Shareholder Voting as Veto

The Delaware Chancery Court famously declared that the “shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests." However, the case against shareholder voting reform rests on an apparent trump card in the debate — the well-recognized problem of rational ignorance that limits the effectiveness of shareholder involvement. In this Article I offer a very specific response, based in political science, to the case against shareholder voting reform based on this critique of shareholders' rational ignorance. The challenges of rational ignorance, as well as related problems of collective action, that corporate scholars identify as impediments to sensible shareholder voting are not at all particular to corporate voting. They are basic constraints that confront all types of voting by large, diffuse electorates, including voting in democratic government on candidates and policy questions on the ballot. Voters overcome these constraints, however imperfectly, by gravitating toward heuristic voting strategies that may work equally well in shareholder voting and, indeed, may explain why shareholder voting works as it does as currently practiced. A limited objective here is to highlight the distinction between the affirmative preferences and negative preferences, as I have sketched out so far. What I call “affirmative preferences” represent the familiar notion of most preferred outcomes that voters might seek as ideal goals for corporate policy in voting on shareholder matters. However, most shareholders are typically passive investors with incomplete and mainly “negative preferences.” They appear to vote mainly on the basis of latent negative preferences against the recommendations of what has proved to be bad management, without necessarily possessing any clear affirmative vision for what management ought to do in most cases. Shareholder voting based on negative preferences, rather than affirmative ones, defines what shareholder voting does best and most readily resolves problems of rational ignorance. In other words, any debate over shareholder voting can be about not only the quantum of power that shareholders ought to hold vis-à-vis the board, but also about how well the shape of shareholder voting maps onto what shareholders do well despite their rational ignorance