Shareholder Passivity Reexamined

Abstract

This article assesses the extent to which the traditional passivity of American shareholders is a result of legal rules and conflicts of interest that discourage shareholder activism, or a result of collective action problems that discourage voting, proxy proposals, and other forms of shareholder activism. I develop a simple model of the decision of a large shareholder whether to vote or launch a proxy campaign. Large shareholders can have significant incentives to vote on an informed basis or launch proxy campaigns, especially for issues that are common across many companies and therefore involve economies of scale. However, they face significant legal impediments to owning large percentage stakes in companies or taking an activist role. These legal obstacles are reinforced by conflicts of interest that affect most major classes of institutional investors.