Chapter 10: Corporate Governance 319
business relationship with the firm. Initially, these shareholder activists and institutional
investors concentrated on the performance and accountability of CEOs and contributed
to the dismissal of a number of them. More recently, activists target the actions of boards
more directly via proxy vote proposals that are intended to give shareholders more deci-
sion rights because they believe board processes have been ineffective.^58 A rule approved
by the SEC allowing large shareholders (owning 1 to 5 percent of a company’s stock)
to nominate up to 25 percent of a company’s board of directors enhances shareholders’
decision rights.^59
The institutional investor BlackRock, Inc., is the largest manager of financial assets in
the world, with just under $4 trillion invested and holdings in most of the largest global
corporations. Interestingly, it was once described as a “silent giant” because it did not
engage in activism. However, recently the silent giant has been awakened, as it has begun
asking more questions of the firms in which it holds significant investments. Most of its
actions are “behind the scenes,” only voting against a director or a company proposal when
its unobtrusive actions have failed to change the firm’s behavior. BlackRock has become
more “confrontational” in order to ensure the value of its investments, and some wish
that it would become even more active because of the power of its large equity holdings.^60
BlackRock’s CEO, Larry Fink, recently sent a letter to S&P 500 listed firms suggesting that
they focus on the long-term: “It is critical ... to understand that corporate leaders’ duty
of care and loyalty is not to every investor or trader who owns their companies’ shares at
any moment in time, but to the company and its long-term owners,”^61 To date, research
suggests that institutional activism may not have a strong direct effect on firm perfor-
mance, but it may indirectly influence a targeted firm’s strategic decisions, including those
concerned with international diversification and innovation. Thus, to some degree at least,
institutional activism has the potential to discipline managers and to enhance the likeli-
hood of a firm taking future actions that are in shareholders’ best interests such as invest-
ing in human capital.^62
10-3 Board of Directors
Shareholders elect the members of a firm’s
board of directors. The board of directors is
a group of elected individuals whose primary
responsibility is to act in the owners’ best
interests by formally monitoring and con-
trolling the firm’s top-level managers.^63
Those elected to a firm’s board of directors
are expected to oversee managers and to
ensure that the corporation operates in
ways that will best serve stakeholders’ inter-
ests, and particularly the owners’ interests.
Helping board members reach their expect -
ed objectives are their powers to direct the
affairs of the organization and reward and
discipline top-level managers.
Though important to all shareholders,
a firm’s individual shareholders with small
ownership percentages are very dependent
on the board of directors to represent their
interests. Unfortunately, evidence suggests
that boards have not been highly effective
Board of directors is a
group of elected individuals
whose primary responsibility
is to act in the owners’
best interests by formally
monitoring and controlling
the firm’s top level managers.
Bloomberg/Getty Images
Larry Fink, CEO of BlackRock, the largest mutual fund provider, has
suggested that managers need to focus on long-term strategy rather
than responding to short-term trader proposals.
