QVB vs Proxy Exchange: Buy Votes or Assign Them?

VoteBuyingThanks to Broc Romanek I learned of what he termed the Wildest Idea of the Year? Creating a “Vote Buying” Framework, July 29, 2013. Here’s part of his take:

Two Professors from the U. of Chicago – Eric Posner and Glen Weyl – have used their economic backgrounds as a way to devise a solution to shareholders who are too lazy to vote or too ill-informed when they vote as noted in their study. So the essence of their idea is to force shareholders to buy votes so that only “interested” parties have a right to vote – owning shares would only provide a shareholder with a right to profits…

My bottom line is that I just don’t see vote buying as an idea that will catch on. I believe it could wind up with individuals or small groups (eg. corporate raiders) controlling many outcomes, some of them pretty extreme.

And here’s from the abstract and summary of Quadratic Vote Buying as Efficient Corporate Governance by Posner and Weyl:

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 Vote Buying (QVB), 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. QVB ensures that voting outcomes are efficient under reasonable conditions. We argue that corporations should implement QVB, 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 QVB is implemented.

Conclusion. QVB holds great promise as a mechanism for eliciting people’s private valuations. It is well-suited to the corporate context, which lacks the norm of one-person-one-vote and where law and tradition permit people to use money to signal the intensity of their interests in managerial decisions. As with any innovation, QVB merits experimentation prior to widespread adoption to help reveal potential weaknesses that eluded our analysis given the novelty of QVB compared to the many centuries of experience with voting. The flexibility of corporate charter law allows for such small-scale experimentation by innovative, early-adopting firms that could then be studied by others and, if successful, spread. In the longer term, if such experimentation is successful we believe that QVB could be useful in other settings. Kominers and Weyl advocate its use as an alternative to eminent domain in land assembly; Posner and Weyl incorporate it into a proposal for reforming Chapter 11; and Weyl suggests variants that might be plausible for committee or broader public decision-making even if an aversion to “money in politics” persists.

The system Posner and Weyl propose is complicated and foreign to how we approach elections. Here’s a description of the heart of the proposal:

The price of the ballots is a quadratic function of the number of ballots purchased. For example, one can buy one ballot for $1, two ballots for $4, and three ballots for $9. One can also buy fractions of ballots, again for the square of the fraction. The proposal subject to the vote is approved if the number of votes in favor exceeds the number of votes against. The money collected from the voters is transferred to the corporate treasury, and thus ultimately distributed to the shareholders, except that large shareholders (with more than 1% of stock) would only receive back 1% of the money collected from the votes they personally buy. Any excess thus generated would be distributed pro rata by shares directly to the rest of the shareholders.

Contrast QVB with the proposal for a proxy exchange made by Glyn Holton. Again, first the abstract and then the conclusion.

Abstract: Recent market crashes and financial scandals are symptomatic of a capitalism in which shareholders have lost control over the corporations they own. To reassert control, shareholders must overcome obstacles that prevent them from voting their shares. The solution is to form a proxy exchange through which investors can conveniently secure, transfer, aggregate, and exercise their voting rights.

Conclusion: Recent market crashes and financial scandals are symptomatic of a capitalism in which shareholders have lost control over the corporations they own. U.S. law recognizes shareholders’ right to exercise control through a proxy of their choosing. But because there has been no practical way to facilitate it, shareholders have been denied this fundamental right. The result is managerial capitalism. Its costs— fraud, diversion of resources, cronyism, and just plain mediocrity—are incalculable. Legislative responses like the Sarbanes–Oxley Act of 2002 do some good, but they also impose significant costs. Rather than reform managerial capitalism, a proxy exchange will eliminate it. It is a market-based solution that will work through the simple device of putting owners back in charge. Investors will benefit; financial institutions will benefit; and society as a whole will benefit. Democracy of capitalism is a wonderful thing—if we can get it working. We need an investor suffrage movement. A proxy exchange will launch it.

Here are a couple of paragraphs that get to the heart of Holton’s proposal.

Suppose the woman receives a letter from her mutual fund company reminding her that her mutual funds vote the shares they hold on her behalf. She has never had a choice about this, but the letter now offers her one. She can have the mutual funds continue to vote the shares, or the voting rights can be assigned to an organization of her choosing—perhaps a charity involved in environmental or children’s issues.

The letter goes on to explain that her fund company, cooperating with other institutions, has established a “proxy exchange.” This is like any other exchange except that it is not for trading stocks or futures. It is for transferring voting rights. Use of the exchange is free, and the woman can access it through a secure website. She can transfer her voting rights to anyone she chooses—anyone willing to accept them.

Personally, I find Holton’s proposal much more compelling. As an individual shareowner I’m not willing to pay much, if anything to vote due to rational apathy. Yes, according to the complicated system proposed by Posner and Weyl, at least part of what I pay supposedly comes back to me… in fact I might get a bonus because some of the money paid by large shareowners for voting is distributed back to small shareowners.

The money collected from the voters is transferred to the corporate treasury, and thus ultimately distributed to the shareholders, except that large shareholders (with more than 1% of stock) would only receive back 1% of the money collected from the votes they personally buy. Any excess thus generated would be distributed pro rata by shares directly to the rest of the shareholders.

I’m not sure why large shareowners that choose to vote should have to subsidize smaller shareowners but I’m even more concerned that monies collected by the corporation will ever be returned to me. Most often, the companies where I would pay the most to vote are the ones where management and an entrenched board are using the corporate treasury to disproportionately benefit themselves, to the detriment of shareowners. Why should I trust them to collect and redistribute money I would now be required to pay them for the privilege of voting when I often don’t trust them to run our company? For many more criticisms, see the comments at Shareholder democracy needs people to pay for their votes, FT.com, May 13, 2013.

Holton’s idea of a proxy exchange has much more appeal. I’m surprised some huge mutual fund isn’t pushing the idea of being able to pass through the voting of shares they hold in trust for their customers. As I have explained in more detail elsewhere (see Agency Capitalism: Corrective Measures), large funds, such as Vanguard, Northern Trust, BlackRock and Fidelity have little incentive to monitor their portfolios and take an active role in challenging management and boards. Since they hold diverse portfolios, any benefit they could obtain through such actions would equally benefit competitors, while they would bear all the costs (free rider problem). Passing votes back to beneficial owner would free mutual funds from the expense of analyzing votes and would free them from the conflicts they face when voting against a company while trying to win a contract to run their 401(k) program.

The big problem facing the proxy exchange idea is the one inherent positive to QVB, being able to fund the system. Ultimately, it could be easily solved through a small tax on publicly traded companies or on trades. However, in the meantime it would be great if someone stepped with a $1 million dollar donation to get a proxy exchange off the ground. In addition to developing the powerful computer system needed, I think the exchange should also be designed to actually vote the shares.

Although some organizations would be willing to accept transferred votes, many would not. Imagine the fiduciary nightmare faced by a public pension fund willing to vote on behalf of nonmembers, even nonresidents. Who is the board accountable to?MoxyVote

Better to design the system to allow shareowners to not only allow transfer of votes but also to allow the exchange vote for them… vote my shares as if CalSTRS was voting them. Of course, that sort of system would face the same problem that now defunct MoxyVote.com encountered. Since MoxyVote had to pay Broadridge every time it voted, the more votes they cast, the deeper in the hole they went. See In Celebration of MoxyVote.com.

Money; it always seems to come down to that. Imagine a world where you could assign your votes easily to someone with your values. I think it would be a lot greener, a lot more compassionate, a lot more like the Interfaith Center on Corporate Responsibility.

, , , , , , , , , , , , , , ,

Comments are closed.