Sunday, March 8, 2009
The Legitimate Rights of Public Shareholders, by Lawrence E. Mitchell, George Washington University - Law School, was recently posted on SSRN. Here is the abstract:
In recent years there has been significant ongoing academic debate over the expansion of public shareholders' participation rights in corporate governance. The debate has accompanied a dramatic increase in institutional shareholder and hedge fund activism attempting to influence the conduct of corporate affairs.
The legitimacy of shareholder participation rights depends upon the actual role public shareholders play in contributing to the corporation's function of providing goods and services and, ultimately, to economic growth and social welfare. Nobody in the debate has stopped to examine this question. This paper presents original empirical evidence that demonstrates that public shareholders do not, on net, contribute capital to finance industrial production, and in fact are net consumers of corporate equity. Moreover, their investment incentives significantly distort the behavior of corporate managers who place strong emphasis on stock price at the expense of long-term business health, a fact that has played some role in the current global financial debacle. The logical conclusion is that public shareholders' rights should, ideally, be eliminated, and certainly not expanded or enhanced.