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Archive for August, 2017

The Case Against Passive Shareholder Voting, by Dorothy Shapiro Lund

The increase in the power of shareholders faces big challenges as regulation is not necessarily followed by a correct valuation of voting (the most powerful of their capacities), by them. The One Share One Vote principle is affected by dual-class share systems and no voting shares; but shareholders also suffer from rational apathy and collective action problems, so that the objective of empowering shareholders is not easily reached. See my previous posts on the topic here (1)

Dorothy Shapiro Lund from the University of Chicago recently published an article in which she analyzes the effect on rational voting practices stemming from the shift of investors (American in her study) from actively managed funds investing into (indexed) passive funds. (2) She states this trend will damage the market for corporate influence, thus lowering the discipline imposed on managers. Their investment in Corporate Governance (CG from now on) and/or in gathering firm-specific information leaves them with the cost and only a small fraction of the eventual profit…so they lack the financial incentive to invest. Furthermore, passive funds are less likely to channel funds to hedge funds, (which could help correct the problem, -see (3)), and will adhere to low-cost governance solutions, following proxy advisors or simple-not-so-smart criteria).

150331130735-motley-index-funds-780x439 Read more…

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