Public Pension Fund Activism in Corporate Governance Reconsidered

A key organizational feature of large United States corporations isthe separation of ownership from control. This separation creates anagency problem, that managers may run the firm in their own, ratherthan the shareholders\u27 interest, choosing the quiet life over the maximizationof share value. In the 1980s, corporate takeovers provided ameasure of discipline by threatening poor performers with replacementby bidders who would reunite ownership and control. With the lull intakeovers in the 1990s, commentators concerned about corporate performance have turned their attention to identifying alternative mechanismsfor disciplining management. The principal solution has been tocall for more active monitoring of management by institutional investors. The focus has been on a subset of these investors, public pension funds (the pension funds of state and local government employees), because managers of corporate pension funds and financial institutions have other business relations with issuers that are thought to generate conflicts of interest preventing them from opposing corporate management.This Article seeks to add a dose of realism to the debate overshareholder activism in corporate governance by underscoring whatwas once widely recognized in the literature but of late has been overlooked:public pension funds face distinctive investment conflicts thatlimit the benefits of their activism