Can strong corporate governance selectively mitigate the negative influence of “special interest” shareholder activists? Evidence from the labor market for directors
Giving small shareholders a voice in corporate governance is crucial to limiting agency conflicts. However, shareholders do not always find their calls for action desirable. The proposals of labour union pension funds which simultaneously represent workers in negotiations at the target firm can be in conflict with general shareholder goals. Del Guercio and Woidtke (2017) highlight this case and suggest that directors are motivated to fulfil the special requests these activists represent in order to avoid distressed labour relations. However, appeasing them comes at a cost: according to the study, the labour market for directors punishes directors for complying with special interest activists.
1. Firms are most likely to comply with conflicted activists when boards are comprised of older directors, and when labour union pension funds have greater leverage at the firm due to contentious labour relations. In line with this, firms are less likely to follow special interest proposals when directors are younger and are more concerned with building a reputation.
2. The market for directorships appears to prevent firms from implementing special interest proposals: when directors implement non-binding proposals by conflicted activists, they are subject to an abnormal loss in directorships.
3. However, the labour market for directors does not generally punish openness to shareholder requests. The opposite seems to be the case, as directors are rewarded with additional directorships for complying with them.
Special interest activism has fuelled substantial discussion about the risks and merits of giving small shareholders access through low-cost interventions. Arguably, only few firms are immune to the influence of labour union pension funds, which own shares in most publicly-traded firms in the U.S. The paper by Del Guercio and Woidtke is important in this context as it illustrates that the labour market for directors provides a functioning mechanism that limits the detrimental impact to special interest activists – without hindering the functioning of low-cost activism as a whole.