Shareholder Activism with Weak Corporate Governance: Social Pressure, Private Cost and Organized Crime

Abstract

Prior research provides mixed results on the ability of American shareholder activists to improve managerial behavior. In Japan, the means of external control (e.g., takeover, litigation) are not as effective as they are in the U.S. Challenging management during annual meetings may be the only option left for disgruntled shareholders. Yet, the situation is complicated by the existence of corporate racketeers who disrupt meetings to blackmail managers. In response, authorities have encouraged companies to hold their annual meetings on the same day to spread the racketeers' thin over simultaneous events. However, this policy has a similar effect on legitimate activists. Our empirical results indicate that, contrary to governmental expectations, shareholder activism leads to improvement in a company's corporate governance, informational environment and profitability. It also enables firms to attract foreign shareholders. In addition, firms that collude to have their meetings on the same day have lower profitability and worse governance. This provides evidence of the positive role activists may play and suggests the authorities should reverse their policy of discouraging shareholder activism.