Home > Corporate Governance Theory, Minority Shareholder Rights > Voice: the perspective of Minority Shareholders

Voice: the perspective of Minority Shareholders

In firms with concentrated structure, (be it because of the economic stake or as a result of multiple-share capital structures, or as a result of the retail shareholders´apathy), the fact that controlling shareholders can extract private benefits from other shareholders, who still remain passive is appealing, and constitutes the theme for Dov Solomon´s “The voice: the minority shareholder´s perspective”, published in May 2017, (1).


Rational apathy (2) has been identified as a main factor for the passive attitude, and measures addressing it try to (i) increase the benefits arising from participating and voting: rising the influence in the voting outcome pushing institutional investors to vote; (ii) decrease the costs of voting, introducing online voting for instance. If voting reality improved, all other activism tools would be enhanced also, thus its relevance.

Solomon firstly describes the Agency problems when controlling shareholders are present in a company, so that minority shareholders´ fortunes can be affected. Neither monitoring nor incentives suffice to eliminate asymmetries nor conflicts of interest. The focus of the article refers to agency problems between majority and minority shareholders, not between shareholders and managers nor between them and other stakeholders. Solomon states that agency problems may worsen when the controller is the founder and/or his voting rights exceed his/her stake, (Google started a trend for this in 2004, but it only followed the path of New York Times and others). Moreover, these problems go beyond the cases where the controller holds more than 50% of voting rights, due the rational apathy mechanism.

Solomon analyzes then Rational Apathy. He uses the cost-benefit analysis to explain why it appears, with investment diversification as a multiplier-factor. The result is the voice of shareholders is not heard. The corrective methods try to:


  1. Increase the benefits derived from voting: due to the problems connected with organizing large groups, convincing institutional investors to act seems reasonable; their benefits can be large; their share in total share ownership has increased strongly; their duty of care forces them to be active.
  2. Decreasing the costs associated with voting: time and mobility are the obstacles to be removed; proxy rules have traditionally been used for this, even if there are some disadvantages –lack of debate and difficulties in convincing others-; online shareholder forums and electronic voting systems further reduce the costs and disadvantages. Turkey, India, Israel have also opened this path.

Solomon wonders though whether rational apathy is a problem deserving government intervention; first, he acknowledges there are other mechanisms by shareholders to fight against agency problems, exit and loyalty, (3). Solomon thinks “voice” has value and is useful or effective, even if it faces big problems. Hirschman (4) merely accepted voice was effective when the company policies affected the public interest, when shareholders actually reacted. Solomon was beyond his argument.

He analyzes the intrinsic value of shareholder voting rights. Courts in the USA have given voting rights the nature of a fundamental right based on theoretical arguments, as it founded and legitimized the power by managers and boards; accountability is also considered; alignment and the derived efficiency has also been noticed by courts and scholars; Solomon considers the legitimacy issue not only “utilitarian” but “ideological and deontological”, thus fundamental and not objectionable. It is for him the basis for Corporate Law. Absent the shareholder franchise, the public corporation is deprived of its ideological foundation.

As for the “efficiency or utility” of voting rights, Solomon adds: corporate democracy lowers agency costs as it forces alignment between controller and minority shareholders; it also impacts the performance of capital markets, as a reduction in agency costs also reduces the cost of capital; moreover, voting rights are a mechanism to introduce trust in financial markets, which means higher funds available and prosperity.

Solomon finally overviews the main objections to Corporate Democracy:

  1. Some object Freedom of Contract against intervention. Solomons disagrees to the existence of a true contract between shareholders and directors in modern corporations; beyond that, market imperfections invalidate its absolute validity;
  2. Others think that promoting voting rights being exercised by minority shareholders enhances short-termism, which is rejected by Solomon on the ground of the relevance of institutional investors, who generally have long-term interests, and because even in the case of hedge funds, evidence is not decisive.
  3. Other argue retail shareholders lack knowledge, information and can be manipulated so that they can promote suboptimal decisions. But even if this could be the case, there is not guarantee that controllers (informed) do not extract rents for their own benefit.

I would like to point out that one of the strongest points Solomon does in the article and repeats in his conclusions, refers to the deontological relevance of the shareholder franchise; all arguments against it stem from a utilitarian or efficiency ground, but cannot object to the former.


  1. Solomon, Dov, The Voice: The Minority Shareholder’s Perspective (May 10, 2017). 17 Nevada Law Journal 739 (2017). Available at SSRN: https://ssrn.com/abstract=2868725
  2. Nili, Yaron and Kastiel, Kobi, In Search of the ‘Absent’ Shareholders: A New Solution to Retail Investors’ Apathy (November 16, 2016). Delaware Journal of Corporate Law (DJCL), Vol. 41, No. 1, 2016; Univ. of Wisconsin Legal Studies Research Paper No. 1397. Available at SSRN: https://ssrn.com/abstract=2870590
  3. See my other posts at https://joaquinbarquero.wordpress.com/2016/07/18/why-do-institutional-investors-exit-instead-of-raising-their-voice/ and https://joaquinbarquero.wordpress.com/2017/03/30/corporate-governance-challenges-in-controlled-companies-usa-versus-eu/

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