Corporate Voting

Abstract

Discussion of shareholder voting frequently begins against a background of the democratic expectations and justifications present in decision-making in the public sphere. Directors are assumed to be agents of the shareholders in much the same way that public officers are representatives of citizens. Recent debates about majority voting and shareholder nomination of directors illustrate this pattern. Yet the corporate process differs in significant ways, partly because the market for shares permits a form of intensity voting and lets markets mediate the outcome in a way that would be foreign to the public setting and partly because the shareholders' role is more limited than that of citizens in the political process. The most developed theory of corporate voting, Easterbrook & Fischel's economic based theory from the 1980s, describes shareholder voting as the best means to fill gaps in incomplete contracts; shareholders as the residual owners have the best economic incentives to exercise such discretion. Such a theory supports unfettered shareholder action substantially broader than what actually exists.

In this article, we set out a new theory for shareholder voting based on information theory and more particularly voting as a method of error-correction. Like the prior theory, our approach explains why, among various corporate constituencies, only shareholders may vote. More importantly, our theory provides a more consistent theoretical foundation for explaining the few issues on which shareholders actually do vote. We use this approach to address the recent development of empty voting, a process where investors have used innovations in finance such as derivatives, equity swaps and share lending, to obtain voting rights in a corporation stripped of any financial interest in the company. The error-correction purpose of corporate voting requires that there be alignment between the voting right and the underlying financial interest of shares as has been illustrated in the traditional corporate law practices of one share/one vote and bans on vote buying and contracts that separate voting rights and financial interests. We propose that courts reinvigorate these principles to police empty voting. Our theory also provides a superior framework in which to assess proposals for increased shareholder power in corporate governance.