The expansion of rights to equity investors in U.S. public companies carries the potential of substantial risk for bondholders with limited or no covenant protections, according to a new report by Moody’s Investors Service.

“The balance of power at U.S. companies appears to be undergoing a substantial shift in which shareholders are demanding and winning new rights that give them more direct and active influence over decisions that are the traditional purview of management and boards of directors,” says Mark Watson, team managing director of Moody’s corporate governance group.

“We raise this concern now because, once awarded, shareholder rights are rarely withdrawn,” says Watson, a co-author of the report along with Jeff Benner and Francis Byrd.

It would be of less concern if these new powers belonged only to public pension funds and other long-term shareholders, said Watson. That’s because such shareholders have interests that are generally aligned with bondholders. However, short-term investors could exercise their new rights to press companies harder for short-term gains, at the cost of long-term credit quality.

“For those bondholders with protective covenants, such as limitations on leverage, or the option to put the bonds back to the issuer in the event of a change in control, the enhancement of shareholder rights should pose limited additional risk, provided the exceptions to these limitations are relatively minimal,” said Watson.

He said it is rare for investment-grade issuers to incorporate covenants that restrict dividend distributions and other payouts and the assumption of debt in their bond indentures. In fact, speculative-grade bonds with limited covenant protection or bank loans that are “covenant lite” are becoming more common.

He conceded that corporate governance improvements at U.S. corporations in recent years have benefited bondholders in some cases, especially through marked improvements in the quality of financial controls and the rigor and independence of board oversight.

“Several of the rights being demanded by shareholders, in themselves, may have some benefit to bondholders, not least because they diminish the opportunity for management to act in its own interests and not in those of shareholders,” said Watson.

“Our concern is the pace and scale of change, and the potential unintended consequences and harmful effects that exercise of these rights by a small minority of short-term investors, in combination, may have for bondholders,” explained the analyst.

In a special report issued earlier this month, Moody’s reported that, to date, the effects of shareholder activism on the creditworthiness of Moody’s-rated issuers have been almost universally negative, even if only to some degree, with numerous downgrades at least indirectly linked to concessions to activists. These have included such shareholder preferences as the adoption of a more aggressive financial policy and increases in an issuer’s dividend or share buyback program achieved through higher leverage.