Whose Corporation Is it Anyway? Myopic Gadflies and Institutional Share Ownership: Is Shareholder Activism a Short-sighted Solution?

Abstract The modern role of institutional shareholders and the phenomenon of shareholder activism are significant and steadily evolving. This chapter reviews several aspects of activism that are relevant to the motivation and role of corporate directors in a world in which corporations are increasingly viewed not only as a source of shareholder wealth but also of social duty. The two distinct types of activism—impact or social activism and performance activism—are considered, noting that their aims are frequently difficult or impossible for corporate managers to reconcile. The impact of shareholder activism on corporate performance is a complex empirical question. There is a litany of concerns associated with the rise of activist hedge funds including, among others, that corporations may be pushed to de-emphasize long term investments, including in research and development (R&D), that they may be incentivized to increase leverage significantly, and that they may be prompted to distribute corporate cash holdings especially in the form of share buy-backs rather than reinvest those earnings. Even as directors and officers of publicly traded corporations struggle to discern how to prioritize the interests of shareholders in seeking to fulfil their fiduciary duties, the interests of those shareholders—as represented by votes cast in person or in proxy—may themselves be an imperfect or even distorted reflection of the preferences of the human beings whose material interests ultimately stand to be affected by the financial performance of the company.