Title:
The One Share–One Vote Debate: A Theoretical Perspective
Authors:
Mike Burkart and Samuel Lee
Publisher:
European Corporate Governance Institute (ECGI), Finance Working Paper No. 176/2007
Date Published:
May 2007
What are the advantages and disadvantages of giving some shareholders more decision-making power than others? Certain firms, like Google and Berkshire Hathaway, have succeeded without giving voting power to all of their shareholders, but more and more companies are gravitating toward the “one share–one vote” system. This paper supports the latter trend. It’s fine to have concentrated authority when a company’s insiders are highly sophisticated investors and business thinkers like Warren Buffett, but this usually isn’t the right thing to do. When insiders have disproportionate voting power, it is easier for them to resist hostile takeovers and other “disciplinary” measures that might be undesirable for them but good for shareholders overall. Investors in firms that do not use the one share–one vote system can sometimes have their interests trod on by management. Of course, in the real world, there are many more considerations, and for certain companies (like Buffett’s) the benefits of giving insiders total authority probably outweigh the disadvantages.
Bottom Line:
One share–one vote systems, by weakening insiders, make it more likely that value-increasing takeovers will occur. Often, insiders are the only shareholders who will resist such takeovers, and other investors are out of luck if they don’t have voting power.
