Document Type

Article

Publication Title

Southern California Law Review

Publication Date

2014

Page Number

1359

Keywords

corporate governance, corporate law, corporate voting, hedge fund activism, say on pay, institutional investors

Disciplines

Business Organizations Law | Commercial Law | Law

Abstract

Shareholder voting is a key part of contemporary American corporate governance. As numerous contemporary battles between corporate management and shareholders illustrate, voting has never been more important. Yet, traditional theory about shareholder voting, rooted in concepts of residual ownership and a principal/agent relationship, does not reflect recent fundamental changes as to who shareholders are and their incentives to vote (or not vote). In the first section of the article, we address this deficiency directly by developing a new theory of corporate voting that offers three strong and complementary reasons for shareholder voting. In the middle section, we apply our theory to a world where most shares are held by institutional investment intermediaries (and mostly within retirement plans). We show that intermediaries’ business plans give them little reason to vote those shares and even create conflicts of interest that may distort their votes. Yet several key developments have countered that reality and opened the way for voting’s new prominence. First, government regulations now require many institutions to vote their stock in the best interests of their beneficiaries. Second, subsequent market innovations led to the birth of third party voting advisors, including Institutional Shareholder Services (ISS), which help address the costs of voting and the collective action problems inherent in coordinated institutional shareholder action. Third, building on these developments, hedge funds have aggressively intervened in corporate governance at firms seen as undervalued, regularly using the ballot box to pressure targeted firms to create shareholder value, thereby giving institutional shareholders a good reason to care about voting. But there is more to the corporate franchise than hedge fund inspired voting. Say on Pay proposals, Rule 14a-8 corporate governance proposals, and majority vote requirements for the election of directors, are all important, recurrent topics involving shareholder votes. We must also explain why these lower value votes should be held. In our concluding section, we apply our theory to examine when shareholder voting is justified. We examine hedge fund activism as an example of high value voting situation and Say on Pay votes as an illustration of lower value cases where there are still good reasons to have shareholder votes.

Share

COinS
 
 

To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.