Initiation Payments
In an article recently published in the Journal of Corporation Law, I propose that corporations implement “initiation payments”—payments for investors that initiate corporate changes that investors would collectively prefer. These would apply to the most obvious forms of investor initiation, shareholder proposals and proxy contests. The initiation payments would be paid by the corporation only […]
Scott Hirst is Associate Professor of Law at Boston University. This post is based on an article recently published in the Journal of Corporation Law. Related research from the Program on Corporate Governance includes Big Three Power, and Why it Matters (discussed on the Forum here), Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy (discussed on the Forum here), and The Specter of the Giant Three (discussed on the Forum here) all by Lucian A. Bebchuk and Scott Hirst; The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian A. Bebchuk, Alma Cohen, and Scott Hirst.
In an article recently published in the Journal of Corporation Law, I propose that corporations implement “initiation payments”—payments for investors that initiate corporate changes that investors would collectively prefer. These would apply to the most obvious forms of investor initiation, shareholder proposals and proxy contests. The initiation payments would be paid by the corporation only if a proposal put forward under Rule 14a-8 or in an investor’s own proxy statement was approved either by a majority of independent investors, or by the board of directors. The payment would be calculated to cover the cost to the investor of initiating the corporate change, and to provide some additional reward for doing so.
Initiation payments would resolve a fundamental question in corporate governance: is there under-initiation of corporate changes? If there is under-initiation, initiation payments would eliminate it. They are a concrete, tractable, and readily implementable solution. In contrast to other potential solutions to under-initiation, initiation payments could be implemented by private ordering, and so would not require (unlikely) legislative, regulatory or judicial intervention. All that would be required is the support of institutional investors. This also means that whether or not initiation payments are implemented is effectively a test of whether institutional investors believe there is under-initiation, and if so, whether they wish to eliminate it.
