Restructuring the Capital Market to Protect Small Investors and More

Abstract

We question the effectiveness of shareholders’ protection from the moral hazard risk that managers might make choices contrary to the shareholders’ best interests. We explore the evolution of the dynamic manager-shareholder relationship and suggest a change that can be made to improve it. Specifically, a significant group of shareholders should not be viewed as “owners” because they lack effective means to protect their interests via the normal tools of ownership, i.e., voting in corporate elections. Therefore, in exchange for their voting rights, they should receive an explicit contract that spells out their specific compensations and protections.