What are the advantages and disadvantages of giving shareholders a larger say in the operations of a firm?

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thanatassa eNotes educator| Certified Educator

Shareholder activism has been increasingly in the news in the recent decade, especially in connection with issues having to do with corporate governance. It can have both good and bad effects.

On the positive side, activist shareholders can make corporations more responsible. The combination of independent boards of directors and activist shareholders can restrain the tendency to give astronomical pay and golden parachutes to executives who harm the corporation to maximize their stock options by short term tricks like share buybacks. Activists can also keep a corporation focused on profitability rather than pointless acquisitions or simply growth for its own sake. Shareholders can also hold a corporation to higher standards of ethics and social responsibility, and act as a counterweight against cronyism.

On the down side, shareholders can place too much emphasis on short term profitability and dividends and less on the long term future of a company. 

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