The Rise of Agency Capitalism and the Role of Shareholder Activists in Making It Work

• Date: 01 March 2019
• DOI: http://doi.org/10.1111/jacf.12327
• Author: Jeffrey N. Gordon,Ronald J. Gilson
• Published date: 01 March 2019

IN THIS ISSUE:

Agency

Capitalism

8e Rise of Agency Capitalism and the Role of Shareholder Activists

in Making It Work

Ronald J. Gilson, Columbia and Stanford Law Schools, and

Jeffrey N. Gordon, Columbia Law School

23 e Eect of Shareholder Approval of Equity Issuances

Around the World

Clifford G. Holderness, Boston College

42 Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

e Case of the United Kingdom

Marco Becht, Université libre de Bruxelles, CEPR, and ECGI; Andrea Polo, Luiss University,

Universitat Pompeu Fabra, EIEF, Barcelona GSE, CEPR and ECGI; and Stefano Rossi, Bocconi

University, CEPR, and ECGI

62 e Early Returns to International Hedge Fund Activism: 2000-2010

Marco Becht, Université libre de Bruxelles, CEPR, and ECG; Julian Franks, London Business

School, CEPR, and ECGI; Jeremy Grant, Berenberg Bank; and Hannes Wagner, Bocconi University,

ECGI, and IGIER

81 How Has Takeover Competition Changed Over Time?

Tingting Liu, Iowa State University, and Harold Mulherin, University of Georgia

95 Do Large Blockholders Reduce Risk?

David Newton and Imants Paeglis, Concordia University

113 Estimating the Equity Risk Premium and Expected Equity Rates

of Return: e Case of Canada

Laurence Booth, University of Toronto

126 Save the Buyback, Save Jobs

Greg Milano and Michael Chew, Fortuna Advisors

VOLUME 31

NUMBER 1

WINTER 2019

APPLIED

CORPORATE FINANCE

Journal of

8Journal of Applied Corporate Finance • Volume 31 Number 1 Winter 2019

T

e now-eclipsed regime of dispersed ownership was often

identied as the era of “managerial capitalism,” one that Mark

Roe characterized as pitting “strong managers” against “weak

owners.”¹ e successor to this era might be called “agency

capitalism,” a term we dened in a Columbia Law Review arti-

cle several years ago.² Agency capitalism is an apt name for a

capital-market-driven ownership structure in which record-

holding “agents” hold equity ownership of a large share of the

economic base on behalf of benecial owners.

e benets of this transformation of ownership, as we

argue below, have been considerable, chiey in providing a

mechanism for low cost-diversication for retirement savers.

But these changes have also given rise to a particular sort of

agency cost, what we dubbed “the agency costs of agency

capitalism.” Such costs arise from the natural tendency of insti-

*This article summarizes the argument of, and draws heavily on, our earlier published

articles, Ronald J. Gilson and Jeffrey N. Gordon, “The Agency Costs of Agency Capital-

ism: Activist Investors and the Revaluation of Governance Rights,” 113 Columbia Law

Review 863, 916 (2013); and “Agency Capitalism: Further Implications of Equity Inter-

mediation,” in Research Handbook on Shareholder Power (J. Hill and R. Thomas eds.,

2015).

1 Mark Roe, Strong Managers and Weak Owners (Princeton University Press

1994).

2 As cited in the opening footnote.

tutional intermediaries to pursue their own goals even when

those goals are in tension with the goals of the ultimate bene-

ciaries. More specically, there is an important dierence—one

might even call it a “conict”—between the “business model”

of the agents and the interests of the benecial owners. Institu-

tional intermediaries compete and are rewarded on the basis of

“relative performance” metrics that give them little incentive

to monitor corporate performance vigorously and to under-

take shareholder activism that could address performance

shortfalls. e agency problem—or conict—stems from

the fact that although such actions by institutional investors

could improve the absolute performance of their portfolios,

the degree to which such portfolios are diversied eectively

ensures that the expenditure of time, money, and eort on

directly influencing individual companies is unlikely to

improve the institutions’ relative performance—that is, their

returns in comparison to those of the other large institutions

that compete with them in attracting investor assets. And as

a consequence, such large institutional investors are likely to

appear “rationally apathetic,” as many observers have described

their behavior, when it comes to disciplining underperforming

companies and other tasks of corporate governance.

by Ronald J. Gilson, Columbia and Stanford Law Schools, and Jeffrey N. Gordon, Columbia Law School*

he past 50 years have seen a fundamental change in the ownership of U.S. public

companies. During that time, equity ownership has shifted from dispersed individual

owners to concentrated institutional owners, specically investment intermediaries such as

pension funds, mutual funds, and bank trust departments. In light of the canonical account

in 1932 by Adolph Berle and Gardiner Means of “the separation of ownership control,” this

shift might be described as a “reconcentration” of ownership.” Institutional investors collec-

tively now own well over 70% of the stock of the typical public company; and in many of

these companies, the institutions that collectively own more than 50% of the company

would comfortably t around the boardroom table.

e Rise of Agency Capitalism and the Role of

Shareholder Activists in Making It Work