Socially and privately optimal shareholder activism

This paper aims to evaluate the private and social gains of shareholder activism in an optimal contracting framework involving dispersed shareholders who may become active. The social gains are based on the welfare to stake holders in the firm, whereas the private gains are based on shareholder wealth only. Active shareholders influence the contracting game with the CEO, and therefore also the size and the distribution of the surplus to be split between the shareholders and the CEO. Although the model is very simple and focussing on the creation and distribution of welfare between the shareholders and the CEO, we nonetheless identify surprising divergence between the private and social profitability of shareholder activism. Shareholder activism that is privately profitable is not necessarily socially profitable. The distributional effects of shareholder activism may dominate the efficiency effects to make shareholder activism a negative social NPV project.