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

Jang-Sup Shin ()
Additional contact information
Jang-Sup Shin: National University of Singapore

No 77, Working Papers Series from Institute for New Economic Thinking

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.

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. (search for similar items in EconPapers)
JEL-codes: G18 G28 K22 L21 M10 N22 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2018-07
New Economics Papers: this item is included in nep-cdm, nep-his and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published

Downloads: (external link)
https://www.ineteconomics.org/uploads/papers/WP_77-Jang-Sup-Shin.pdf (application/pdf)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3226103 First version, 2018 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:77

DOI: 10.2139/ssrn.3226103

Access Statistics for this paper

More papers in Working Papers Series from Institute for New Economic Thinking Contact information at EDIRC.
Bibliographic data for series maintained by Pia Malaney ().