Voting on Public Goods: Citizens vs Shareholders

Abstract

We study the interplay between a "one person-one vote" political system and a "one share-one vote" corporate governance regime. If shareholders push firms for more pro-social policies, political backlash may arise, undoing ESG initiatives. In a frictionless economy, shareholder democracy becomes irrelevant: the political system fully offsets shareholder influence. With public policy frictions, pro-social corporations can mitigate regulatory shortcomings and enhance corporate public goods provision. Nevertheless, shareholder democracy can hurt citizens due to the representation problem: it favors the preferences of the wealthy. Investor diversification, pass-through voting, and lobbying have important implications for these trade-offs of shareholder democracy.

Keywords: shareholder democracy, political democracy, socially responsible investing, public good, carbon tax, ESG, political backlash, wealth inequality, pass-through voting, universal owners