The Essential Unity of Shareholders and the Myth of Investor Short-Termism

Abstract:     
The separation of ownership and control publicized by Berle and Means in 1932 persists today. Domination of public companies by self-serving and ineffective executives costs America billions of dollars every year and contributed to the current economic meltdown. Repeated efforts to solve this problem--including the Sarbanes-Oxley Act, expanded disclosure duties, and more stringent requirements for director independence--have had little benefit and have sometimes made matters worse. The flaws in our corporate governance system are a growing problem for America’s economy as disillusioned investors increasingly place their capital in other countries.

Nonetheless, proposals for greater shareholder power have encountered criticisms: various shareholders have conflicting goals; shareholders favor a short-term perspective at the expense of the long-term health of companies; and shareholders lack the knowledge needed to play a positive leading role in corporate governance.

Keywords: director primacy model of corporate governance, CEO domination, shareholder primacy, board of independent directors, shareholder control, investor voice, (inter)shareholder conflicts, investor behavior, investor protection

JEL Classifications: D21, K22, L2, L21, L22

Working Paper Series