The Essential Unity of Shareholders and the Myth of Investor Short-Termism

George W. Dent, Jr.

The separation of ownership and control publicized by Berle and Means in 1932 persists today. Domination of public companies by self serving and ineffective executives costs America billions of dollars every year and contributed to the current economic meltdown. Repeated efforts to solve this problem-including the Sarbanes-Oxley Act, expanded disclosure duties, and more stringent requirements for director independence-have had little benefit and have sometimes made matters worse. The flaws in our corporate governance system are a growing problem for America’s economy as disillusioned investors increasingly place their capital in other countries. Nonetheless, proposals for greater shareholder power have encountered criticisms: various shareholders have conflicting goals; shareholders favor a short-term perspective at the expense of the long-term health of companies; and shareholders lack the knowledge needed to play a positive leading role in corporate governance.

This article refutes these charges. It shows that the objections to shareholder power are greatly exaggerated, often contradict elementary economic principles, and have no empirical basis; they are myths. The article delves into the latest research in financial economics to demonstrate that greater shareholder power is associated with better corporate performance in all respects, including those respects in which critics charge that shareholder influence would be detrimental.