Reflections on the Nature of the Public Corporation in an Era of Shareholder Activism and Shareholder Stewardship

For the greater part of the twentieth century the role of shareholders within the public corporation has been conceptualized within the contractarian framework influenced by the neo-liberal emphasis on market efficiency. Within this framework the shareholders do not wish to be involved with the corporation's management, nor do they gain any benefits from an active engagement, mainly because of the market efficacy to control managerial discretion and a series of legal and extra-legal obstacles to shareholders' active involvement. Through most of the twentieth century, this contractarian orthodoxy of the rather passive role of shareholders also coincided with the practice. This paper argues that these contractarian assertions do not hold anymore in the face of the rise in the holdings and influence of institutional investors in recent years. In addition, the contractarian framework cannot provide suitable benchmarks for evaluating the current shareholder-centric policy reforms promoting the shareholder franchise and shareholder accountability. At the same time, the increasing “financialization” of the modern corporation and the role of activist shareholders in corporate law practices needs to be taken into account. This context can mark a paradigm shift for Anglo-American corporate law, from contractarianism and agency theory to what can be described as an “investor paradigm” for corporate law. Within this paradigm institutional investors are expected to act in a two-fold way: as a monitoring mechanism promoting shareholder value maximization and as an accountability mechanism protecting the interests of other shareholders and the economy as a whole through the promotion of shareholder stewardship