March 11, 2008
What is Shareholder Voting Supposed To Do?
Posted by David Zaring

Ever since an investor in Mylan acquired sufficient hedged shares from investment banks to tip the vote in favor of a merger with King Pharmaceuticals - in essence, using votes that were untethered to the economic stakes of the firm to force that firm into an acquisition - there has been a renewed interest in corporate voting.  Three recent papers (and one less recent, by Bainbridge) have got me thinking about the issue.  First, some critics.  Marcel Kahan and Ed Rock note that "The inescapable complexity, combined with the already well studied issues of shareholders’ rational apathy and free rider problems, detract from the case for shareholder voting. To what extent should we put matters to a shareholder vote if we cannot trust in the outcome?"  They appear to conclude that the inadequacy of shareholder voting makes it something of a curio, something that neither vindicates shareholder rights nor legitimates managerial supervision.  (Stephen Bainbridge is skeptical of shareholder voting, but he thinks it just supports the case for unfettered management.)

Matt Bodie and Grant Hayden have a new paper that also recounts the many problems of shareholder democracy.  They argue that the franchise depends on a fiction that shareholders are committed to the maximization of firm value, and that that fiction is increasingly unreliable.  They suggest that shareholder voting should instead embrace a broader vision of what firms are for.  Bodie and Hayden conclude:

To be true to social utility, we must allow for the expression of monetary and nonmonetary utility in our preference aggregation. Finally, we must consider how interests and preferences can be expressed and protected through the entire corporate structure.

It seems to me that this isn't a criticism of the franchise per se, but an effort to claim that since shareholder voting doesn't maximize firm value in practice, it should be perfectly acceptable to use the franchise for other things - divestment campaigns in Zimbabwe, perhaps, or union recognition.

In my view, some of this depends on whether voting is an instrument, as most corporate scholars seem to assume, or whether voting qua voting has its own constitutive value, as voting rights people like Michael Kang appear to believe.  I'm more inclined to take the instrumental view.  But if shareholder voting is supposed to serve other purposes, is that because it vindicates other values?  I wonder if Bodie and Hayden have a view on that.

Anyway, download these new papers - almost all brand new this year - while they're hot, as they say.....

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