Tuesday, 17 November 2009

The logic of collective shareholder inaction

"The fact that management tends to control the large corporation and is able, on occasion, to further its own interest at the expense of the stockholders, is surprising, since the common stockholders have the legal power to discharge the management at their pleasure, and since they have, as a group, also an incentive to do so, if the management is running the corporation partly or wholly in the interests of the managers. Why, then, do not the stockholders exercise their power? They do not because, in a large corporation, with thousands of stockholders, any effort the typical stockholder makes to oust the management will probably be unsuccessful; and even if the stockholder should be successful, most of the returns in the form of higher dividends and stock prices will go to the rest of the stockholders, since the typical stockholder owns only a trifling percentage of the outstanding stock. The income of the corporation is a collective good to the stockholders, and the stockholder who holds only a minute percentage of the total stock, like any member of a latent group, has no incentive to work in the group interest. Specifically, he has no incentive to challenge the management of the company, however inept or corrupt it is."

From The Logic of Collective Action.


Nick Drew said...

this is a totally general phenomenon

you could substitute all the terms in this passage, so that it simply talks about 'individual members' and 'de facto ruling elite' of any organisation / body / etc

Tom Powdrill said...

yep, absolutely, and he applied it to all kinds of organisations.