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Shareholder Voting in an Age of Intermediary Capitalism

81 Pages Posted: 28 Feb 2014 Last revised: 19 Aug 2017

Paul H. Edelman

Vanderbilt University - Law School

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Robert B. Thompson

Georgetown University Law Center

Date Written: August 27, 2014

Abstract

Shareholder voting is a key part of contemporary American corporate governance. As numerous contemporary battles between corporate management and shareholders illustrate, voting has never been more important. Yet, traditional theory about shareholder voting, rooted in concepts of residual ownership and a principal/agent relationship, does not reflect recent fundamental changes as to who shareholders are and their incentives to vote (or not vote). In the first section of the article, we address this deficiency directly by developing a new theory of corporate voting that offers three strong and complementary reasons for shareholder voting. In the middle section, we apply our theory to a world where most shares are held by institutional investment intermediaries (and mostly within retirement plans). We show that intermediaries’ business plans give them little reason to vote those shares and even create conflicts of interest that may distort their votes. Yet several key developments have countered that reality and opened the way for voting’s new prominence. First, government regulations now require many institutions to vote their stock in the best interests of their beneficiaries. Second, subsequent market innovations led to the birth of third party voting advisors, including Institutional Shareholder Services (ISS), which help address the costs of voting and the collective action problems inherent in coordinated institutional shareholder action. Third, building on these developments, hedge funds have aggressively intervened in corporate governance at firms seen as undervalued, regularly using the ballot box to pressure targeted firms to create shareholder value, thereby giving institutional shareholders a good reason to care about voting. But there is more to the corporate franchise than hedge fund inspired voting. Say on Pay proposals, Rule 14a-8 corporate governance proposals, and majority vote requirements for the election of directors, are all important, recurrent topics involving shareholder votes. We must also explain why these lower value votes should be held. In our concluding section, we apply our theory to examine when shareholder voting is justified. We examine hedge fund activism as an example of high value voting situation and Say on Pay votes as an illustration of lower value cases where there are still good reasons to have shareholder votes.

Keywords: corporate governance, corporate law, corporate voting, hedge fund activism, say on pay, institutional investors

JEL Classification: A1, F3, G3, H00, K2, M2, N2

Suggested Citation

Edelman, Paul H. and Thomas, Randall S. and Thompson, Robert B., Shareholder Voting in an Age of Intermediary Capitalism (August 27, 2014). Southern California Law Review, Vol. 87, p. 1359, 2014; European Corporate Governance Institute (ECGI) - Law Working Paper No. 246/2014; Vanderbilt Law and Economics Research Paper No. 14-9. Available at SSRN: https://ssrn.com/abstract=2401746 or http://dx.doi.org/10.2139/ssrn.2401746

Paul H. Edelman

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States
615-322-0990 (Phone)
615-322-6631 (Fax)

Randall S. Thomas (Contact Author)

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Robert B. Thompson

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States
(202) 661-6591 (Phone)

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