Corporate Governance and Managerial Incompetence: Lessons from KmartNorth Carolina Law Review
AbstractModern corporate governance scholars often extol an activist role by institutional investors in directing corporate activity. Widely viewed as a solution to the collective action problems that inhibit such activism by individual investors, institutional investors are praised for adding value to corporations through their participation in the decision making process. The ouster of Joseph Antonini as Chief Executive Officer of Kmart Corporation in 1995 might be taken as a vindication of this view, because substantial evidence indicates that institutional investors played a crucial role in influencing Kmart's board of directors to remove him. In this Article, Professor Smith challenges this potential reading of the events at Kmart and poses the fundamental question of whether institutional investor activism designed to address perceived incompetence among corporate managers consistently adds value to corporations in which such activism is present. Professor Smith analyzes the effect of internal and external forces on managers, particularly on Antonini and Kmart's directors, and derives two fundamental lessons: (1) External constraints are ineffective in solving managerial incompetence; and (2) Investor activism will often be counterproductive because it destroys the value of centralized decision making.
Citation InformationD. Gordon Smith, 𝘊𝘰𝘳𝘱𝘰𝘳𝘢𝘵𝘦 𝘎𝘰𝘷𝘦𝘳𝘯𝘢𝘯𝘤𝘦 𝘢𝘯𝘥 𝘔𝘢𝘯𝘢𝘨𝘦𝘳𝘪𝘢𝘭 𝘐𝘯𝘤𝘰𝘮𝘱𝘦𝘵𝘦𝘯𝘤𝘦: 𝘓𝘦𝘴𝘴𝘰𝘯𝘴 𝘧𝘳𝘰𝘮 𝘒𝘮𝘢𝘳𝘵, 74 N.C. L. REV., 1037 (1996).