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Control of Corporate Decisions: Shareholders vs. Management

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Control of Corporate Decisions: Shareholders vs. Management

Milton Harris, Artur Raviv

Proponents of increased shareholder participation argue that such participation is needed to counter the agency problems associated with management decisions. Opponents offer several arguments such as that shareholders lack the requisite knowledge and expertise to make effective decisions or that shareholders may have incentives to make value-reducing decisions.


This paper addresses the issue of when direct shareholder control of decisions is appropriate. The study uses a model that accounts for private information, delegation, communication and agency considerations. This study is based on the assumption that there are no differences of opinion, information or preferences among shareholders (or at least among the controlling group of shareholders).

The study shows that popular arguments both for and against direct shareholder control are flawed. For example, a strong intuitive argument has been advanced by several commentators that shareholders should not control major corporate decisions because, unlike management, they do not possess the relevant information. The study shows, that the shareholders should control decisions for which they have none of the information possessed by management and have no private information of their own, provided these shareholders are aware of their ignorance and the extent of insiders’ private information. This result follows, in part, from the failure of the simple argument to take account of the fact that shareholders can delegate the decision to management.

On the other hand, it is often argued that if shareholders can delegate and want to maximize value (with no agency problem), they should control every major decision. This study finds that this argument is incorrect, because, if shareholders have private information, they will fail to delegate optimally. The reason for this is that shareholders take account of the inference made by management about shareholders’ private information based on shareholders’ decision to delegate.

The study finds that insiders best control decisions for which their private information is much more important than that of shareholders Arguments have been put forward against shareholder control on the grounds that either shareholder overestimate the extent of their information or that shareholders have agendas other than value maximization. This paper suggests that in both cases there are still some decisions for which shareholder control is optimal. This is due, in part, to the fact that shareholder biases, due either to misperception or non-value maximizing agendas, may improve communication from insiders to shareholders. This effect is ignored in popular arguments against shareholder control.

In general, the analysis highlights the complicated interaction among control rights, who actually makes the decision, and the extent of communication between the parties. The paper suggests that managerial agency results in management making decisions that are biased relative to value maximizing decisions. In general, when shareholders have private information, shareholders should be in control of decisions whenever insiders’ information is less important than agency costs. When insiders’ information is more important than agency costs, insiders should be in control when their information is sufficiently important relative to that of shareholder. The study also suggests shareholders with social /political /environmental agendas should control some decisions.

Harris, Milton and Raviv, Artur, "Control of Corporate Decisions: Shareholders vs. Management" (December 18, 2007). CRSP Working Paper No. 620 Available at SSRN:



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