Corporate Governance and Managerial Incompetence: Lessons from Kmart

104 Pages Posted: 24 Nov 1997

See all articles by D. Gordon Smith

D. Gordon Smith

Brigham Young University - J. Reuben Clark Law School


Modern corporate governance scholars often extol an activist role by institutional investors in directing corporate activity. Widely viewed as a solution to the "collective action" problems that inhibit such activism by individual investors, institutional investors are praised for adding value to corporations through their participation in the decision making process. The ouster of Joseph Antonini as Chief Executive Officer of Kmart Corporation in 1995 might be taken as a vindication of this view, because substantial evidence indicates that institutional investors played a crucial role in influencing Kmart's board of directors to remove him. In this Article, Professor Smith challenges this potential reading of the events at Kmart and poses the fundamental question of whether institutional investor activism designed to address perceived incompetence among corporate managers consistently adds value to corporations in which such activism is present. Professor Smith analyzes the effect of internal and external forces on managers, particularly on Antonini and Kmart's directors, and derives two fundamental lessons: (1) External constraints are ineffective in solving managerial incompetence; and (2) Investor activism will often be counterproductive because it destroys the value of centralized decision making.

JEL Classification: G34

Suggested Citation

Smith, D. Gordon, Corporate Governance and Managerial Incompetence: Lessons from Kmart. Available at SSRN: or

D. Gordon Smith (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

422 JRCB
Provo, UT 84602
United States
801.422.3233 (Phone)
801.422.0390 (Fax)

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