Eric Posner Argues that 'Quadratic Vote-Buying' Would Improve Corporate Governance
As Jamie Dimon waits for JPMorgan’s shareholders to rule on his future job description, the bank’s chairman and chief executive can take comfort in how that decision will be made. In the US (and in many other countries), management has few constraints. Shareholders have virtually no influence over the composition of boards of directors or even major transactions, such as mergers. The situation is dire and decades of reform efforts have failed to solve it. But new economic ideas offer promise for improvement.
Shareholders’ advocates have tried to press boards of directors and management to respect their votes, to strengthen board independence and to give shareholders a greater role in corporate governance. But the deeper problem is with shareholder democracy itself. People with stakes in companies are generally too ill-informed to cast a vote wisely, or even to bother to vote. Even large and sophisticated shareholders such as pension funds often realise that the cost of monitoring management exceeds the benefits, which are shared with other investors.
The solution to these problems is a better system of shareholder voting. We need a system that lets those with stronger views about a company’s future weigh in without allowing a few insiders or raiders to run roughshod over everyone else. In our academic work, we have proposed such a system based on the burgeoning science of market design for which Al Roth and Lloyd Shapley won the 2012 Nobel Prize in economics. We believe that our system of quadratic vote-buying (QVB) could improve corporate governance. Here’s how it works.