Weighing shareholder democracy’s benefits and costs

Firms with strong corporate governance are like democracies, according to Nickolay Gantchev, a finance professor in SMU’s Cox School of Business.
Through their proposals and votes, shareholders can determine the broad direction of a company. In new research, Nickolay Gantchev of SMU Cox and Mariassunta Giannetti study the effectiveness of this low-cost form of shareholder activism. As in a democracy, informed shareholders, as voters, can better vet good or bad proposals.
In exploring this form of shareholder governance, Gantchev goes beyond his recognized expertise in hedge fund activism. Hedge fund activism has been found to improve governance and firm performance, but it is costly. Shareholder activism by proposals is a less costly form of external corporate governance but has been shown to have mixed effectiveness. Shareholders can put forward proposals regarding any governance topic, such as demanding more finance experts to serve on a firm’s board.
Read more at SMU Cox.