Reshaping the Playing Field?

Abstract:     
The rise of the institutional investor has been hailed as a corrective to the principal-agent problem for publicly held firms. It is argued that, because institutions typically own larger blocks than individuals and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors can play a far more active role in corporate governance than dispersed shareholders. This article argues that institutional investors simply assume the role of agent, instead of the managers. Moreover, some institutional investors - e.g., labor groups, "ethical funds," government employee pension funds - may have interests other than simply increasing the firm's value. So the rise of institutional investors may not improve the position of dispersed shareholders.

Keywords: shareholder, Securities and Exchange Commission, proxy access, Delaware Code, corporate decisionmaking, American corporations, principle-agent, corporate law, shareholder activism, authority-based decisionmaking, board of directors, institutional investors, union funds, pension funds

JEL Classifications: G3, G30, G23, G34, G38, G39, K2, K22, M1, M14, D92, D4, D21, D2

Accepted Paper Series