Thursday, September 21, 2023

Many of the central discussions in corporate governance, including those regarding proxy contests, shareholder proposals, and other activism or stewardship, can be understood as a single question: Is there under-initiation of corporate changes that investors would collectively prefer? This Article sheds light on this question in three ways. First, the Article proposes a theory of investor initiation, which explains the hypothesis that there is under-initiation of collectively-preferred corporate change by investors. Even though investors collectively prefer that certain corporate changes take place, the costs to any individual investor from initiating such changes through high-cost proxy contests, or even low-cost shareholder proposals, would outweigh the benefits to that investor. Second, the Article puts forward a concrete, tractable, and readily implementable proposal that would eliminate any under-initiation by investors. If the problem is indeed that costs to an initiator exceed the benefits, the solution follows clearly: “Initiation payments” to investors that initiate corporate changes, contingent on the approval of the change by investors or managers, sufficient to increase the benefits to investors that initiate successful changes above their costs. Third, the Article explains how the only requirement necessary for initiation payments to be implemented is that institutional investors support them. This means that whether initiation payments are actually implemented is effectively a test of whether institutional investors believe there is under-initiation and whether they have incentives to rectify it. Observing whether institutional investors support initiation payments will thus shed light not only on whether there is under-initiation, but also on the ongoing debate regarding the incentives of investment managers.


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