The Idealized Electoral College Voting Mechanism and Shareholder Power

Abstract

Increasing concern over corporate governance has led to calls for more shareholder in‡uence over corporate decisions, but allowing shareholders to vote on more issues, such as executive compensation, may not affect the quality of governance. We should expect instead that, under current rules, shareholder voting will implement the preferences of the majority of large shareholders and management. This is because majority rule offers little incentive for small shareholders to vote. I offer a potential remedy in the form of a new voting rule, the Idealized Electoral College (IEC), modeled on the American electoral college, that significantly increases the expected impact that a given shareholder has on election. The bene…t of the mechanism is that it induces greater turnout, but the cost is that it sometimes assigns a winner that is not preferred by a majority of voters. Therefore, for issues on which management and small shareholders are likely to agree, majority rule is a superior mechanism for shareholder voting. For issues on which they are likely to disagree, the IEC is superior.

Keywords: Voting, Electoral College, Governance

JEL Classification: D72, G34