January 07, 2009
Why Care About (Powerless) Voice?
Posted by Benjamin Means

In the comments to my first post about minority shareholder oppression, Kate Litvak, Elizabeth Brown, and I debate whether it is appropriate to provide any protections to minority shareholders who, after all, failed to bargain for them. Kate raises an important concern, which I share to some extent, that judicial protection of minority shareholders risks a “massive wealth transfer” from controlling shareholders to the minority. In advocating tailored judicial scrutiny based upon minority shareholder voice, my aim is not to create a new substantive entitlement for minority shareholders but to improve the application of existing oppression standards and to create incentives for more inclusive governance. I oppose proposals that would go further and create an automatic right of exit for minority shareholders.

However, my relatively modest insistence that minority shareholder voice is important to the health of close corporations leaves me open to a different kind of objection -- that this is all feel-good nonsense. Allowing a minority shareholder to have her say and then outvoting her is, for all practical purposes, the same thing as just outvoting her. I disagree. Corporate decisions based on transparent, open discussion will more often serve the interests of all shareholders and the minority will more likely accept the results of an inclusive, deliberative process as fair.

The exercise of voice is, or can be, more than the casting of votes. Formal studies indicate that groups have cognitive advantages over sole decision-makers. Many heads are better than one. When minority shareholders participate in decision-making, the majority may benefit from the presentation of opposing arguments and will be pressed to defend its own preferences. If, for instance, payment of dividends depends upon the corporation’s expected need for cash in the coming year, reviewing the corporation’s financial outlook together with minority shareholders will make it more likely for a reasonable consensus to emerge. If the corporation does not truly need to retain earnings, controlling shareholders will find it harder to withhold or reduce dividends.

Conversely, where the majority can articulate an objective basis for its own view, the minority may disagree but will see that there are countervailing considerations and will more likely accept the outcome as fair. Sometimes, it is valuable to be heard on an issue, even when ultimate decision-making authority rests elsewhere. For example, shareholders in public corporations have increasingly demanded the ability to cast nonbinding votes concerning executive compensation. Although the board sets compensation, shareholders want a voice in the process. Among other things, they believe that compensation committees will act with greater deliberation if their work is subject to enhanced scrutiny and meaningful, if nonbinding, feedback from shareholders.

It remains true that majority shareholders ultimately decide all contested questions, but voice is a political mechanism and need not be synonymous with control. A person’s ability to participate and to be heard on issues important to a shared enterprise, whether family, business organization, or nation state, does not turn on the final tally of votes. Voice is not as crude a mechanism as exit; its value lies in its nuance, as a means of shaping the goals of a close corporation to better accommodate the interests of all shareholders.

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