Disney CEO Bob Iger officially fended off the attempt by institutional investor Nelson Peltz and his hedge fund Trian Partners to secure two board seats. During the affair, Disney faced pressure from proxy advisory firm Institutional Shareholder Services to support Peltz’s initiative. While Iger prevailed, the costliest board fight in history underscores the significant influence of shareholders in shaping the fates of corporations.
Historically, U.S. corporate power was concentrated among executives, though with varying degrees of influence held by workers and other stakeholders. However, over the last century, U.S. corporations increasingly oriented themselves around their stock price and the imperative to maximize shareholder value. This mindset has now firmly entrenched itself within U.S. corporate culture and continues to shape their decisions and priorities.
Until the early 20th century, shareholders wielded minimal influence over U.S. corporations, with notable changes instigated by industries such as railroad conglomerates. To sidestep antitrust accusations and manipulate competition, for example, railroad companies created “communities of interest” by buying shares in one another, frequently installing their financiers and bankers on targeted companies’ boards. However, increased antitrust enforcement from the Supreme Court discouraged these practices by 1912.
Investors remained undeterred. Throughout the 1920s Merger Wave, shareholders amassed large stakes in various companies, eroding the traditional influence of company founders, executives, families, as well as other stakeholders like employees, trade unions, suppliers, customers, and local communities. The momentum of the shareholder rights movement surged following the stock market crash in 1929, which prompted legislation aimed at increasing transparency granting shareholders increased authority and information access.
During World War II, U.S. industrial power was centralized under government control. This trend, however, waned after the conflict concluded, leading to a resurgence of privatization that benefited shareholders as control shifted away from government oversight. Despite initially dominating the post-WWII economic landscape, U.S. companies began encountering tougher competition from global rivals by the 1960s, hindering their growth.
During the 1970s, prioritizing stock price growth for shareholders gained traction. However, it was the 1980s when this mindset became institutionalized, with legal rulings such as Smith v. Van Gorkom, (1985) and Revlon, Inc. v. MacAndrews and Forbes Holding, Inc. (1986) affirming corporations’ duties to shareholders.
Amendments to corporate laws aimed to enhance shareholder rights, enabling actions like director nominations, and voting on executive pay. Executive stock rewards thus began to increase, incentivizing risk-taking for short-term gains. Additionally, the 1986 Tax Reform Law cut the individual top tax rate and fueled heightened interest in short-term stock trading.
The evolution of institutional investors also played a pivotal part in reshaping the financial landscape. The growing role of hedge funds, 401(k) pension plans managed through mutual funds, and the introduction of other major asset management firms like Vanguard and........