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http://ssrn.com/abstract=796227
 
 

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Shareholder Activism and Institutional Investors


Stephen M. Bainbridge


University of California, Los Angeles (UCLA) - School of Law

September 2005

UCLA School of Law, Law-Econ Research Paper No. 05-20

Abstract:     
Recent years have seen a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The logic of these proposals is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm's performance and to make changes in the board's composition when performance lagged.

In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.

Number of Pages in PDF File: 19

Keywords: corporate governance, corporation law, shareholders, voting rights, institutional investors

JEL Classification: K22

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Date posted: September 7, 2005  

Suggested Citation

Bainbridge, Stephen M., Shareholder Activism and Institutional Investors (September 2005). UCLA School of Law, Law-Econ Research Paper No. 05-20. Available at SSRN: http://ssrn.com/abstract=796227 or http://dx.doi.org/10.2139/ssrn.796227

Contact Information

Stephen Mark Bainbridge (Contact Author)
University of California, Los Angeles (UCLA) - School of Law ( email )
385 Charles E. Young Dr. East
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United States
310-206-1599 (Phone)
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HOME PAGE: http://www.professorbainbridge.com
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