The Outside Investor: Citizen Shareholders & Corporate Alienation
53 Pages Posted: 3 Dec 2014 Last revised: 11 Dec 2014
Date Written: 2013
This Article explores the creation and conundrum of citizen shareholders - investors who enter the securities market primarily through employer-sponsored defined-contribution plans, invest in mutual or index funds, and are saving for long-term goals like retirement. Citizen shareholders are a consequence of a retirement revolution, and are the fastest growing group of investors.
Citizen shareholders are distinguishable from other shareholders on the grounds of choice, exit, and the number of intermediaries inserted into the investment chain in defined-contribution plans. They are largely missing from corporate policy and scholarship debates; few discussions have incorporated the growing reality that shareholder status has changed over the last several decades with how, why, and in what form individual investors enter the securities market. This group of investors, estimated to be nearly 75 million Americans, is alienated from traditional corporate governance mechanisms at both the operating company and the investment company levels. Citizen shareholders complicate corporate law assumptions about shareholder empowerment, exacerbate tensions between management and control, and undermine corporate regulatory solutions such as those advanced in Dodd Frank. Additionally, the disclosure-based regime required under federal securities and Employee Retirement Income Security Act ("ERISA") laws are incomplete, fractured, and not tailored to the needs of citizen shareholders, a group of investors that includes low-dollar and often unsophisticated investors. As a result, citizen shareholders are long-term investors locked in a market system that rewards short-term performance and facilitates exit over activism. Second, citizen shareholders exercise constrained control over their self-directed accounts with limited investment options, virtually no control over fee structures that erode retirement savings, and splintered and incomplete information about their investments and the fees charged to them. Recognizing that retirement investments play a crucial role for the individual and for society, this Article proposes both theoretical and practical approaches to better incorporate the interests of citizen shareholders into the markets.
Keywords: law, securities law, corporate law, corporate governance, shareholders, citizen shareholders, defined contribution, investors, mutual funds, index funds, securities, investment
JEL Classification: G39, G19, K22
Suggested Citation: Suggested Citation