Steve Bainbridge has a new paper out on SSRN called "Shareholder Activism and Institutional Investors."  Here is a nice summary of points from the abstract:

[I]nstitutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.

If you read the corporate law posts on Steve's blog, you are familiar with this argument. While I find many points of agreement with Steve, two things trouble me about his argument. First, he treats all forms of shareholder involvement as "activism." As a result, intervention on a particular issue (e.g., executive compensation) is the same as nominating director candidates. In my article on managerial incompetence, I suggest that we encourage participation by shareholders in matters of board composition, but discourage participation by shareholders in deciding particular policies of the corporation. Steve rightly recognizes that too much shareholder control over director elections gives shareholders effective control over particular policies, but that only reveals the need to callibrate shareholder power. It doesn't preclude the possibility of election reform.

Second, Steve assumes that historical patterns of shareholder activism -- with the most active shareholders being unions and state or local public employee pensions -- will remain constant after reforms. It is far from clear that this is true in a world where directors are required to obtain a majority vote, for example. (This particular initiative seems to me like a misguided reform, so take that as an illustration, not as an endorsement.)

Despite our disagreements, I recommend the paper. Among other things, it is refreshingly short.

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