March 31, 2006
The Happiness of Shareholders
Posted by Gordon Smith

Happiness Australian corporate law scholar James McConvill sent me the same announcement that he sent to Steve Bainbridge relating to the forthcoming book Shareholder Participation And the Corporation: A New Perspective. This is from the announcement:

By applying recent empirical studies into human happiness McConvill convincingly argues that shareholders, particularly individuals, should be included in the internal governance framework of public corporations, and enjoy a direct participatory role in the corporation if they so choose. Recent studies have consistently shown that active participation is one of a limited number of factors that has a positive correlation with levels of personal happiness, however while disciplines within the social sciences have long considered the implications of these findings legal scholars have failed to grasp their significance.

Steve is skeptical. He cites his own work on participatory management to show that many employees prefer hierarchy, and he suspects that shareholders are similar.

But I am wondering why we would care whether shareholders are similar to employees in this regard. I can think of lots of arguments for and against shareholder participation in corporate governance, but happiness -- at least in the sense invoked here -- has nothing to do with any of those arguments. Let me flesh this out a bit.

First, what does McConvill mean by happiness? In a paper on the proper role of happiness in formulating tax policy, he embraces a definition of happiness from David Myers:

[Happiness is] a pervasive sense that life is good. Well-being outlasts yesterdays moment of elation, today's buoyant mood, and tomorrow's hard time; it is an ongoing perception that this time of one's life, or even life as a whole, is fulfilling, meaningful, and pleasant.

Second, why should shareholder happiness in this sense be a goal of the corporate governance system? McConvill hints that happiness should be an important consideration in crafting all laws. As for happiness and corporate governance, McConvill writes the following in an article entitled Towards Mandatory Shareholder Committees in Australian Companies, 28 Melb. U. L. Rev. 125 (2004) (with Mirko Bagaric):

[E]ven the 'hard-nosed' economic rationalist can readily appreciate the likely benefits of reforms that increase shareholder contentment. A greater level of satisfaction among shareholders potentially could result in more share ownership, resulting in more corporate capital and, presumably, more economic prosperity.

I am certain that McConvill forges the connections in this line of argument more completely in the book, but I confess that I do not "readily appreciate the likely benefits of reforms that increase shareholder contentment." Even assuming a connection between shareholder participation and the sort of happiness McConvill describes (and that's a pretty big assumption), some obvious questions leap out:

  • Why would increased share ownership be a good thing for society?
  • Would government mandates regarding shareholder participation increase shareholder happiness more than private reforms?
  • Given that most shares are held by institutions, what are the ancillary effects of happiness policies aimed at individual shareholders?

That last question seems particularly important. Why place happiness at the center of corporate governance policy when the primary actors in corporate affairs are institutions, not individuals? I guess I need to read the book to see if he can answer that question.

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