I recently wrote on what I thought were conflicting ideas. As I’ve indicated in the past, I disabled comments because of too much spam, even with filters. However, I encourage readers to comment via e-mail. Sometimes we get a good exchange. Here’s a recent example, starting with the first two paragraphs from the post, then moving to comments:
Thanks 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… (read post)
I read and really enjoyed your post. I gave some responses on twitter. I have some real concerns about a proxy exchange; it could be used for linear vote buying/empty voting. I think that QVB, or a simpler version that is less radical called Square Root Voting in which individuals get to vote the square root of the shares they hold, would address many of the concerns you had about the radicalism of our proposal as well as the broader corporate governance concerns that both you and Mr. Romanek raise.Our proposal addresses the problem of majority rule, which is a problem even if all investors are well-informed and well-motivated to vote. The problem with majority rule is that the majority can in effect decide to transfer value from the minority to themselves (usually through a subterfuge). The risk of those transfers should raise the cost of capital for corporations since investors may worry that they will end up in the minority on some issue. So you might think of this in terms of someone buying into a firm, say, at the IPO stage, although later as well. If this person buys a large but not majority share, he should realize that in the future someone else might get the majority, and QVB will protect him from being exploited. Even if he buys a majority share, he will benefit from the fact that others would pay more for the minority knowing that they will be protected through QVB. Because the firm can get capital more cheaply, his own majority share will rise in value relative to simple majority rule.
While square root voting offers some appeal, especially when dealing with dominant shareowners such as those in South Korea under the chaebol, I’m hard pressed to accept a system that waters down the rights of large owners. Why should those who invest a disproportionate sum in a company have their vote penalized?
Yes, there are lots of problems with dominate family holders and different classes of stock that often leaves founders and the families for many generations with too much power. However, in my discussion I’m primarily concerned with helping shareowners vote by allowing them to basically do so by trusted brand by way of a proxy exchange. Yes, under square root voting small shareowners would have more incentive to vote but primarily as a by-product of denying power to larger shareowners.
When you think of larger shareowners, you appear to be thinking of controlling families, which I agree often pose an severe obstacle (however, they can also be a plus… see Bob Monks’ latest book. However, when I think of large shareowners I think of CalPERS, and its retiree members, or BlackRock and all its combined savers. Why should these institutional investors have their voting power cut by 90%.
The two proposals are not incompatible. I like your proposal very much, but I see it as addressing a different problem than ours.
Our proposal addresses the problem of majority rule, which is a problem even if all investors are well-informed and well-motivated to vote. The problem with majority rule is that the majority can in effect decide to transfer value from the minority to themselves (usually through a subterfuge). The risk of those transfers should raise the cost of capital for corporations since investors may worry that they will end up in the minority on some issue.
So you might think of this in terms of someone buying into a firm, say, at the IPO stage, although later as well. If this person buys a large but not majority share, he should realize that in the future someone else might get the majority, and QVB will protect him from being exploited. Even if he buys a majority share, he will benefit from the fact that others would pay more for the minority knowing that they will be protected through QVB. Because the firm can get capital more cheaply, his own majority share will rise in value relative to simple majority rule.
Square root voting is an intriguing idea, although Jim’s concerns are valid. I think, also, it would be easily circumvented just as early 19th century corporate experiments with one-man-one-vote (as opposed to one-share-one-vote) were circumvented by large shareowners utilizing straw men. Under square root voting, large shareowners could divide their holdings into smaller blocks held by various custodians, trusts, brokers, etc. If someone wants to disguise ownership of shares, it is easy to do.
One man one vote is used extensively in elections all around the world and while sometimes is corrupted is the foundation of most democracies. So I wouldn’t be as pessimistic as Glyn suggests. Also, essentially all minority shareholder protections depend on being able to keep track of identities…otherwise it would be trivial for an exploitative raider to set up several shell companies to control 51% of a firm and loot the minority. A recent case in Israel saw major executives go to jail for just such a scheme, showing enforcement against such manipulations is very much feasible. So why I think Glyn raises a crucial practical issue I think it is far from insurmountable.
I should also add that the manipulation issues are more serious with one man one vote than SRV because SRV requires giving shares to proxies (illegally). This would tempt the proxies not to return the shares after the vote and help defeat any such manipulation, just as with antitrust cartels.
Pershing Square’s William Ackman is using holding companies to accumulate stakes, effectively avoiding/delaying disclosing 5% stakes with the SEC and public. See UPDATE 5-Ackman’s Pershing Square takes $2.2B stake in Air Products
Always great to hear from readers. Your thoughts?
Comments are closed.