The Evolution of Shareholder Activism in the United States

In the early 1900s, American financial institutions were active participants in U.S. corporate governance. But during the next few decades, laws were passed that limited the power of financial intermediaries and prevented them from having an active role in corporate governance. The consequence of such laws and regulations was a progressive widening of the gap between ownership and control in large U.S. public companies. In 1942, SEC rule changes allowed shareholders to submit proposals for inclusion on corporate ballots. Since that time, shareholder activists have used the proxy process, along with other approaches, to pressure corporate boards and managers for change. In particular, the involvement of large institutional shareholders increased dramatically in the mid-1980s with the advent of public pension fund activism. Although the aim of most shareholder activism is to increase corporate values, the empirical evidence on the effects of such activism is at best mixed. Studies have reported positive short-term market reactions to announcements of certain kinds of activism, as well as value-increasing changes in corporate investment and financing decisions in response to private shareholder activism. However, there is little evidence of improvement in the long-term operating or stock market performance of the targeted companies. The recent increase in hedge fund activism appears to be associated with dramatic corporate changes and increases in share values. But the research in this area, although suggestive, is still somewhat preliminary and the longer-term effects of such activism will become clear only with time.