In this Harvard Law School Forum on Corporate Governance post: “Who Are Quality Shareholders and Why You Should Care,” Mayer Brown Special Counsel Lawrence Cunningham discusses the attributes and concerns associated with different types of shareholders (depicted below) based on their investment horizon (i.e., duration of holding period) and investment conviction (i.e., portfolio concentration) with reference to Delaware law’s principles-based approach to corporate governance, which—among other benefits—fosters governance practices tailored to company-specific circumstances rather than a one-size-fits-all scheme.
Notably, index holders—heavily concentrated in BlackRock, State Street, and Vanguard—together with transient investors, may constitute collectively as much as 80% of public equity holdings (40% indexers and 25% to 40% transients depending on how “short-term” is defined). Only high-quality shareholders, which comprise a relatively small percentage of the investor arena, can be viewed as consistently focused on tailored governance practices aimed at maximizing long-term shareholder value at a specific company, exemplifying the Delaware law approach. In contrast, index funds seek to maximize the performance and minimize the risks of their portfolios and, as illustrated by example in the post, tend to push standardized, prescriptive governance and—increasingly, environmental and social—practices across their portfolios, without regard to company-specific shareholder value and contrary to the intent of the Delaware law enabling framework.
The post, which is based on the author’s remarks delivered as the 37th Annual Francis G. Pileggi Distinguished Lecture in Law at Delaware Law School last week, encourages a “back-to-basics” corporate governance approach consistent with Delaware law and maximizing company-specific shareholder value.