Does activism pay off for shareholders? Shareholder democracy and is discontents.

Typically, shareholders are not sure whether boards act in their interest, or have been captured by management. They are also less well informed than boards about firm investment opportunities and operating conditions. We develop a model, consistent with these observations, in which discretionary compensation payments to managers might increase firm value or might simply enrich managers at the expense of shareholders. After observing the board’s compensation and investment policies, shareholders update the probability that the board is captured using Bayes rule. Shareholders are “outraged” if this updated probability is sufficiently large. Outrage is costly for the board. Shareholder democracy, by enabling outrage to constrain board actions, typically lowers firm value relative either to governance regimes that insulate boards from shareholder outrage, or regimes that ban discretionary compensation altogether.