Can Strong Corporate Governance Selectively Mitigate the Negative Influence of 'Special Interest' Shareholder Activists? Evidence from the Labor Market for Directors

Abstract

The motivation behind labor union and public pension fund activism is widely debated. We posit that activism motivated by private benefits primarily arises when there is a firm-specific conflict of interest, such as when a union activist also represents workers in collective bargaining negotiations. We provide evidence that the labor market for directorships mitigates the negative effect of “special interest” activism on other shareholders. Specifically, directors who cater to self-serving requests are punished with a loss in directorships and damage to their reputation as corporate monitors. Moreover, we provide insight into when boards are most vulnerable to “special interest” pressure.