CLS Blue Sky Blog

Finding Value in Shareholder Activism

The following comes to us from Bernard S. Sharfman, Visiting Assistant Professor of Law at Case Western Reserve University School of Law.

In this era of shareholder activism, there are still many attorneys and academics who believe that the traditional authority model of corporate governance (the “traditional model”) leads to optimal corporate decision-making and shareholder wealth maximization for large organizations.  This model favors the views of management over those of outside shareholders like institutional investors.  In the words of Professor Stephen Bainbridge, it is an approach to corporate governance where the “preservation of managerial discretion should always be the null hypothesis.”

However, even a strong proponent of the traditional model does not believe that corporate boards and executive management should act without some outside accountability.  Therefore, it would be fruitless to ignore numerous and repeated empirical studies that create a strong inference that hedge funds, and other shareholder activists, help maximize wealth when they invest large amounts of money in the equity of a public company and then advocate for certain types of corporate changes.   Professor Brian Cheffins and John Armour refer to this activity as “offensive shareholder activism”.

This inference does not detract from the traditional model but enhances it by identifying a legitimate tool of accountability that helps to increase shareholder value in some cases. This is exactly how Professor Paul Rose and I interpreted the meaning of these empirical studies in our recent article, “Shareholder Activism as a Corrective Mechanism in Corporate Governance.”

According to renowned economist Kenneth Arrow, “others in the organization may have access to superior information on at least some matters.” Therefore, it is legitimate to criticize centralized authority from time to time and acknowledge and accept the value provided by the “corrective mechanism.” In this case, the value provided by offensive shareholder activism.

In sum, it may be more productive for those who believe in the traditional model to move away from attacking the value of offensive shareholder activism and instead focus on attacking those who opportunistically or inefficiently participate in other types of shareholder activism.

The full article is available here.

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