Shareholder Passivity Reexamined

This article argues that shareholder monitoring is possible: It’s an idea that hasn’t been tried, rather than an idea that has failed. I defer to a second article currently in draft the question of whether more monitoring by institutional shareholders is desirable. Will direct shareholder oversight, or indirect oversight through shareholder-nominated directors, improve corporate performance, prove counterproductive, or, perhaps, not matter much one way or the other? What are the benefits and risks in giving money managers – themselves imperfectly monitored agents – more power over corporate managers? If more shareholder voice is desirable, how much more and for what issues? Which of the many relevant rules ought to be loosened, which tightened, and by how much, in light of the various purposes – often unrelated to shareholder voting – that those rules serve? For all of these questions, the answers may well be different for different institutions.

This article proceeds as follows. Part II summarizes the views of the naysayers who invoke collective action problems to explain why shareholders will rarely do anything. Part III reviews the principal state and federal rules that affect, and mostly obstruct, shareholder activism. Part IV discusses recent developments in institutional stock ownership and voting behavior that make the passivity story obsolete. These developments include rapid growth in ownership by less-conflicted public pension funds and mutual funds, increasing shareholder activism with public funds as the most visible actors, and the formation of trade groups that can facilitate collective shareholder action.

Part V presents a theoretical model of the incentives of shareholder proponents that sheds light on shareholder incentives to remain passive, and the importance of scale economies in reducing those incentives. Part VI models the incentives of nonproponent shareholders to become informed or remain rationally apathetic. Part VII addresses the importance of agenda control in determining substantive outcomes. Part VIII examines the incentives of the major types of institutional investors, and the conflicts of interest that they face. Part IX is a conclusion.