2015, forthcoming, Maria Goranova and Lori Verstegen Ryan (Eds.), Palgrave-Macmillan
- Shareholder Empowerment: Introduction
Shareholder empowerment has spurred a heated debate whether empowered shareholders could cure corporate ills or would adversely affect corporate fortunes. The chapter reviews the developments in key corporate governance mechanisms, such as executive compensation, board of directors, monitoring by large shareholders, and the market for corporate control and influence. Following brief overview of the remaining chapters included in this book, the authors raise key questions for the debate on shareholder empowerment, shareholder primacy, and the unified corporate objective function. Critical fault lines for shareholder empowerment are discussed along the dimensions of: treatment of organizational stakeholders, proliferation of agency chains and the impact of intermediary ownership on overall agency costs, and the implications of shareholder empowerment for the global competitiveness of American corporations.
PART I. SHAREHOLDER EMPOWERMENT: PROMISES AND ILLUSIONS
- Combining Financial and Psychological Insights for a New Typology of Ownership
Existing typologies of ownership focus on how the heterogeneous interests of shareholders can be aggregated into similar motives and behaviors. However, all of these assume that ownership is purely financial and economically rational. We introduce elements of psychological ownership to our understanding of owners. In doing so, we provide a more comprehensive and behavioral view of ownership. The resulting typology can have significant implications for organizational theories. We highlight implications of these different ideal types of owners for shareholder monitoring, investment horizons, diversification, innovation and activism.
- Is Shareholder Empowerment a “Good Thing”?
In this chapter we ask, “is shareholder empowerment a good thing?” This question is important given the central role corporations play in society; and also our own responsibilities as investors and consumers. But, it is also too generalized, given different types of shareholders; the various sources of complexity and variation of business environments in different institutional settings; and the various perspectives such a question could be investigated from. We ground discussion of what is “good” using four normative perspectives: laissez faire, Utilitarianism, deontological ethics and virtue ethics. These can lead us to many answers. Given the absence of an absolute answer, we argue that a way ahead is productive dialogue among stakeholders and continuous reflexivity on one’s motives and position.
- Shareholder Democracy as a Misbegotten Metaphor
With the rise in corporate scandals and the dawning of the great recession, frustrated shareholders have sought greater power to influence the actions of the firms in which they own stock. This corporate governance reform movement, known as shareholder democracy, is well established in the United States and gaining ground throughout the word. We begin this chapter with the history of this shareholder democracy movement from WWII to the present. We look at how shareholder democracy has worked in practice, and then we explore shareholder democracy as a concept, comparing it to civic democracy. We conclude that shareholder democracy is neither a panacea nor a pariah, and we suggest that time spent on shareholder rights would be better spent focusing on board improvement.
- Agents without Principals Revisited
In this chapter we reconsider the role of agency theory in corporate governance from both conceptual and empirical perspectives, particularly in the wake of recent regulatory changes stemming from Dodd-Frank. We summarize some facets of governance that could be altered by increased shareholder participation in corporate governance. We argue that the principal/agent contract metaphor is inappropriately applied to shareholder/manager relationships and offer one explanation as to why agency theory-based empirical propositions are poorly supported. We discuss the recent SEC rule change facilitating shareholder nomination of directors, and theorize on the effects this change might have on corporate governance practices and on managerial opportunism and entrenchment.
- Boards and Shareholders: Bridging the Divide
In an environment where shareholders and other corporate constituents are flooded with information from new channels (e.g. Twitter, blogs, emails, listservs), shareholder activism is on the rise. Shareholder activists are most often asking firms to improve communication and provide transparency of corporate practices, suggesting that shareholders are increasingly able and willing to voice their discontent and demand corrections. In this chapter, we explore ways to answer these demands and further empower shareholders through fostering direct engagement with the board of directors, reducing the proxy voting conflicts of interest and issuing more integrated reporting on corporate strategy and policy.
A decade into the twenty-first century, the public corporation may have reached its twilight. The “shareholder value” movement has succeeded in turning managers into faithful servants of share price maximization, but it also brought other changes. Corporate ownership is no longer dispersed; the concentration of assets and employment have been in decline for three decades; and today’s largest corporations bear little resemblance to the companies analyzed by Berle and Means. Moreover, there are far fewer of them than there used to be: the United States had half as many listed corporations in 2010 as it did in 1997. In another generation, the Berle and Means corporation may be largely a memory, overtaken by new forms of organization and financing.
PART II. SHAREHOLDER DIVERSITY AND GLOBAL EMPOWERMENT
- Managerialism vs. Shareholderism: An Examination of Hedge Fund Activism
Based on their status as private investments, hedge funds are enabled to be highly effective activists. Their activism is about pressing – generally successfully – for a strategic change, such as CEO replacement, sale of a division of the firm itself, or stock buybacks, as the means to increase a targeted firm’s share price. Rather than hedge fund activism being largely about corporate influence, it may largely be about corporate control. As evidence, hedge funds use their investments in distressed companies to exercise control over the firms’ bankruptcy proceedings and control over the firms’ fate. Further, their empty and hidden voting can affect corporate merger activity. Last, much of the abnormal gains associated with hedge fund activism occur due to the funds’ forcing of corporate takeovers.
- Religious Organizations as Shareholders: Characteristics, Tendencies and Implications
Religious organizations are a highly active group of shareholders in responsible investment in the US. Drawing on previous literature and over 40 interviews with members of the Interfaith Center on Corporate Responsibility (ICCR), this chapter explores the identity and evolution of religious organizations in responsible investment. Using the shareholder salience framework, the power, legitimacy and urgency attributes of religious organizations are assessed. The findings show a growing preference for behind-the-scenes dialogue and the potential for religious organizations to become a trusted asset for companies. However, a recourse to power is maintained through the appearance of dedicated activism funds. The findings imply two key challenges for the shareholder empowerment debate: addressing resource constraints, and the development of suitable approaches to dealing with diverse shareholder interests.
10. Angel Investors: Firms’ Early Empowered Shareholders
Angel investors are a unique segment of firm owners as they invest early in entrepreneurial firms and accumulate a significant ownership stake in the venture. In addition to providing capital to the firms in which they decide to invest, angel investors can both influence the firm itself as well as subsequent investors. However, to date, much remains unknown about angel investors as their private nature has limited the amount of in-depth research that has been conducted. This paper explores how angel investors make their investment decisions, how they influence the firms in which they invest, and how they pave the way for later owners. We summarize extant research in each of these areas, address relevant theoretical implications, and propose future research directions.
11. Privatization and Principal-Principal Conflicts in Transition Economies
Although shareholder rights are essential for effective privatization processes, along with other formal institutions they are also weak in transition economies offering a new window to understand the new agency problems centered on principal-principal conflicts. In this chapter, we address principal-principal conflicts in transition economies and specifically explore the role of privatization on firm ownership structure and institutional development. We argue that the heterogeneity in terms of the methods and speed of privatization helps us understand the underlying conditions that contributed to the evolution of concentrated ownership over dispersed structure and also the differences in ownership identities and institutional development across transition economies.
12. Institutional Change and Ownership Patterns in Italy
Literature indicates that institutional changes in corporate governance systems can lead to a radical transformation of the ownership structure. Starting from this premise, in this chapter we explore the Italian case as the large increase of investors’ rights and the massive privatizations experienced in the last two decades did not seem to affect significantly the stability of the ownership structure of large listed companies. The chapter shows that while concentrated and family ownership remained relatively stable, the large privatization process and the increase in investors’ rights contributed respectively to decrease state ownership, the use of control enhancing mechanisms and the separation between ownership and control rights. The evidence collected shows that the study of ownership structures is still very intriguing and open to several interpretations.
13. Local Repairs in Light of Global Ideas: Ownership Structure and the Worldwide Diversity of Corporate Governance Codes
Corporate governance reforms have traditionally been studied from the opposing perspectives of global convergence and local persistence, but empirical support for each of these alternatives is mixed at best. Our study of such reforms in 52 nations around the world suggests an alternative conceptualization of the reform process: local repairs in light of global ideals. We find that the direction of governance change can be predicted from the ownership structure in a given country. Countries with dispersed ownership focus their reforms on internal governance mechanisms, whereas jurisdictions dominated by family firms focus on transparency. However, we find no relationship between countries dominated by State owned firms and a specific direction of governance change.