Less is More: Making Institutional Investor Activism A Valuable Mechanism of Corporate Governance
Year: 2001
Type: article
Abstract: Institutional investors have increasingly engaged in corporategovernance activities, introducing proxy proposals and negotiating withmanagement, with a goal of improving corporate performance. Asshareholder activism has increased, financial economists have sought tomeasure its effect on performance. This Article reviews the corporatefinance literature on institutional investors' activities in corporategovernance and uses the findings of the empirical literature to informnormative recommendations for the proxy process. In brief, there is anapparent paradox: notwithstanding the development of shareholderactivism and commentators' generally positive assessments of it, theempirical research indicates that such activism has little or no effect ontargetedfirms' performance. This implies that activist institutions ought toreassess their agendas, in order to use their resources more effectively.The Article takes a two-pronged approach to furthering this aim. First, itsuggests a mechanism ofinternal control, whereby funds would engage inperiodic review of their shareholder-activism programs to identifY themost fruitful governance objectives. Second, it seeks ways to provideincentives to undertake such internal reevaluations, advocatingelimination or significant reduction ofthe subsidy ofproposal sponsorshipunder the SEC rules unless a proposal achieves substantial voting supportor permittingfirms' shareholders to choose what level ofsubsidy they wishto provide to proposal sponsors. The estimated savings from eliminatingthe subsidy for proposals that fail to receive at least 40% of the votesranges from $293 million to $1.9 billion.
Source: bepress Legal Repository
Author: Roberta Romano
Institution: Yale University
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3125557288