Reflections on the Nature of the Public Corporation in an Era of Shareholder Activism and Shareholder Stewardship

Forthcoming, Understanding the Company: Corporate Governance and Theory (Barnali Choudhury and Martin Petrin eds., Cambridge University Press)

TLI Think! Paper 29/2016

King's College London Law School Research Paper No. 2016-24

31 Pages Posted: 14 May 2016 Last revised: 26 Jul 2016

See all articles by Dionysia Katelouzou

Dionysia Katelouzou

King's College London – The Dickson Poon School of Law; A Dickson Poon Transnational Law Institute

Date Written: May 12, 2016

Abstract

For the greater part of the twentieth century the role of shareholders within the public corporation has been conceptualized within the contractarian framework influenced by the neo-liberal emphasis on market efficiency. Within this framework the shareholders do not wish to be involved with the corporation’s management, nor do they gain any benefits from an active engagement, mainly because of the market efficacy to control managerial discretion and a series of legal and extra-legal obstacles to shareholders’ active involvement. Through most of the twentieth century, this contractarian orthodoxy of the rather passive role of shareholders also coincided with the practice. This paper argues that these contractarian assertions do not hold anymore in the face of the rise in the holdings and influence of institutional investors in recent years. In addition, the contractarian framework cannot provide suitable benchmarks for evaluating the current shareholder-centric policy reforms promoting the shareholder franchise and shareholder accountability. At the same time, the increasing “financialization” of the modern corporation and the role of activist shareholders in corporate law practices needs to be taken into account. This context can mark a paradigm shift for Anglo-American corporate law, from contractarianism and agency theory to what can be described as an “investor paradigm” for corporate law. Within this paradigm institutional investors are expected to act in a two-fold way: as a monitoring mechanism promoting shareholder value maximization and as an accountability mechanism protecting the interests of other shareholders and the economy as a whole through the promotion of shareholder stewardship.

Keywords: theory of the firm, contractarianism, institutional investors, shareholder activism, shareholder stewardship

JEL Classification: K20, K22, K29

Suggested Citation

Katelouzou, Dionysia, Reflections on the Nature of the Public Corporation in an Era of Shareholder Activism and Shareholder Stewardship (May 12, 2016). Forthcoming, Understanding the Company: Corporate Governance and Theory (Barnali Choudhury and Martin Petrin eds., Cambridge University Press); TLI Think! Paper 29/2016; King's College London Law School Research Paper No. 2016-24. Available at SSRN: https://ssrn.com/abstract=2779026

Dionysia Katelouzou (Contact Author)

King's College London – The Dickson Poon School of Law ( email )

Somerset House East Wing
Strand
London, WC2R 2LS
United Kingdom

A Dickson Poon Transnational Law Institute ( email )

London, England WC2R 2LS
United Kingdom

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