For those who have followed
the shareholder activism debate between Harvard Professor Lucian Bebchuk
(see a recent op-ed
piece here), corporate lawyer Martin Lipton from Wachtell, Professor
Stephen Bainbridge of UCLA (see here for
example) and others, a new article provides some additional data
points. In their article,
Professors Paul Rose of Ohio State and Bernard Sharfman of Case Western use the
work of Kenneth Arrow as a basis to discuss offensive shareholder activism. The
abstract is below:
Under an Arrowian
framework, centralized authority and management provides for optimal decision
making in large organizations. However, Arrow also recognized that other
elements within the organization, outside the central authority, occasionally
may have superior information or decision making skills. In such cases, such
elements may act as a corrective mechanism within the organization. In the
context of public companies, this article finds that such a corrective
mechanism comes in the form of hedge fund activism, or more accurately,
offensive shareholder activism.
Offensive shareholder activism exists in the market for corporate influence,
not control. Consistent with a theoretical framework where the value of
centralized authority must be protected and a legal framework in which
fiduciary responsibility rests with the board, authority is not shifted to
influential but unaccountable shareholders. Governance entrepreneurs in the
market for corporate influence must first identify those instances in which
authority-sharing may result in value-enhancing policy decisions, and then
persuade the board and/or other shareholders of the wisdom of their policies so
that they will be permitted to share the authority necessary for the policies
to be implemented. Thus, boards often reward offensive shareholder activists
that prove to have superior information and/or strategies by at least
temporarily sharing authority with the activists by either providing them seats
in the board or simply allowing them to directly influence corporate policy.
This article thus reframes the ongoing debate on shareholder activism by
showing how offensive shareholder activism can co-exist with—and indeed, is
supported by—Arrow’s theory of management centralization which explains and
undergirds the traditional authority model of corporate law and governance.
Empirical studies have repeatedly shown that certain types of offensive
shareholder activism lead to an increase in shareholder wealth. However, the
results of empirical studies must be interpreted carefully so as not to
overstate their informational value. Empirical research supports the argument
that certain types of offensive shareholder activism have value, but it does
not provide conclusive proof that they have value at any specific company at
any specific time. Instead, the use of empirical evidence supporting offensive
shareholder activism should be understood as providing proof that offensive
shareholder activists may on occasion successfully rebut the presumption of the
superiority of existing managerial strategies.