The One Share - One Vote Debate: A Theoretical Perspective

Burkart M., Lee S.
ECGI Working Paper, Brussels, 2007

ECGI Finance Working Paper No. 176/2007

Abstract:     
The impact of separating cash flow and votes depends on the ownership structure. In widely held firms, one share - one vote is in general not optimal. While it ensures an efficient outcome in bidding contests, deviations mitigate the free-rider problem, thereby promoting takeovers. In the presence of a controlling shareholder, one share - one vote promotes value-increasing control transfers and deters value-decreasing control transfers more effectively than any other vote allocation. Moreover, deviations allow a controlling shareholder to reduce her equity stake, thereby exacerbating the conflict of interest between her and the minority shareholders. If there is any, the rationale for mandating one share - one vote must therefore be to dis-empower controlling minority shareholders. While this is likely to reduce conflicts among shareholders, it tends to empower managers to the detriment of all shareholders. It is an open question whether this policy would improve the quality of corporate governance, notably in systems built around large active owners. In addition, an all-inclusive one share - one vote principle would require to also regulate pyramidal groups as well as (some) derivative security transactions. The verdict in the case of depositary certificates, voting and ownership ceilings is less ambiguous, since they insulate managers from both takeovers and effective shareholder monitoring.