Shareholder Power: How Retail Investors Can Contribute to a Well-Functioning Financial System

Abstract

The growth of passive asset managers is a hot topic. The industry complains about its new rulers, while academics criticise their voting behaviour, arguing that their passivity can lead to a lack of oversight of systemic risks posed by companies. In contrast, few pay attention to retail investors and their voting behaviour. However, as they are often the underlying owners and their market share in listed companies is growing, retail investors could help address these issues. Nevertheless, retail investors hardly play a role in policies and stewardship frameworks. Therefore, this study explores how such frameworks
could involve retail investors and how this group could exercise voting rights to integrate as part of a well-functioning financial system. The qualitative empirical study consists of a digital ethnography on the social network Reddit and three interviews with practitioners in the field of investing. The analysis shows that retail investors have limited possibilities to engage with companies through brokers and passive asset managers. The results demonstrate that discount brokers, combined with unchanged regional regulations, are two opposing conditions that reinforce the passivity of retail investors. Moreover, the study points to a principal-agent problem, as the voting preferences of retail investors are, in certain instances, likely to differ from their stewards. Consequently, the thesis shows how incorporating retail investors more explicitly into stewardship frameworks could lead to a more significant consideration of systemic risks. The thesis concludes by showing how retail investor voting can increase through policy changes and entrepreneurial innovation. These findings indicate the need for policymakers to find global solutions for retail investor voting and the need for companies within the investment ecosystem to provide customers with transparent services combined with the possibility of exercising shareholder rights. Overall, the paper confirms the existing literature but points out that a focus on retail investors in studies on corporate governance, sustainability and stewardship would be beneficial to shape research in these areas more holistically.