Director's Dilemma: Can Strong Governance Tame 'Special Interest' Activists?
"New research reveals how corporate governance and labor dynamics influence the labor market for directors, shaping boardroom decisions and shareholder activism."
The rise of shareholder activism, particularly from labor union and public pension funds, has sparked debate about whether these activists are genuinely working in the best interest of all shareholders or pushing their own agendas. Critics worry that granting more power to these groups through low-cost tactics like proxy proposals could allow them to exert undue influence over firms for private gain.
On the other hand, some argue that corporate CEOs, who are often the loudest critics of labor union and public pension fund activism, may simply be trying to discredit these groups to protect themselves from increased monitoring by shareholders. Low-cost activism provides a crucial avenue for shareholders of large U.S. corporations to influence management, so policies designed to curb ‘special interest’ activism could inadvertently worsen managerial agency problems.
For example, consider proposed legislation in Congress that would dramatically increase the ownership stake required for sponsoring shareholder proposals. While this might deter activists with ulterior motives, it could also stifle valuable input from other shareholders. This article explores whether existing corporate governance mechanisms can selectively address the concerns raised by special interest activists without undermining the rights of all shareholders.
Decoding 'Special Interests': When Stakeholders and Shareholders Collide
To understand the impact of shareholder activism, it’s crucial to differentiate between the types of interests at play. This research focuses on instances where shareholder activists have potential conflicts of interest, specifically when labor union pension funds (LUPFs) sponsor shareholder proposals at firms where they also represent workers under collective bargaining agreements. These are classified as 'conflicted activists.'
- The Conflicted Activist: Labor union pension funds targeting firms where they also represent workers.
- The Non-Conflicted Activist: LUPFs targeting non-union firms and public pension funds.
- The Shareholder Perspective: Prioritizing returns and long-term firm value.
- The Stakeholder Perspective: Prioritizing worker benefits and job security.
Striking a Balance: Governance in the Age of Activism
As boards and shareholders vie for influence, it’s easy for each side to discredit the other. However, research shows that an existing governance mechanism—the labor market for directors—can selectively mitigate the potential negative influence of conflicted activists. Directors who cave to pressure from these activists and offer union concessions face significant losses in directorships, while those who resist are not penalized. This suggests that concerns over empowering shareholders may be overblown and that clawing back shareholder power could worsen governance, especially in poorly governed firms.