Article | Corporate Governance
The Giant Shadow of Corporate Gadflies
by Kobi Kastiel* and Yaron Nili†
From Vol. 94, No. 3
94 S. Cal. L. Rev. 569 (2021)
Keywords: Corporate Law, Shareholders, Corporate Social Responsibility
Modern-day shareholders influence corporate America more than ever before. From demanding greater accountability of executives, to lobbying for a variety of social and environmental policies, shareholders today have the power to alter how American companies are run. Amazingly, a small group of individual shareholders wields unprecedented power to set corporate agendas and stands at the epicenter of our contemporary corporate governance ecosystem. In fact, the power of these individuals, known as “corporate gadflies,” continues to rise.
Corporate gadflies present a puzzling reality. Although public corporations in the United States are increasingly owned by large institutional investors, much of their corporate governance agenda has been and is still dominated by a handful of individuals who own tiny slivers of most large companies. How does an economy with corporate equity in the trillions of dollars cede so much governance power to corporate gadflies? More importantly, should it? Surprisingly, scholars have paid little attention to the role of corporate gadflies in this ever-changing governance landscape.
This Article is the first to address the giant shadow that corporate gadflies cast on the corporate governance landscape in the United States. The Article makes three contributions to the literature. First, using a comprehensive dataset of all shareholder proposals submitted to the S&P 1500 companies from 2005 to 2018, it offers a detailed empirical account of both the growing power and influence that corporate gadflies wield over major corporate issues and of gadflies’ power to set governance agendas. Second, the Article uses the context of corporate gadflies to elucidate a key governance debate over the role of large institutional investors in corporate governance. Specifically, the Article underscores the potential concerns raised by the activity of corporate gadflies and questions the current deference of institutional investors to these gadflies regarding the submission of shareholder proposals. Finally, the Article proposes policy reforms aimed at reframing the current discourse on shareholder proposals and potentially sparking a new line of inquiry regarding the role of investors in corporate governance.
*. Assistant Professor of Law, Tel Aviv University; Research Fellow and Lecturer on Law, Harvard Law School Program on Corporate Governance.
†. Associate Professor of Law, University of Wisconsin Law School and Smith-Rowe Faculty Fellow in Business Law. For helpful comments and suggestions, the Authors would like to thank Albert Choi, Asaf Eckstein, Yuval Feldman, Jesse Fried, Eric Goodwin, Zohar Goshen, Assaf Hamdani, Sharon Hannes, Cathy Hwang, Rob Jackson, Adi Libson, Amir Licht, Ehud Kamar, Kate Litvak, Dorothy Lund, James McRitchie, Gideon Parchomovsky, Ed Rock, Sarath Sanga, Bernard Sharfman, Eric Talley and the participants of the Rethinking the Shareholder Franchise Conference at the University of Wisconsin, the 2020 National Business Law Scholars Conference, the 2020 Annual Meeting of the Israeli Private Law Association, the Faculty Lunch Seminar at Tel Aviv University, the law and economics and empirical studies workshops at Bar Ilan University, the Securities and Exchange Commission, the Missouri Law School Faculty Colloquium, the BYU Law 2020 Winter Deals Conference, the University of Florida 2020 Business Law Conference, and the Soshnick Colloquium on Law and Economics at Northwestern Pritzker School of Law. Maya Ashkenazi, Katie Gresham, Gabrielle Kiefer, James Kardatzke, Chris Kardatzke, Tom Shifter, Maayan Weisman, and Gretchen Winkel provided valuable research assistance.