Corporations should serve shareholders’ interests – they “own” the firms, after all. But judging from a widespread explosion of executive pay and a decoupling of pay from performance, current governance practices instead give management too heavy a hand in steering the corporation. What should we do? Strengthen public laws and securities regulations, and even pursue litigation, to give shareholders a louder voice in corporate governance.
This type of argument is popular but incomplete.1Importantly, giving shareholders a stronger say in governing corporations offers no free lunch – doing so would also change the distributional pressures on corporate revenues and thus fundamentally alter other stakeholders’ incentives to act productively. Bond market participants, for example, may demand higher interest rates to compensate for the increased likelihood of corporations pursuing projects that favor equity over debt holders. And those who are asked to instead supply human capital, like...
KeywordsLarge Shareholder Ownership Concentration Hostile Takeover Golden Parachute Strong Shareholder
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