4:41

One Person, One Vote, No Proxies

Summary: 

Perhaps it's not as much a case of why the one person, one vote rule is good for funding of unpredictable R&D+. Perhaps it's more a case of how bad the one share, one vote rule can be.

The one share, one vote rule, called the proportionality principle, states voting power should match economic incentives, i.e., shareholders should be able to vote their opinion in proportion to their claim on cash flows from the firm. Sounds alluring, but consider why a percentage claim on cash flows from a firm (e.g., dividends) should entitle anyone to the same percentage claim on decisions affecting firm revenues, cash expenditures or debt levels? Cash flows are typically a very small percentage of revenues (e.g., 10-15%). Why should a percentage of cash flows be transferable to a vote on the many thousands of decisions of the firm often having little to do with cash flows?
Figure 1. The support structure for funding of unpredictable R&D. Investor education is key. Investor participation makes for more effective education. Investor retention is needed to make the education stick.

Proportionality is under attack on a number of fronts. It's not practiced in venture capital firms or in most LLC's. Even non-shareholding labor representatives claim a right to vote in firms of several European countries. It is not by far an indisputable principle.1

New derivative financial products allow stockholders to hedge their financial interest in such a way they no longer have the same interests as their unhedged counterparts. As a result, hedged shareholders can vote against the interests of the firm in order to maximize the value of their derivative stake. Hedged shareholders can vote in a way designed to cause firm share prices to fall. Proportionality, one share, one vote, enables this adverse perversity.

Figure 1 shows the funding support structure for unpredictable R&D+. Investor education is key. Our investors must understand the grounds for our claim to provide steady share pricing from perfectly unpredictable R&D investments. Participation comes next. The surest way for investors to buy into our unorthodox funding approaches is through participation. Doing delivers a much more powerful message than knowing. Success in both education and participation are predicated on investor retention+. If we can't keep 'em we can't educate 'em. These are the foundation for funding of unpredictable R&D: Education, Retention and Participation.

The voting rule one person, one vote aligns best with the funding supports. We contact you for your vote on an upcoming proposition. We seek you out to educate you for an upcoming vote. We recruit your participation to rally other voters. You the investor are actively courted by the many interested parties to the upcoming votes. You the investor are made to feel important and significant in the operations of the funding agency+ and in exchange you make an effort to become a more informed voter. Voting is participation and provides a very strong impetus for investor education and retention.

Why not just educate one voter and get ten educated votes in return? Because windfalls+ from successful investments represent potentially tens of billions of U.S. dollars in cash flows to be allocated across investors. That's a lot of temptation. Individuals will work day and night to snag a larger share of this windfall than is justified by their capital contributions (i.e., claiming them as private benefits). They will be highly motivated to do this in a way that can be made to seem fair and equitable. We need many educated investors, each looking out for their own best interests, to place a check on these very sophisticated and subtle hijacks.

Windfalls represent a key stress test for any voting rule. We avoid machinations that temporarily inflate voting power just before a big vote. We block efforts by investors to band together as a cabal to seek a larger share of the windfalls for themselves. We stand in for future investors, who today do not have the vote. The one person, one vote+ rule plus voting constructs+, provide the best protection from these and other assaults on the long-term health and well-being of the funding agency.

One share, one vote has very little to recommend itself beyond the perquisites it provides for a privileged few, of which hijacking windfalls will be top priority. One person, one vote has the advantage of more fully engaging all investors in the vote. Every investor will get a phone call, and perhaps several, for each upcoming vote. Many voters can still come up with the wrong answer. But at least it's an answer that is not a rubber stamp for a privileged few. A billion dollars generates a lot of emotion. We can survive a wrong answer by the majority. We cannot survive a general collapse of investor confidence that would come from perceptions of a privileged few hijacking windfalls for their own benefit.

  • 1. Perhaps the best argument for proportionality is found in cases where a few high-count shareholders exercise due diligence for the good of all investors, especially in the oversight of agency management+. These same high-count shareholders, of course, can just as easily expropriate greater wealth for their own private benefit.
Further Reading
Reba Tull
Offline
Joined: 03/30/2011
Big fish. Small fish.

Millionaires want to feel like big fish. The one person, one vote+ rule makes everyone small fish. You need to come up with some pretty enticing perks for large investors as a recompense. Agency management+ will also need outrageous enticements if you expect to get the best people and to get the best out of those people. One share, one vote at least gives the appearance of fairness to non-millionaires, while stroking the egos of the millionaires.

You can't ignore the psychology of wealthy investors when divvying up the goodies. To think you can do this without them is just braggadocio.