Collective Action Among Shareholder Activists

Abstract: This study addresses the problem of explaining the emergence and viability of coalitions among shareholder activists. The formation of coalitions for purposes of shareholder activism is generally unexpected from a theoretical perspective. Potential shareholder activists typically rely on the exit mechanism rather than becoming actively involved in the governance of corporations, and they tend to be in a prisoner’s dilemma type of situation, which has a non-co-operative outcome. Moreover, unless co-operation can be expected from others, no individual shareholder will make costly contributions to a coalition. Still, minority shareholder coalitions exist. The purpose of this study is to develop a model that accounts for the emergence and viability of minority shareholder coalitions.Two ideal-typical minority shareholder coalitions are developed: the offensive minority shareholder coalition, and the defensive minority shareholder coalition. These are based primarily on contractual theory (transaction cost economics, agency theory and property rights theory) and take form under the assumption that economic ends alone motivate actors. The offensive minority shareholder coalition emerges to seize an opportunity to increase share price by means of voice; it is led by a coalitional entrepreneur who carries all costs, thereby inducing co-operation from passive shareholders. The defensive minority shareholder coalition emerges to safeguard the members’ investments from risks of expropriation, which arise from increasing costs of using the exit mechanism; it is characterised by widespread active participation, since free riding further increases the risk of being expropriated.The model integrates the ideal types with results from three case studies of minority shareholder coalitions. These case studies show that under certain conditions, coalition members act as if they consider the effects of their actions on their reputation within networks of shareholders; this has implications for a coalition’s emergence and viability. The case studies further show that controlling shareholders, under certain circumstances, will tend to act as if they consider the effects of their actions on their public image as perceived by relevant (present or future) stakeholders; this places a shareholder coalition in a different bargaining position.