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2014 BYU L. Rev. 1015 (2014)
Shareholder Activism as a Corrective Mechanism in Corporate Governance

handle is hein.journals/byulr2014 and id is 1055 raw text is: Shareholder Activism as a Corrective Mechanism in Corporate Governance Paul Rose and Bernard S. Sharfman * Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Kenneth Arrow also recognized that other elements within the organization, beyond the central authority, occasionally may have superior information or decision-making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this Article finds that such a corrective mechanism comes in the form of hedge fund activism, or, more accurately, offensive shareholder activism. Offensive shareholder activism operates in the market for corporate influence, not control. Consistent with a theoretical framework that protects the value of centralized authority and a legal framework that rests fiduciary responsibility with the board, authority is not shifted to influential, yet unaccountable, shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies, before they will be permitted to share the authority necessary to implement the policy. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing *Paul Rose is Professor of Law at The Ohio State University Moritz College of Law and is the Executive Director of the Law School's Law and Capital Markets Program. Bernard S. Sharfman is a former Visiting Assistant Professor of Law at Case Western Reserve University School of Law (Spring 2013 and 2014). This paper was presented at the Weinberg Center's 2014 Corporate Governance Symposium (March 19, 2014). Mr. Rose and Mr. Sharfman would like to thank Brian Cheffins, Lawrence Cunningham, Walter Effross, William Judge, Charles Korsmo, Henry G. Manne, James McRitchie, Charles (Chuck) Nathan, Eric Orts, and Simone Sepe for their helpful comments and suggestions. Mr. Sharfman would like to dedicate this Article to his wife, Susan Thea David, and his daughter, Amy David Sharfman. 1015

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