Essays in Honour of Keith Cowling
Edited by Michael Waterson
Chapter 10: Incentives to Corporate Governance Activism
Dennis Leech INTRODUCTION Much recent discussion of policies to improve standards of corporate governance has increasingly focused on the role of shareholders: as the legal owners of a company they can be said to have the ultimate responsibility for all aspects of its conduct and performance and therefore are the group to whom management is accountable. This contrasts with the more traditional view in which investors are not supposed to become involved in the direction of their portfolio companies – simply buying or selling their shares according to whether they do well or badly – and relying on the market for corporate control to ensure high standards or performance through takeovers or threat of takeovers. As a form of market regulation this has been shown by many studies to be inadequate and there are strong arguments for the new approach based on corporate governance activism.1 At the same time, and on the other hand, there is considerable evidence that investors have yet fully to embrace their new responsibilities and discharge their associated duties,2 Shareholder activism3 or engagement derives from investors developing long-term face-to-face relationships with the companies in which they invest. Rather than their involvement being little more than that of anonymous speculators, trading their shares on the market, they become the owners with an interest in the company’s progress, a knowledge of its business and personnel and a commitment to its long-term success; at the same time they have the capacity to inﬂuence the direction of the company through...
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