Two Stories About Shareholders

Abstract

Corporate law contains two contradictory stories about the role of shareholders. In one, the shareholders are a useful countervailing force against the self-interested behaviour of corporate agents. In the other, shareholders lack the motivation, information, and proper incentives to contribute to the good governance of business corporations. Both stories are true on occasion, but is one more true than the other? Currently, developments in corporate and securities law are predicated on the idea that shareholders are, generally, a positive force in corporate governance. This seems to be a corollary of agency cost theory, the dominant paradigm for understanding the relationships between corporate actors.

This article reviews the body of empirical research on the outcomes of the various forms of shareholder activism. Proposals, proxy campaigns, and takeovers represent the most impactful and costly forms of shareholder engagement with corporations. As it happens, the empirical evidence does tend to strongly support one of the two stories about the role of shareholders, but it is not the one currently dominating law reform efforts. If the character of shareholder interventions generally supports the story that shareholders lack the proper incentives and information to contribute to positive business outcomes, then much about the current regulatory scene needs to be re-evaluated.

Keywords: corporate law, corporate governance, shareholder, finance, capital markets, shareholder activism, shareholder proposals, takeovers

JEL Classification: K22, G30, G34