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Shareholder Initiative: An Informal Social Choice and Game Theoretic Approach


Jeffrey N. Gordon


Columbia Law School; European Corporate Governance Institute (ECGI)

February 2008

ECGI - Law Working Paper No. 93/2008

Abstract:     
Current arguments to increase shareholder power in the large public U.S. corporation need to take account of the well-established historical practice of extensive delegation by shareholders of business decision-making and agenda-control to management and the board, what might be characterized as an absolute delegation rule. This practice sharply limits the power of shareholders to put either business or governance proposals to the shareholders for dispositive resolution. The paper, originally published in 1991 but newly relevant, argues that the rule is based on potential pathologies in shareholder voting rather than the inherent information asymmetry between shareholders and managers. Rational shareholders who know of this asymmetry (and know that others know) would simply vote against most shareholder proposals. But shareholder voting gives rise to potential cycling problems, as shifting shareholder majorities vie for preferred policies, and potential opportunism, as shareholders engage in side deals with management and other shareholders to extract rents in corporate decision-making. Since shareholding patterns are in part a response to control rights, deviations from the absolute delegation rule will predictably lead to greater block ownership, for defensive and offensive reasons. These concerns need to be addressed in arguments for the expansion of shareholder power.

Number of Pages in PDF File: 45

Keywords: Shareholder voting, Delegation, Management, Cycling, Shareholder Opportunism

JEL Classification: D70, G30, G34, G38, K22, M14, N22, N42, N80, N82,

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Date posted: March 3, 2008  

Suggested Citation

Gordon, Jeffrey N., Shareholder Initiative: An Informal Social Choice and Game Theoretic Approach (February 2008). ECGI - Law Working Paper No. 93/2008. Available at SSRN: http://ssrn.com/abstract=1099369 or http://dx.doi.org/10.2139/ssrn.1099369

Contact Information

Jeffrey N. Gordon (Contact Author)
Columbia Law School ( email )
435 West 116th Street
Ctr. for Law and Economic Studies
New York, NY 10027
United States
212-854-2316 (Phone)
212-854-7946 (Fax)
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
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