Competing for Votes

Abstract

Shareholder voting matters. It can directly shape a corporation’s governance, operational and social policies. But voting by shareholders serves another important function—it produces a marketplace for votes where management and dissidents compete for the votes of the shareholder base. The competition over shareholder votes generates ex ante incentives for management to perform better,
to disclose information to shareholders in advance, and to engage with large institutional investors.

Traditional corporate law has looked to a variety of “market forces” as a means of curbing the agency costs of public corporations. Yet, for various reasons, these market forces are, at best, an incomplete answer to the agency costs associated with public corporations. This Article is the first to develop a theory of a new force that may have a better chance at curbing managerial entrenchment— the competition for votes. In a world where shareholder voting is becoming increasingly powerful, and where highly incentivized and sophisticated players, such as hedge funds, aggressively court the support of fellow shareholders, the importance of active competition for votes cannot be understated.

The Article empirically depicts the emergence of a vibrant competition for votes, outlines its major building blocks, and explains how to further facilitate its operation. The policy implications of our analysis are wide-ranging, casting new light on several hotly contested governance debates such as the legitimacy of dual-class shares, shareholder activism, the role of passive investors, and the role of proxy advisors.

Keywords: Corporate Law, Board of Directors, Proxy Advisors, Agency Cost, Public Corporations, Shareholders, Voting, Business Investors

JEL Classification: K10, K22