareholder proposals on corporate value and the appropriate approach to regulation. The study utilizes a dataset of such incidents in China, where the board enjoys significant discretion in rejecting proposals due to the inadequacy of legal enforcement mechanisms. The findings provide suggestive evidence that the market reacts negatively to the announcement of proposal rejections, leading to a significant decline in a firm’s stock value. The most adverse effects are associated with rejections of director nomination proposals and blockholder-sponsored proposals. The inclusion of external legal opinions can help alleviate these adverse consequences. Additionally, the research uncovers that while the two stock exchanges in China demonstrate overall competence in identifying harmful rejection decisions, the effectiveness of their regulatory actions via comment letters is hindered by the inherent weakness of the soft law approach. Drawing upon these results, this study posits that the critical value of the shareholder proposal regime lies in providing a low-cost approach for dissident shareholders to replace poorly performing management and facilitating the constructive engagement of large shareholders and the management. Furthermore, it is recommended that China establish an SEC-style review process for board rejection decisions, with the exchanges as the ultimate authority permitting the exclusion of shareholder proposals.
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Increasing attention to activist campaigns raises the question of whether they lead to better performance. The impact of different motives, demands, and proposals is still unclear and, sometimes, contradictory. We used a unique dataset of activist campaigns targeting firms in the US from 2002 to 2017 and analysed the impact of activism on firm performance, considering their specific demands. Our results show that firms experience a decline in profitability almost immediately after campaigns, although the effect is unclear in the years subsequent to the intervention. Results also suggest that campaigns primarily focused on demanding a change in strategic direction or obtaining board control intensify the decline in profitability. Seeking board representation is the type of demand that effectively increases target firms’ profitability. Our analysis adds to research on shareholder governance and competitive dynamics by highlighting that the type of demand adopted in campaigns impacts differently on firms’ performance.
Chapter
The third quarter of the twentieth century was a golden age for labor in the advanced industrial countries, characterized by rising incomes, relatively egalitarian wage structures, and reasonable levels of job security. The subsequent quarter-century has seen less positive performance along a number of these dimensions. This period has instead been marked by rapid globalization of economic activity that has brought increased insecurity to workers. The contributors to this volume distinguish four explanations for this historic shift. These include 1) rapid development of new technologies; 2) global competition for both business and labor; 3) deregulation of industry with more reliance on markets; and 4) increased immigration of workers, especially unskilled workers, from developing countries. In addition to analyzing the causes of these trends, the contributors also investigate important consequences, ranging from changes in collective bargaining and employment relations to family formation decisions and incarceration policy.
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The business corporation is one of the greatest organizational inventions, but it creates risks both for shareholders and for third parties. To mitigate these risks, legislators, judges, and corporate lawyers have tried to learn from foreign experiences and adapt their regulatory regimes to them. In the last three decades, this approach has led to a stream of corporate and capital market law reforms unseen before. Corporate governance, the system by which companies are directed and controlled, is today a key topic for legislation, practice, and academia all over the world. Corporate scandals and financial crises have repeatedly highlighted the need to better understand the economic, social, political, and legal determinants of corporate governance in individual countries. Comparative Corporate Governance furthers this goal by bringing together current scholarship in law and economics with the expertise of local corporate governance specialists from twenty-three countries.
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The globalization of capital markets since the 1980s has been accompanied by a vigorous debate over the convergence of corporate governance standards around the world towards the shareholder model. But even before the financial and economic crisis of 2008/2009, the dominance of the shareholder model was challenged with regard to persisting divergences and national differences in corporate law, labor law and industrial relations. This collection explores this debate at an important crossroads, echoing Karl Polanyi's famous observation in 1944 of the disembeddedness of the market from society. Drawing on pertinent insights from scholars, practitioners and regulators in corporate and labor law, securities regulation as well as economic sociology and management theory, the contributions shed important light on the empirical effects on the economy of the shift to shareholder primacy, in light of a comprehensive reconsideration of the global context, policy goals and regulatory forms which characterize market governance today.
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The globalization of capital markets since the 1980s has been accompanied by a vigorous debate over the convergence of corporate governance standards around the world towards the shareholder model. But even before the financial and economic crisis of 2008/2009, the dominance of the shareholder model was challenged with regard to persisting divergences and national differences in corporate law, labor law and industrial relations. This collection explores this debate at an important crossroads, echoing Karl Polanyi's famous observation in 1944 of the disembeddedness of the market from society. Drawing on pertinent insights from scholars, practitioners and regulators in corporate and labor law, securities regulation as well as economic sociology and management theory, the contributions shed important light on the empirical effects on the economy of the shift to shareholder primacy, in light of a comprehensive reconsideration of the global context, policy goals and regulatory forms which characterize market governance today.
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This book investigates the pre-crisis practice of bankers' remuneration in the UK to provide evidence of the problems in practice. It critically analyses the regulatory initiatives implemented after the crisis and investigates the post-crisis practice to reflect the effects and problems of the regulation. The book also discusses the traditional administration of remuneration and political incentives in Chinese banks and the regulatory initiatives for reforming bankers' remuneration. It investigates the recent practices in major Chinese banks to reveal the problems of the regulatory initiatives and the impact of political incentives. It will help academics, researchers, students and practitioners develop a comprehensive understanding of the ongoing reform of bankers' remuneration in the UK and the uniqueness of banks' remuneration systems and incentive mechanisms in China. Furthermore, it provides theoretical insights into the differences between the two jurisdictions in their regulations and practices and the deep-seated reasons for the differences.
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Shareholder Activism bezeichnet den Versuch von Aktionären, Entscheidungen der Unternehmensführung direkt zu beeinflussen. Dies kann sowohl im Rahmen der etablierten Corporate-Governance-Mechanismen geschehen als auch jenseits dieser Mechanismen, bspw. durch öffentliche Kritik an der Unternehmensleitung. Aktivistische Investoren sind neben passiven und aktiven Investoren heute eine bedeutsame Zielgruppe der Investor Relations. Shareholder Activism fordert gängige Corporate-Governance-Praktiken heraus – für die Investor-Relations-Funktion ergibt sich dadurch aber auch die Chance, ihre strategische Rolle zu stärken, indem sie einen aktiven Dialog mit diesen Investoren sucht, Feedback einholt und Aktionärsinteressen in strategische Unternehmensentscheidungen einbringt.
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Using the online voting policy in Chinese market as a natural experiment of minority shareholders protection, this paper explores the relationship between minority shareholders protection and corporate financial leverage. The results show that the participation of minority shareholders in online voting of shareholders' meeting can significantly reduce corporate financial leverage. Our results are still valid after a series of robustness tests. In terms of mechanism, we find that minority shareholders participating in the online voting can play a crucial supervisory role on the management, which can improve the level of internal control and reduce the overconfidence of the management. The above monitoring effect can reduce the corporate financial leverage. In addition, our heterogeneity test results show that the impact of online voting on financial leverage is more significant for small capitalization, non-state-owned firms, and firms with relatively low level of external supervision.
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This study investigates the effects of high-speed rail (HSR) introduction in China on small investors’ on-site participation in shareholders’ general meetings, which is used to measure the ‘inverse distance–participation syndrome’. We find that HSR introductionhas a significantly positive effect on small investors’ on-site attendance. The poorer the transportation infrastructure connecting other cities before HSR introduction, the shorter the distance between HSR station and the firm’s headquarters after HSR introduction, and the more nonlocal investors the firm has, the higher the attendance rate. Small shareholder activism that arises with HSR introduction results in a higher likelihood of proposal rejection, fewer tunnelling by large shareholders, and less earnings manipulation. Overall, our results show that HSR introduction reduces monitoring costs for small shareholders and increases their on-site participation. Our findings provide important implications for policymakers on encouraging small shareholder activism.
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The battle for corporate control may ultimately lead to the improvement of corporate governance, or the plunder of corporate wealth. The goal of hostile takeover regulation is to promote merit-adding takeovers while decreasing as much as possible the agency costs between corporate insiders and shareholders. Different practices in the US, the UK and the EU all have their merits and inadequacies. This research examines the western practices from a path dependence perspective, and offers insights for future Chinese hostile takeover legislation. For complex reasons and institutional factors, amendments to the law would be of little use in improving the hostile takeover regulations in China, and the main priority should be to discard the “CSRC centralism” dependency path that has been active for decades.
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How does management insulation from shareholder pressure influence banks’ resilience to crises? To address this question, we develop a measure of management insulation based on legal provisions. Unlike the existing alternatives, our measure considers the interactions between different provisions. We use this measure to study the relationship between management insulation and bank failure during the 2007-09 financial crisis. We find that banks in which managers were more insulated from shareholders in 2003 were less likely to be both bailed out in 2008/09 and targeted by activist shareholders. By contrast, alternative measures of management insulation fail to predict both bailouts and shareholder activism.
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In this Article, we investigate whether labor unions and related entities should be permitted to continue to make shareholder proposals using Rule 14a-8 of the federal securities laws. We focus on the claim that labor is using the shareholder proposal mechanism to further the interests of workers at the expense of other shareholders. In particular, corporate management groups have suggested that when labor is involved in collective bargaining negotiations with management, it should be barred from submitting shareholder proposals because labor proposals seek to further interests not shared by other security holders of the company. Using data on shareholder proposals from the 1994 proxy season,we find that labor union proposals as a whole get as much or more support than do similar proposals made by other shareholder groups. Furthermore, when we examine a subset of labor union proposals that have been identified by management groups as instances where labor was acting in its own self-interest, we find no significant differences between shareholder support for these proposals and for other shareholders' proposals of a similar nature. We conclude that regulatory reform is unnecessary.
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I survey corporate governance activity by instit utional investors in the United States, and the empirical evidence on whether this activity affects fir m performance. A small number of American institutional investors, mostl y public pension plans, spend a trivial amount of money on overt activis m efforts. They don't conduct proxy fights, and rarely try to elect their ow n candidates to the board of directors. Legal rules, agency costs within th e institutions, information costs, collective action problems, and limite d institutional competence are all plausible part ial explanations for this relative lack of activity. The currently available evidence, taken as a whole, i s consistent with the proposition that the institution s achieve the effects on firm performance that one might expect from this level of effort -- namely, no t much.
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Corporate law scholars have long debated whether state competition for corporate charters is a "race for the bottom" or a "race for the top." This paper offers an analysis of the dynamics and performance of state charter competition. I show how the presence of managerial opportunism and externalities may lead states to adopt undesirable corporate law rules. The analysis identifies the various issues with respect to which state competition is likely to fail, and he advocates an expansion of federal regulation to govern all of these issues. I also connect the state competition question with the question of contractual freedom in corporate law and argue that many scholars should reconsider their inconsistent views regarding these two questions. Finally, I conclude by addressing potential objections to the expansion of federal corporate regulation.
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This article assesses the extent to which the traditional passivity of American shareholders is a result of legal rules and conflicts of interest that discourage shareholder activism, or a result of collective action problems that discourage voting, proxy proposals, and other forms of shareholder activism. I develop a simple model of the decision of a large shareholder whether to vote or launch a proxy campaign. Large shareholders can have significant incentives to vote on an informed basis or launch proxy campaigns, especially for issues that are common across many companies and therefore involve economies of scale. However, they face significant legal impediments to owning large percentage stakes in companies or taking an activist role. These legal obstacles are reinforced by conflicts of interest that affect most major classes of institutional investors.
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The SEC is now considering a proposal to require some public companies to include in their proxy materials candidates for the board nominated by shareholders. I document that incumbents do not currently face any meaningful risk of being replaced via the ballot box, and I argue that providing shareholder access would be a moderate step toward improving board accountability. Analyzing each of the objections that opponents have raised against the proposed shareholder access, I conclude that none of them provides a good basis for opposing it. Indeed, it would be desirable to supplement shareholder access with additional measures to invigorate corporate elections.
Article
The basic building blocks of post-privatization Slovenian corporate governance differ rather dramatically from those of the United States. Slovene corporations are characterized by highly concentrated ownership dominated by state-controlled funds and other institutional investors. In addition, Slovene corporation law provides for a two-tier board of directors (similar to the German codetermination system) in which employees are entitled to representation on both the management and supervisory boards. This article provides an analysis of these features, exploring possible reforms in Slovenian law that might enhance the effectiveness of Slovene boards of directors.
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Institutional investors have been slow to respond to the widespread presence of takeover defenses in the charters of firms whose shares they hold through private equity funds, and their response to date has been tepid compared to their efforts in the proxy context. Institutions' hesitancy may reflect a rational unwillingness among private equity funds, as well as the institutions' own investment staff, to require portfolio companies to go public with takeover-friendly charters. This article develops a hypothesis to explain the common presence of defenses in the charters of firms that go public with private equity investment and the half-hearted response of institutional investors to this situation. Under this hypothesis - based on private equity funds' need to maintain a reputation for dealing well with successful managers of portfolio companies - it is privately rational but socially inefficient for private equity funds to have their portfolio companies adopt takeover defenses. The implication of the hypothesis is that institutional investors may face at least as difficult a challenge in ridding IPO charters of takeover defenses as they face in urging managers of already-public firms to eliminate defenses from their charters.
Article
Since the public corporation first evolved as a business form, there has been a lively debate over whether its proper purpose always is to maximize shareholder wealth, or whether directors sometimes can consider the interests of creditors, employees, and other corporate stakeholders. This article reviews why two of the arguments traditionally used to justify strict shareholder primacy - that shareholders own the corporation, and that shareholders are the sole residual claimants of corporations - are bad arguments, in the sense that they are demonstrably incorrect from both an economic and a legal perspective. The article then explores a third and better argument for shareholder primacy: that requiring corporate directors to serve only shareholders is the best way to keep directors from imposing excessive agency costs on firms. This agency cost argument recognizes that in an ideal world, directors would take account of the interests of both shareholders and other stakeholders. Indeed, allowing this can provide ex ante benefits to shareholders by encouraging nonshareholder groups to make firm-specific commitments to corporate team production. Nevertheless (the argument goes), a rule of strict shareholder primacy remains preferable, because it permits corporations to monitor and reward director performance according to a single easily-observed metric: stock price. While plausible in theory, the agency cost argument for strict shareholder primacy suffers from a serious weakness. In practice, the business world displays a strong revealed preference for corporate governance rules that grant directors discretion to serve stakeholder groups, even at shareholders' ex post expense. What's more, this pattern is observed when firms are first incorporated and brought public, a time when corporate promoters have every incentive to cater to shareholder interests. Such observations suggest that business participants believe the ex ante benefits of allowing directors to consider stakeholder interests outweigh the ex post harms in terms of greater agency costs. They also raise serious questions about the empirical strength of the agency cost argument for ex post shareholder primacy.
Article
Under the New York Stock Exchange's (NYSE) aegis, a blue ribbon panel has proposed new listing standards that would, inter alia, significantly increase the role of independent directors in public corporations. Despite the considerable hullabaloo surrounding the report's release, however, the report's recommendations in fact consist of little more than the warmed-over rejects of past corporate governance "reform" initiatives. This essay critiques the key director independence provisions of the NYSE Committee's report. The essay argues that those proposals are not supported by the evidence on director performance and, moreover, adopt an undesirable one size fits all approach. Firms have unique needs and should be free -- as state law now allows -- to develop unique accountability mechanisms carefully tailored for the firm's special needs. The SEC should not be further empowered to use its "raised eyebrow" regulatory powers as a vehicle to federalize corporate law. For all of these reasons, the NYSE should reject the Committee's proposals and leave development of corporate governance to state law and market forces.
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This Article provides the first detailed empirical analysis of firms' choice of organizational form. It provides important evidence on whether there is an efficient market in organizational forms or firms' choice of form is impeded by network externalities. We focus on formations of limited liability partnerships (LLPs) and limited liability companies (LLCs) in examining the effect of various factors on firms' cho ice of business form. Our data provides important evidence against the network externalities hypothesis. Because the LLP and LLC forms are similar except for the LLP's link to the existing "network" of partnership law, firms would prefer the LLP to the LLC form if network externalities mattered. In fact, we find that firms prefer the LLC form. Moreover, the reduced relative popularity of LLCs in states that impose entity taxes on LLCs but not LLPs, and the increased relative popularity of LLCs in states and years in which LLCs have particular inherent advantages, provide further evidence that the inherent characteristics of the two business forms, rather than network externalities, are driving choice of form.
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Refining and extending the methodology introduced by Daines (2001), I present evidence that small Delaware firms were worth more than small non-Delaware firms during the period 1991--1996 but not afterwards. I also present evidence that larger firms, which comprise 98% of my sample by size, exhibit no Delaware effect for any year during the period 1991--2002. Thus the Delaware effect "disappears" when examined over time and when examined for firms that are economically meaningful. These new contours of the Delaware effect suggest that the benefit associated with Delaware incorporation was an order of magnitude smaller than estimated by Daines (2001) during the early 1990s, and nonexistent by the late 1990s. The trajectory of the Delaware effect further suggests that it cannot provide support for the "race to the top" view of regulatory competition, as some commentators have argued, and may in fact provide support for the "race to the bottom" view. Finally, the findings presented here identify two puzzles: (1) Why did small Delaware firms exhibit a positive Delaware effect during the early 1990s but larger firms did not? (2) Why did this effect disappear in the late 1990s? I identify doctrinal changes in Delaware corporate law in the mid-1990s, increased managerial incentives to sell during this period, and a cohort selection effect during the 1980s as potential explanations. Copyright 2004, Oxford University Press.