Abstract
Given the current enthusiasm for stakeholder engagement, triple bottom lines, and corporate social responsibility, Shareholder Empowerment provides a refreshing perspective on corporate governance. Although it is well established that minority shareholders of corporations from emerging economies suffer from inadequate protection, this volume reminds us that shareholders’ interests may not be best served by the current board-centric governance model of developed economies. The boards of public companies not only lack diversity but also seldom include a significant—i.e., empowered—shareholder. Goranova and Ryan define shareholder empowerment as a shift in the allocation of power from corporate officers and directors to shareholders, implemented directly via shareholders’ participation in corporate decision making and advisory votes, or indirectly via shareholders’ ability to hold corporate executives and boards accountable. From the scholarly debate documented in this volume, two contrasting views on shareholder empowerment emerge. Some see it as a solution to render managers and directors more accountable to shareholders; others argue that it intensifies the conflict among shareholders, compounding the cost of self-serving managers with that of self-serving shareholders.
In their introductory chapter, the editors provide an overview of corporate governance mechanisms aimed at increasing executive accountability to shareholders: contingent executive pay, independent boards of directors, monitoring by large shareholders, and the market for corporate control (mergers and acquisitions) and influence (activist hedge funds and other stakeholders), noting the equivocal results of studies of their respective efficacy. The volume is organized in two parts: chapters 2–7 offer a broad view of the debate on shareholder empowerment, treating shareholders as a monolithic group; chapters 8–13 disentangle the implications of diverse shareholders (hedge funds, religious organizations, and angel investors) and institutional environments (transition economies, Italy) for corporate governance.
Chapter 2 addresses the fundamental question of whether shareholders are owners. Investigating the financial and psychological dimensions of ownership, Sikavica and Hillman explore the implications for governance of four types of owners: stock renters, stock investors, share owners, and patron owners. The authors suggest that owners who have a sense of psychological ownership—share owners and patron owners—tend to distance themselves from purely financial conceptions of ownership and display beneficial behaviors such as stewardship, personal sacrifice, and the assumption of risk on behalf of the organization. A strong sense of psychological ownership can, conversely, produce less desirable behaviors such as resistance to change, mergers and acquisitions, or external sourcing initiatives.
In chapter 3, Morrell and Heracleous examine the question of under what conditions and for whom does shareholder empowerment create value? This shifts the debate to the philosophical level and involves reviewing competing approaches rooted in the neoliberal notion of laissez-faire, Mill’s utilitarianism, Kant’s deontological ethics, and Aristotelian virtue ethics. The authors argue that while shareholder empowerment may be a given under laissez-faire, whether it is desirable depends on questions of likely outcomes (utilitarian ethics); of intent, motive, and means (deontological ethics); and of whether the actions enabled by empowerment arise from moral character (virtue ethics)—to which there are no simple answers.
Buchholtz and Brown continue the philosophical discussion in chapter 4, exploring shareholder democracy both as a concept and in practice. As a worldwide movement dating back to the era after the Great Depression, it has sparked efforts to shift the balance of power from boards to shareholders. Whether shareholder empowerment creates value for the firm has not been empirically demonstrated, as is clear from their review of empirical work. The authors argue that the metaphor itself (“shareholder democracy”) is misplaced (insofar as it contrasts with plutocracy), insisting on the need to distinguish between representative democracy and direct democracy—the latter form being consistent with the shift of power from boards to shareholders.
Pursuing a similar line of investigation in chapter 5, Jones and Keevil discuss the mechanisms insulating corporate managers from shareholder empowerment: the director selection process, CEO duality, barriers to proxy fights, and tender offers. After reviewing empirical evidence of the efficacy of resources available to shareholders to counter this insulation—board independence, an equity ownership majority, and the market for corporate control—they conclude by questioning the principal–agent metaphor, pointing out that shareholders have played no meaningful role in the principal–agent contracting process.
In chapter 6, Burke and Clark present mechanisms for bridging the information gap between directors and shareholders, including direct shareholder engagement, proxy voting systems, and integrated reporting. This chapter is directly relevant for practitioners striving to improve boards’ accountability to a heterogeneous group of shareholders and constituents.
Concluding the first part, Davis dispels the myth of dispersed ownership that has prevailed since Berle and Means (1932) and documents the decline of public corporations in the United States, which in 2009 had half as many publicly traded domestic corporations as in 1997. Davis outlines evolving features of corporations in the U.S.: the concentration of corporate ownership through the growth of mutual funds; and the reduced concentration of assets and employment through increased modularity and outsourcing-based production systems (a process dubbed “Nikefication”), which has reduced their role as potential catalysts for social change.
Opening part 2, chapter 8 provides a well-balanced discussion of hedge fund activism covering the limited-partnership-based organization, the lightly regulated environment, their broad range of investment options, and the typical attributes of target firms. Reviewing empirical studies, Schneider found that hedge fund activism increased both the short- and long-term share price of targeted firms, although hedge funds earned no more than mutual funds on long-term equity investments due in part to less favorable changes in stock prices of non-targeted firms in the funds’ investment portfolio.
Shifting the analysis to a class of radically different investors, chapter 9 brings the perspective of religious organizations as responsible investors into the shareholder empowerment debate. Religious organizations have a long tradition of responsible investments, dating back 200 years to when Methodists and Quakers refused to invest in slaves or war. Today, religious organizations are the most active filers of social issue resolutions in the U.S. (25 percent of total resolutions filed) and develop separate engagement funds. In addition to formal mechanisms of power such as resolutions and funds, they have focused on building legitimacy by developing long-term, trusting relationships with companies and individuals. They often pool resources through coalitions to share knowledge, experience, time, and direct engagement costs.
To this point in the book, much of the focus is on established firms—notably publicly traded companies—that reflect the tension between managers and shareholders. In chapter 10, Berns and Schnatterly refocus the debate on entrepreneurial firms’ governance and the role of angel investors, defined as early-stage private equity investors. They take stock of what we know and do not know about angel investing—for example, more than half of such investments, driven by gut feel, passion, social connections, and trust, result in a loss for the investor. Angels’ contributions go beyond financial backing to include expertise, experience, personal networks, resource acquisition, and legitimacy. This increases the likelihood of finding additional funding such as venture capital, but VCs invest in only a fraction (5 percent) of angel-financed ventures. The authors call for more research on angel investors’ interactions with other (current and future) investors.
The remainder of the volume takes the reader through various institutional settings, starting with a fascinating exploration of privatization and principal–principal conflicts in transition economies. In chapter 11, Mutlu, Peng, and van Essen explore how such conflicts are affected by the institutional development of transition economies and the privatization process. Variance in the privatization experience across transition economies such as Russia, China, the Baltic States, and Eastern Europe explains heterogeneity in the restructuring of state-owned companies and in governance systems. Transition economies that have witnessed the uncontrolled allocation of shares to insiders or powerful interest groups have experienced expropriation by controlling owners as well as reduced entrepreneurial activity.
Turning to a developed economy, the authors of chapter 12 examine the evolution of ownership patterns along with corporate governance reforms in Italy. Zattoni and Cuomo find that regulatory efforts to change ownership structure have not wholly succeeded in disrupting the concentrated family-based ownership structure that characterizes two-thirds of listed companies; widely held companies accounted for only 3 percent of listed companies in 2007. Though the influence of controlling shareholders is somewhat lower and their controlling stakes more contestable than in the past thanks to regulatory changes, the efficacy of those changes has been somewhat offset by mechanisms such as cross-shareholdings and syndicate pacts, moving ownership from a model of single controlling owners to coalitions.
Moving across different institutional settings, Otten and van Essen provide an insightful and nuanced view on the convergence–divergence debate in chapter 13 by developing a “local repairs” perspective as a counterpoint to the “global ideals” by which most countries seek to make their equity markets broader, deeper, and more liquid, as well as more effective vehicles for private wealth accumulation to stimulate entrepreneurial activity. This chapter reflects the notion that countries tend to make local repairs to their corporate governance reforms instead of blindly adopting foreign models. Reformers from countries with dispersed ownership seek changes to their traditionally weaker internal governance systems. Policy makers in countries dominated by family firms or controlling shareholders focus on creating stronger informational regimes or giving more voice to minority shareholders, which amounts to pressing the system where it hurts the most. The chapter will prove inspiring for comparative scholars.
Ryan and Goranova are to be applauded for furthering the discussion of shareholder empowerment and engaging management scholars in a debate that has been dominated by their finance and legal counterparts. Multiple audiences will benefit from the contributions collected here. Practitioners will find relevant tools and typologies in chapters 1, 2, and 6. Governance scholars will find useful reviews of studies and theoretical thoughts in chapters 3, 4, 5, and 7, as well as the treatment of specific shareholder categories in chapters 8, 9, and 10. Comparative scholars will gain insight from navigating through various institutional landscapes in the last three chapters. I was particularly inspired by the second part of the volume, which covers less familiar, more exotic territories of corporate governance.