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The Mechanisms of Voting Efficiency

By Harvard Law School Program on Corporate Governance

In the wake of the financial crisis, shareholders are increasingly relied upon to monitor directors. But while much has been written about directors? flawed judgments, remarkably little is known about shareholders? ability to make accurate judgments. What determines whether shareholders make the right decision when asked to vote on, say, a merger? In my paper The Mechanisms of Voting Efficiency, which has just become available on SSRN, I take a novel approach to this question by drawing an analogy between corporate voting and another system to aggregate information on estimated values: stock trading.

Using insights on stock market efficiency, the paper makes three contributions to our understanding of voting efficiency. First, the paper identifies four key mechanisms of voting efficiency: (1) informed voting, which implies that shareholders have some information to base their voting decision on; (2) rational voting, which implies that such information is processed in a rational, unbiased way; (3) independent voting, which implies that each shareholder arrives at a judgment by making use of his or her personal cognitive skills, and (4) sincere voting, which implies that shareholders vote with a view to furthering the common interest of maximizing shareholder value rather than their own private interest. The paper explores the operation of each mechanism, and demonstrates that the mechanisms interact in various ways.

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Full post as published by The Harvard Law School Corporate Governance Blog on September 04, 2010 (boomark / email).