Constraints on Shareholder Activism in the United States and Slovenia
20 Pages Posted: 10 Jul 2000
Date Written: May 15, 2000
Prepared for a conference and text on Slovenian corporate governance, this article examines the corporate governance role of the large institutional investors that dominate the stockownership of privatized Slovenian corporations. In contrast to the U.S. model in which ownership and control is separated, stockownership is widely dispersed, and shareholder power is diffuse, as famously described by Berle and Means, the privatization process resulted in highly concentrated ownership of Slovenian corporations. The question presented here is whether such concentration is desirable.
The article acknowledges that shareholder activism on the part of large institutional investors offers some economic benefits by potentially constraining agency costs, but contends that those benefits come at too high a cost. Two lines of argument are pursued. First, there is a substantial risk that large shareholders will use their control to self-deal or otherwise disadvantage minority shareholders. Experience teaches that the risk of self-dealing is especially significant in transition economies, such as Slovenia. Second, the U.S. model of separated ownership and control, dispersed stockownership, and diffuse shareholder control offers significant efficiency advantages. Neither shareholders nor any other constituency have the information or the incentives necessary to make sound decisions on either operational or policy questions. Overcoming the collective action problems that prevent meaningful shareholder involvement would be difficult and costly. Accordingly, shareholders will prefer to irrevocably delegate decisionmaking authority to some smaller group; namely, the board of directors. Given the significant virtues of discretion, preservation of managerial discretion should always be the null hypothesis. The separation of ownership and control mandated by U.S. corporate law has precisely that effect. The further constraints on shareholder activism provided by U.S. securities law, accordingly, likely have a strong efficiency justification.
The article then provides a doctrinal overview of those constraints. Four specific aspects of U.S. securities law are examined: (1) disclosure requirements pertaining to large holders; (2) shareholder voting and communication rules; (3) insider trading laws; and (4) short swing profits rules. The article concludes by summarizing the comparable provisions of Slovenian law, noting that Slovenian law in many respects parallels the U.S. model. Unfortunately, continued state ownership and the political influence of large holders cast doubt on whether Slovenia will muster the will to meaningfully constrain the power of its institutional investors.
JEL Classification: G30, K22, P30
Suggested Citation: Suggested Citation