Minority shareholders tend not to participate in the decision-making process of public companies with a controlling shareholder, and their voice is rarely heard. Even when they disagree with how the company is being managed, they prefer to express this dissatisfaction through exit, ie, by selling their shares, rather than by expressing their voice at a shareholder meeting.
Contrary to the prevailing view, my paper: ‘The Voice: The Minority Shareholder’s Perspective’, provocatively suggests that minority shareholder voice is important and desirable. On the deontological level, I assert that shareholder voice has an intrinsic value that is independent of any utility it may yield. My claim is that shareholder suffrage is a fundamental right and should therefore be granted special status and protection under corporate law. Without the mechanisms of corporate democracy and, specifically, the shareholder’s right to vote, the exercise of power and control by the public corporation’s insiders—its controlling shareholder, directors, and managers—is stripped of its ideological foundation and, accordingly, its legitimacy. Indeed, the shareholder’s right to vote is the foundation upon which the public corporation is constructed and sustained.
On the utilitarian level, I examine the influence of shareholder involvement on a corporation’s decision-making process and aggregate welfare. Corporate democracy ensures that directors and officers are held accountable for their actions. Accountability lowers agency costs, since the threat of replacement pressures directors and officers to align their interests with those of the shareholders. This alignment of interests ultimately leads to greater efficiency and increases financial returns, as it serves to neutralize insiders’ ex-ante incentive to self-deal or expropriate funds. Furthermore, active involvement of shareholders in a firm’s decision-making process improves the quality of the protection of the investment community as a whole, which boosts public trust in the stock market and, consequently, increases investors’ willingness to invest in corporations. This, in turn, supports the development of capital markets as well as expands the pool of financial resources available for production and growth.
However, corporate democracy has many detractors, who claim that the shareholder’s right to vote is an evil and not inevitably a necessary one. I consider three claims commonly raised by opponents of corporate democracy: (1) the principle of freedom of contract might restrict shareholders in exercising their voting rights; (2) retail shareholders are myopic and focus on short-term profits that lead to suboptimal results in the long run; and (3) retail shareholders lack expertise and have less information than the controlling shareholder and managers and, therefore, are likely to support suboptimal decisions at the general meeting. I challenge the arguments made for restricting the shareholder’s right to vote, showing that they are neither theoretically convincing nor supported by the empirical research. Thus, they cannot justify preventing retail shareholders from actively participating at general meetings.
Concentrated ownership companies predominate in capital markets around the world. Given their prevalence, the insights offered in my paper should not be taken as solely theoretical. Rather, they can serve as an important normative basis for policymakers in designing reforms aimed at incentivizing minority shareholders to exercise their voting rights and make their voices heard.
Dov Solomon is an Assistant Professor at the College of Law and Business, Ramat Gan Law School.