What Is Shareholder-Driven Corporate Governance?

This introductory chapter provides an overview of shareholder-driven corporate governance (SCG). SCG is a broad-based analytical concept that refers to the trend in corporate governance whereby shareholders participate in the governance reforms that public corporations adopt. Participation is defined broadly: it does not merely refer to increases in shareholders’ direct voting power; rather, it encompasses reforms that reduce opportunities for managerial entrenchment (boards and management alike) that generally increase the ability of shareholders to become involved in the day-to-day operation of the business. After setting forth the framework for analyzing shareholders’ role in today’s corporation, the chapter outlines the distinctive features of SCG, such as majority voting and proxy access. It also looks at differences in governance regimes across a number of countries and the impact of these differences on shareholders’ interests.

Activism, Wolf Packs, and SCG

This chapter explores shareholder activism carried out by “wolf packs.” Just as a blockholder with a sizable percentage of the corporation’s equity can significantly influence a firm’s governance, a wolf pack is a group of investors that attacks a target corporation in tandem under the leadership of a single, sophisticated activist, collectively acquiring enough equity to form a de facto block. The chapter then looks at the formation of wolf packs and conflicting theories that attempt to explain their behavior. It also focuses on their ability to acquire considerable power in a corporation, considering the challenges that presents to legal regimes, particularly in proxy contests and other change-of-control transactions. Changes of control, especially in cases of hostile takeovers, are controversial because they often necessitate a consideration of strategic objectives different from those of the target company’s board prior to the takeover.

Policy Choices and Conclusions

This concluding chapter argues that the nexus-of-contract model continues to bear importance in analyses of the corporation but that this model only explains part of the story. While the corporation is certainly a hub of contractual relationships, it remains subject to the increasingly important phenomenon of shareholder-driven corporate governance (SCG). The chapter examines policy choices in a regime that allows and facilitates SCG. SCG is a trend to be observed, but it is also an ideal to be achieved. Achieving this ideal calls for greater shareholder participation in corporate governance, a weighty objective that can be reached by providing shareholders with the ability to nominate directors, imposing protections in dual-class share companies, and imposing restrictions on executive compensation, for example.

SCG and Corporate Law Theory

This chapter discusses the existing conception of the public corporation and questions whether any of these ideas appropriately account for the rise of shareholder-driven corporate governance (SCG). In particular, it considers the contractarian model of the corporation as well as the agency theory, which explains the division of ownership and control as an agency relationship that necessarily produces agency costs. The chapter also addresses a newer and contrasting idea called principal cost theory, which argues that principal (or shareholder) control also comes at a cost, resulting from shareholders’ lack of expertise and the potential for conflicts of interest among them. This theory offers an important counterpoint to the normative arguments for SCG because it emphasizes the potential failings of shareholders and challenges the supposition that they are necessarily well positioned to play an active role in governance.

Multiple-Voting Share Structures

This chapter focuses on multiple-voting share (MVS) structures, which allow insiders to control governance, thus building the potential for conflicts of interest into the corporation’s own rules. When a firm goes public using an MVS structure, it issues two or more classes of shares, one to the public and another to insiders. The shares that are issued publicly have limited voting rights, while the class issued to insiders carries more voting rights, allowing the insiders to control the company without owning a majority of shares of the firm. This corporate structure disrupts the one-to-one ratio of votes to shares that, in non-MVS firms, gives minority shareholders a voice in the boardroom proportionate to their investment. By allowing issuers to accept public capital without relinquishing control of the corporation, MVS structures raise important questions relating to the rights of investors.

Shareholders and Takeover Bids: Revisiting the Poison Pill

This chapter assesses change-of-control transactions and the use of the defensive tactic known as the poison pill, a governance tool that often puts boards, rather than shareholders, in charge of a corporation’s response to a takeover. Much as in the MVS context, this separation of ownership of the corporation from its control may invite conflicts of interest, here between boards and shareholders. The chapter then asks how shareholder-driven corporate governance (SCG) can and should inform regulation of this defensive tactic. It also considers management entrenchment theory and the shareholder-primacy norm in the context of changes of control. Both the normative and the positive aspects of SCG make it necessary to revisit the current legal balance between the interests of directors and the interests of target shareholders in takeovers.

Shareholder Democracy and Shareholder Activism

This chapter examines shareholder-driven corporate governance (SCG) through the twin concepts of shareholder democracy and shareholder activism. Taken together, these concepts are the vehicle through which SCG takes effect in practice. The term activist investor describes an institutional investor that seeks value-enhancing changes in the leadership, governance, capital structure, or strategy and operations of a corporation in which it is invested. There are two basic types of activism: offensive activism, in which a hedge fund takes over a poorly performing firm and then reforms it to enhance its performance; and defensive activism, in which the activist institution takes on an advocacy role when it is unhappy with a corporation of which it already holds a significant block. Meanwhile, shareholder democracy refers to the ability of shareholders to influence the corporation through their votes. It is an important concept in corporate law, one that underpins the legitimacy of shareholder activism.