Agreement in Principle: A Compromise for Activist Shareholders from the UK Stewardship Code
Equity ownership in the United States and Europe is now highly concentrated in the hands of institutional investors, which gives rise to new problems of agency and corporate governance. These large investment intermediaries, such as mutual funds, specialize in maximizing beneficial owner value based on short-term performance benchmarks but lack the expertise and incentive to actively engage corporate boards on business strategy and governance matters. Instead, institutional investors are “rationally reticent,” meaning that they are willing to respond to governance proposals but not to propose them. Activist shareholders may offer an endogenous solution to address “latent activism” in institutional intermediaries and, ultimately, spur the effective monitoring of corporate boards. Activist shareholders, such as hedge funds, often achieve their business strategy and governance objectives by obtaining toehold positions in a corporation and soliciting support from institutional investors for their governance proposals. However, this solution is in jeopardy. Recently proposed regulatory changes in the United States track adopted legislation in the United Kingdom and Europe, and pose a threat to domestic activist shareholder success. This Note argues that incorporation of the UK Stewardship Code’s Principle 5 into the U.S. regulatory scheme may help alleviate the potentially chilling effects of the proposed rule-making on shareholder activists.