Quadratic Voting as Efficient Corporate Governance

Abstract

Shareholder voting is a weak and much-criticized mechanism for controlling managerial opportunism. Among other problems, shareholders are often too uninformed to vote wisely, and majority and supermajority rule permits large shareholders to exploit small shareholders. We propose a new voting system called Quadratic Voting (QV), according to which shareholders are not given voting rights but may purchase votes, with the price of votes being a quadratic function of the number of votes purchased. QV ensures that voting outcomes are efficient under reasonable conditions. We argue that corporations should implement QV, or a simple approximation called square-root voting, and that the law permits them to do so. Certain legal protections for shareholders, such as the appraisal remedy and poison pill, are unnecessary if QV is implemented.

Keywords: shareholder democracy, vote buying, corporate governance, minority shareholders

JEL Classification: D71, G34, K22, D61