Less is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance

Abstract

Institutional investors have increasingly engaged in corporate governance activities, introducing proxy proposals and negotiating with management, with a goal of improving corporate performance. As shareholder activism has increased, financial economists have sought to measure its effect on performance. This Article reviews the corporate finance literature on institutional investors' activities in corporate governance and uses the findings of the empirical literature to inform normative recommendations for the proxy process. In brief there is an apparent paradox: notwithstanding the development of shareholder activism and commentators' generally positive assessments of it, the empirical research indicates that such activism has little or no effect on targeted firms'performance. This implies that activist institutions ought to reassess their agendas, in order to use their resources more effectively. The Article takes a two-pronged approach to furthering this aim. First, it suggests a mechanism of internal control, whereby funds would engage in periodic review of their shareholder-activism programs to identify the most fruitful governance objectives. Second, it seeks ways to provide incentives to undertake such internal reevaluations, advocating elimination or significant reduction of the subsidy of proposal sponsorship under the SEC rules unless a proposal achieves substantial voting support orpermittingfirms' shareholders to choose what level of subsidy they wish to provide to proposal sponsors. The estimated savings from eliminating the subsidy for proposals that fail to receive at least 40% of the votes ranges from $293 million to $1.9 billion