Take Action

Home | Faculty & Research Overview | Research

Research Details

Control of Corporate Decisions: Shareholders vs. Management, Review of Financial Studies

Abstract

Activist shareholders have lately been attempting to assert themselves in a struggle with management and regulators over control of corporate decisions. These efforts have met with mixed success. Meanwhile, shareholders have been pressing for changes in the rules governing access to the corporate proxy process, especially in regard to nominating directors. The key issue which these events have brought to light is whether, in fact, shareholders will be better off with enhanced control over corporate decisions. Proponents of increased shareholder participation argue that such participation is needed to counter the agency problems associated with management decisions. In this view, boards of directors do not exercise sufficient control over self-interested managers because management insiders typically hand-pick directors through their control of the proxy process. Opponents offer several arguments such as that shareholders lack the requisite knowledge and expertise to make effective decisions or that shareholders may have incentives to make value-reducing decisions. In this paper, we investigate what determines the optimality of shareholder control, taking account of some of the above arguments, both pro and con. Our main contribution is to use formal modeling to uncover some factors overlooked in these arguments. For example, we show that the claims that shareholders should not have control over important decisions because they lack sufficient information to make an informed decision or because they have a non-value-maximizing agenda are flawed. On the other hand, it has been argued that, since shareholders have the correct objective (value maximization) and can always delegate the decision to insiders when they believe insiders will make a better decision, shareholders should control all major decisions. We show that this argument is also flawed.

Type

Article

Author(s)

Milton Harris, Artur Raviv

Date Published

2010

Citations

Harris, Milton, and Artur Raviv. 2010. Control of Corporate Decisions: Shareholders vs. Management. Review of Financial Studies. 23(11): 4115-4147.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more