Inertia and Conflicts of Interest
Thereisonefinalfactortoconsiderinwhethermanagersin
badlymanagedfirmsfeeltheheatfromstockholders.Ifthe
stockholdersinthesefirmsarepassiveanddon’trespondto
thepleasof acquirersorother investorsby tendering their
sharesinanacquisitionortheirproxiesinaproxycontest,it
isverylikelythatincumbentmanagerswillstayentrenched.
Institutional investors who own about 70 percent of the
outstanding stock at large, publicly traded firms are more
likelytobepassive,votingwiththeirfeet(bysellingstockin
firms that they believe arenot well managed) rather than
against management.
10 Inmanycases,theytendtogoalongwiththeincumbent
managersofthefirmsthattheyownstockin,ratherthantake
issue with their decisions.
11
Whydoinvestorsinmanyfirmsstickwithmanagersinthe
midstofpoorperformance?Forsomeinstitutionalinvestors,
likeFidelity,thatownstockinhundredsoffirms,itmaybe
theonlypracticalsolution.Afterall,activistinvestingistime
andresourceconsuminganditmaynotbefeasibleforafund
with holdings in hundreds of companies. For others, like
investmentandcommercialbanks,therearesidebenefitsthat
areobtained bymaintaininggood relationswith incumbent
managers.Thesebenefitscanoverwhelmthepotentialgains
from being more active stockholders.
Firm-Specific Constraints
Therearesomefirmswhereincumbentmanagers,nomatter
howincompetent,areprotectedfromstockholderpressureby