Saturday, September 1, 2018
Bernard Sharfman has an interesting post over at the Delaware Corporate and Commercial Litigation Blog discussing the agency costs generated by the dominance of institutional investors as shareholders of record of the voting stock of publicly traded companies. In part, he writes:
Agency costs are generated when an institutional investor acts based on its own preferences, not the preferences of those who provide it with the funds to purchase securities. That is, there is a divergence between the objective of shareholder wealth maximization, the default objective of those 100 million plus retail investors in the United States who invest in mutual funds either directly or through retirement accounts, or are the beneficiaries of public pension funds, and the preferences of institutional investors who manage those funds. The result is that these agency costs may significantly harm the efficiency of corporate governance and lead to lower returns for investors. . . .
Former Chancellor William T. Allen was prescient when he stated in the famous 1988 Delaware Chancery Court case of Blasius Industries, Inc. v. Atlas Corp., that “[i]t may be that we are now witnessing the emergence of new institutional voices and arrangements that will make the stockholder vote a less predictable affair than it has been.” However, it is doubtful that he was including in this “less predictable affair” language the additional uncertainty and, most importantly, the inefficiency created by the agency costs of agency capitalism. It is now up to corporate law to respond.
The post is worth a read.