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The Subversion of Shareholder Democracy and the Rise of Hedge-Fund Activism

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  • Jang-Sup Shin

    (National University of Singapore)

Abstract

This paper explains how hedge-fund activists are exerting power over corporate resource allocation far in excess of the actual voting power of their shareholdings. The power of these `minority-shareholding corporate raiders` derives from misguided regulatory `reforms` carried out in the 1980s and 1990s in the name of `shareholder democracy`. Sanctioned and overseen by the Department of Labor (DOL) and the Securities and Exchange Commission (SEC), these reforms include the introduction of compulsory voting by institutional investors and proxy-voting rule changes that greatly facilitated hedge-fund activists` aggregation of the proxy votes of institutional investors. In addition, the introduction of the 1996 National Securities Markets Improvement Act (NSMIA) that allowed hedge funds to draw funds from institutional investors effectively with no limit also played an important role in the rise of hedge-fund activism. The paper concludes with policy proposals to rebalance value creation and value extraction by rebuilding the engagement and proxy voting system including (1) making it mandatory for shareholders to submit justifications in shareholder proposals on value creation or capital formation of corporations concerned; (2) removing voting as a fiduciary duty of institutional investors; (3) introducing differentiated voting rights that favor long-term shareholders; and (4) making it mandatory for both shareholders and management to reveal to the public what they discussed in engagement sessions.

Suggested Citation

  • Jang-Sup Shin, 2018. "The Subversion of Shareholder Democracy and the Rise of Hedge-Fund Activism," Working Papers Series 77, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:77
    DOI: 10.2139/ssrn.3226103
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Labor Shareholder democracy; Hedge-fund activism; Compulsory voting of institutional investors; Engagement and proxy rules; Proxy advisory firms; New Deal financial regulations; Sustainable value creation and value extraction.;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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