What Good Are Shareholders?

Executives complain, with justification, that meddling and second-guessing from shareholders are making it ever harder for them to do their jobs effectively. Shareholders complain, with justification, of executives who pocket staggering paychecks while delivering mediocre results. Boards are stuck in the middle--and under increasing pressure to act as watchdogs and disciplinarians despite evidence that they're more effective as friendly advisers. Over many years shareholders have gained power but been frustrated by the results. Could the problem lie with them? Perhaps they aren't really suited to being corporate bosses. Their role, write the authors, has been to provide money, information, and discipline. But established corporations tend to finance investments out of retained earnings or borrowed money. Furthermore, high-frequency traders now account for as much as 70% of daily volume on the NYSE. As for information, shareholders communicate through stock prices--but human nature dictates that we pay more attention to simple recent signals than to complex long-run trends. And shareholders have only two major disciplinary tools at their disposal: selling their shares and casting their votes. But institutional investors, which own the lion's share of stock and have widely diversified portfolios, find it difficult to focus on the governance and performance of any one company. Fixing corporate governance, the authors conclude, must be about finding roles for other actors in the corporate equation who can assume some of the burden of providing money, information, and especially discipline.

• Stock markets
• Fixed income securities
• Corporate governance
• Executive compensation
• Shareholder relations