Activism - Can't walk? Can't run? Hide?

It's long been argued that institutional investors are the natural safeguard against managerial opportunism. Institutions hold blocks of shares large enough that their voices are taken seriously by management. Even those that choose not to engage actively can have an effect through what a now-famous research paper once called the Wall Street Walk. It's a catchy title for a simple phenomenon: If they don't like what a company's management is doing, shareholders can sell their shares and go away. The argument about the Wall Street Walk is, however, that if the blocks of shares are big enough, and if management is conscious of share price developments, then corporate governance exercised through "exit" can be as effective as when it's undertaken by "voice".

Now a new study has shed some doubt on those conclusions. Very often a shareholder in possession of the block isn't really the principal, but rather another agent in a long chain of agency. "How do agency frictions arising from the delegation of portfolio management affect the ability of blockholders to govern via the threat of exit?" the researchers wonder. "We show that when blockholders are sufficiently career concerned exit will fail as a disciplining device. Our results have testable implications on the relative degree to which different classes of delegated portfolio managers use exit as a form of governance."

It's worth noting that the "blockholders" mentioned aren't the ones we know so well in continental Europe. Holders of very large, controlling stakes often can't exit at all, but they certainly can exercise voice.

Source document: The discussion paper "The Wall Street Walk when Blockholders Compete for Flows", by Amil Dasgupta and Giorgia Piacentino of the London School of Economics, is a 42-page pdf file.