Classifying Institutional Investors

Giving shareholders power to make major corporate decisions on their own initiative, as academics, regulators, and legislators have recently proposed, would reduce shareholder wealth. I accept in this paper that institutional investors will use shareholder intiative intelligently in service of their own interests. But institutional investors, motivated by market, political, and social forces, and insulation from these forces, are interested in things other than shareholder wealth. And the practical requirement that institutions with divergent sectional interests form voting majorities does not guarantee voting outcomes that advance a common shareholder-wealth interest rather than a package of sectional interests. Effective shareholder voting (in the non-takeover context) must be justified as advancing a corporate-law end other than shareholder wealth maximization---for example, distributing corporate profits desirably, attaining a governance process valuable in itself, or inducing corporate compliance with external legal constraints. I conclude that shareholder initiative's supporters are unwittingly supporting the latest effort to redesign corporate law in stakeholders' favor.