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This paper questions the effectiveness of shareholders’ protection from managers who may make choices contrary to the shareholders’ interests. We focus on “silent shareholders” who rarely vote because their goal is purely financial return with no intention or ability to participate in corporate strategies. Since they have virtually no influence on company policies, we argue that they should not be viewed as firm owners, but as consumers of managerial services. Therefore, we suggest the creation of a new class of “capital contract” stock that would grant silent shareholders an explicit legal contract that clearly specifies their rights and compensations in exchange for their investment, but limits their voting rights to proposals regarding changes to the contract. We offer suggestions for specific contract terms customized for each company. One key element of our proposal is linking silent shareholders’ compensation to executive pay. In addition, we propose that the contract should specify reporting requirements that match the characteristics of each company, thereby reducing one-size-fits-all regulations. While the paper focuses on the U.S. capital market, it is also relevant to many other countries.

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