When Words Speak Louder Without Actions

This paper studies communication and intervention as mechanisms of corporate governance. I develop a model in which a privately informed principal can intervene in the decisions of the agent if the latter disobeys her instructions. The main result shows that intervention can prompt disobedience because it tempts the agent to challenge the principal to back her words with actions. This result provides a novel argument as to why a commitment not to intervene (and therefore, relying solely on communication) can be optimal. In this respect, words do speak louder without actions. The model is applied to managerial leadership, corporate boards, private equity, and shareholder activism

Soft Shareholder Activism

This paper studies communications between investors and firms as a form of corporate governance. The main premise is that activist investors cannot force their ideas on companies; they must persuade the board or other shareholders that implementing these ideas is in the best interest of the firm. In this framework, I show that voice (launching a public campaign) and exit (selling shares) enhance the ability of activists to govern through communication. The analysis identifies the factors that contribute to successful dialogues between investors and firms. It also shows that public communications are likely to be ineffective, justifying the prevalence of behind-the-scenes communications

Advising Shareholders in Takeovers

This paper studies the advisory role of the board of directors in takeovers. I develop a model in which the takeover premium and the ability of the target board to resist the takeover are endogenous. The analysis relates the influence of the board on target shareholders and the reaction of the market to its recommendations to various characteristics of the acquirer and the target. I also show that the expected target shareholder value can decrease with the expertise of the board and it is maximized when the board is biased against the takeover. Generally, uninformative and ignored recommendations are not necessarily evidence that the target board has no influence on the outcome of the takeover. Perhaps surprisingly, under the optimal board structure, target shareholders ignore the recommendations of the board, which are never informative in equilibrium

Expertise, Structure, and Reputation of Corporate Boards

This paper studies the optimal structure of the board with an emphasis on the expertise of directors. The analysis provides three main results. First, the expertise of a value-maximizing board can harm shareholder value. Second, it is optimal to design a board whose members are biased against the manager, especially when their expertise is high. Third, directors\u27 desire to demonstrate expertise can shift power from the board to the manager on the expense of shareholders. The effect of these reputation concerns is amplified when the communication within the boardroom is transparent

Nonbinding Voting for Shareholder Proposals

Shareholder proposals are a common form of shareholder activism. Voting for shareholder proposals, however, is nonbinding since management has the authority to reject the proposal even if it received majority support from shareholders. We analyze whether nonbinding voting is an effective mechanism for conveying shareholder expectations. We show that, unlike binding voting, nonbinding voting generally fails to convey shareholder views when manager and shareholder interests are not aligned. Surprisingly, the presence of an activist investor who can discipline the manager may enhance the advisory role of nonbinding voting only if conflicts of interest between shareholders and the activist are substantial

The Labor Market for Directors and Externalities in Corporate Governance

This paper studies how directors\u27 reputational concerns affect board structure, corporate governance, and firm value. In our setting, directors affect their firms\u27 governance, and governance in turn affects firms\u27 demand for new directors. Whether the labor market rewards a shareholder-friendly or management-friendly reputation is determined in equilibrium and depends on aggregate governance. We show that directors\u27 desire to be invited to other boards creates strategic complementarity of corporate governance across firms. Directors\u27 reputational concerns amplify the governance system: strong systems become stronger and weak systems become weaker. We derive implications for multiple directorships, board size, transparency, and board independence

Agents of Inequality: Common Ownership and the Decline of the American Worker

The last forty years have seen two major economic trends: wages have stalled despite rising productivity, and institutional investors have replaced retail shareholders as the predominant owners of the U.S. equity markets. A few powerful institutional investors — dubbed common owners — now hold large stakes in most U.S. corporations. And in no coincidence, when U.S. workers acquired this new set of bosses, their wages stopped growing while shareholder returns increased. This Article explains how common owners shift wealth from labor to capital, thereby exacerbating income inequality. Powerful institutional investors pushing public corporations en masse to adopt strong corporate governance has an inherent, painful tradeoff. While strong governance can improve corporate efficiency by reducing management agency costs, it can also reduce social welfare by limiting investment and thus hiring. Common owners act as a wage cartel, pushing labor prices below their competitive level. Importantly, common owners transfer wealth from workers to shareholders not by actively pursuing anticompetitive measures but rather by allocating more control to shareholders — control that can then be exercised by other shareholders, such as hostile raiders and activist hedge funds. If policymakers wish to restore the equilibrium that existed before common ownership dominated the market, they should break up institutional investors by limiting their size

Agents of Inequality: Common Ownership and the Decline of the American Worker

The last forty years have seen two major economic trends: wages have stalled despite rising productivity, and institutional investors have replaced retail shareholders as the predominant owners of the U.S. equity markets. A few powerful institutional investors—dubbed common owners—now hold large stakes in most U.S. corporations. And in no coincidence, when U.S. workers acquired this new set of bosses, their wages stopped growing while shareholder returns increased. This Article explains how common owners shift wealth from labor to capital, thereby exacerbating income inequality. Powerful institutional investors pushing public corporations en masse to adopt strong corporate governance has an inherent, painful tradeoff. While strong governance can improve corporate efficiency by reducing management agency costs, it can also reduce social welfare by limiting investment and thus hiring. Common owners act as a wage cartel, pushing labor prices below their competitive level. Importantly, common owners transfer wealth from workers to shareholders not by actively pursuing anticompetitive measures but rather by allocating more control to shareholders—control that can then be exercised by other shareholders, such as hostile raiders and activist hedge funds. If policymakers wish to restore the equilibrium that existed before common ownership dominated the market, they should break up institutional investors by limiting their size

Corporate Control Activism

We identify a commitment problem that prevents bidders from unseating resisting and entrenched incumbent directors of target companies through proxy fights. We discuss potential remedies and argue that activist investors are more resilient to this commitment problem and can mitigate the resulting inefficiencies by putting such companies into play. This result holds even if bidders and activists have similar expertise and can use similar techniques to challenge the incumbents, and it is consistent with the evidence that most proxy fights are launched by activists, not by bidders. Building on this insight, we study the implications of activist interventions on the M&A market