The Hanging Chads of Corporate Voting
New York University School of Law; European Corporate Governance Institute
Edward B. Rock
University of Pennsylvania Law School
Georgetown Law Journal, Vol. 96, p. 1227, 2008
U of Penn, Inst for Law & Econ Research Paper No. 07-18
NYU Law and Economics Research Paper No. 07-29
Never has voting been more important in corporate law. With greater activism among shareholders and the shift from plurality to majority voting for directors, the number of close votes is rising. But is the basic technology of corporate voting adequate to the task? In this Article, we first examine the incredibly complicated system of US corporate voting, a complexity that is driven by the underlying custodial ownership structure, by dispersed ownership and large trading volumes, and by the rise in short-selling and derivatives. We identify three ways in which things predictably go wrong: pathologies of complexity; pathologies of ownership; and pathologies of misalignment of interests. We then discuss the current legal treatment of these pathologies and consider a variety of directions for reform, ranging from incremental modifications to fundamental redesign. We show that, absent a fundamental reconstruction of the ownership structure, the existing system will continue to be noisy, imprecise and disturbingly opaque. The problems with the existing system pose fundamental challenges for both proponents of direct shareholder democracy, who advocate more extensive voting rights for shareholders, and for proponents of indirect shareholder democracy, who advocate deference to a board of directors the legitimacy of which ultimately also rests on shareholder elections.
Number of Pages in PDF File: 55
Keywords: shareholder elections, technology of corporate voting, voting systems, ownership structure, legitimacy
JEL Classification: K22
Date posted: August 15, 2007 ; Last revised: April 4, 2009
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