Research Handbook on the Economics of Corporate Law
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Research Handbook on the Economics of Corporate Law

Edited by Claire A. Hill and Brett H. McDonnell

Comprising essays specially commissioned for the volume, leading scholars who have shaped the field of corporate law and governance explore and critique developments in this vibrant and expanding area and offer possible directions for future research.
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Chapter 11: ‘Low-Cost’ Shareholder Activism: A Review of the Evidence

Fabrizio Ferri


Fabrizio Ferri 1. INTRODUCTION Over the last decade, a series of corporate governance scandals have given rise to an intense wave of shareholder activism. In this chapter, I focus on two particular tools of shareholder activism, namely shareholder proposals filed under Rule 14a-8 and shareholder votes on uncontested director elections. These tools share an appealing feature. Their cost is quite modest and they do not require a significant equity stake in the company – hence, they are referred to as ‘low-cost’ tools of activism. But their easy accessibility comes at a price. Both shareholder proposals and shareholder votes on director elections are essentially non-binding on the target firm, casting doubts on their effectiveness as a driver of change. Low-cost activism can be contrasted with ‘activism via large ownership’ where the power to influence the firm derives from the (costly) acquisition of a significant equity stake. This equity stake can then be used to press for changes in governance and strategy (through the threat of ‘exit’ or the threat of gaining control). This power may be quietly exerted behind the scenes (large shareholder activism) or in a more confrontational and public manner (e.g. proxy fights, hedge funds activism).1 In the case of low-cost activism, the power to influence the firm is predicated upon the ability of the activist to build consensus among a broad spectrum of shareholders – crystallized in a symbolic, non-binding vote – and the assumption that boards will respond because ‘symbols have consequences’ (Grundfest 1993), for example, in terms of...

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