Voting Rights in Corporate Governance: History and Political Economy

Voting rights became the subject of sharp legal wrangling in American political elections when the U.S. Supreme Court decided Bush v. Gore in 2000, and again thirteen years later with its decision in Shelby County v. Holder. The result has been legal action, academic debate, and media attention focused on Americans’ voting rights.

Something similar has been happening to shareholder voting rights in the United States, though it has garnered much less attention. Many aspects of shareholder voting rights are now in flux, with major changes involving dual-class structures, ballot access, broker voting, and the universal proxy. Behind the scenes, asset managers are utilizing pass-through and client-directed voting mechanisms to transfer direct voting power back to their clients, a trend that threatens to shift power in companies in close votes.

The current moment has an antecedent in the original Gilded Age—the last major period in which shareholder voting rights experienced transformative change. In a new article, I connect the old Gilded Age to our current New Gilded Age and shed new light on an old mystery in corporate law history—what explains the rise of one-share-one-vote in American corporate law? One-share-one-vote was not the dominant voting rule in the U.S. at the start of the nineteenth century, but had become dominant by that century’s end.

The answer is revealed in power struggles among three sets of players—corporate managers, large shareholders (now asset managers), and small shareholders. This history challenges the conventional agency paradigm, which treats corporate organization as defined by a bilateral “separation of ownership and control” that collapses differences among shareholders. In the nineteenth century, large shareholders and small shareholders were distinct, politically-cognizable groups. Today, again, this has become true, with large asset managers and their clients (and retail shareholders) possessing separate and sometimes conflicting interests. The article, titled “Voting Rights in Corporate Governance: History and Political Economy,” is forthcoming in the Southern California Law Review, and further discussion of it can be found in this N.Y. Times article about my recent work.

The Proxy System

The article begins by recounting the legal change that produced the modern proxy system. In proxy voting, the shareholder delegates the vote to another, the “proxyholder.” Proxy voting was critical to corporate finance in the nineteenth century, because it allowed far-flung investors to buy equity stakes in companies without forfeiting their votes, thus expanding the geographic scope of a corporation’s investor base. Proxy voting also held the potential to empower small shareholders through collective action, but, instead, it became a mechanism for sidelining shareholders in corporate governance. Evidence shows that nineteenth-century corporate managers found ways to harvest proxies and control firms. The practice of proxy solicitation emerged, and proxy votes were even bought and sold—New York’s legislature was forced to outlaw the practice in the 1880s. Because corporate managers had access to stockholder lists and could use the corporate treasury to fund proxy solicitation, they quickly dominated the proxy system.

Large bloc-holders had the most invested and thus the most to lose if low-quality management entrenched itself through the proxy system. This “proxy abuse” emerged early as a major problem and, by 1840, legislatures in Pennsylvania, Ohio, Virginia, and Massachusetts were sharply regulating proxy voting. Most significantly, some states specifically prohibited a corporation’s officers and directors from voting other holders’ shares by proxy. This prohibition is notable not only because it had significant implications for corporate power at the time, but also because proxy voting by a corporation’s management is, today, the dominant form of corporate voting. In the final decades of the nineteenth century, those laws were swept away.

One-Share-One-Vote

In the early nineteenth century, it was common for corporations to limit the voting power of large bloc-holders, and this contributed to the problem of proxy abuse. Corporations employed a range of approaches to share voting: some used “democratic” voting, or a rule of one-person-one-vote; others used graduated voting, which allocated fewer votes per share as the size of a holding grew; and some used voting caps that capped the total percentage of votes that any one holder could exercise. Over the nineteenth century, law and practice gradually adopted the rule of one-share-one-vote. Historians have struggled to explain this, and even today there is little academic consensus about why one-share-one-vote became the dominant rule at the end of the century.

Though the emergence of one-share-one-vote likely had several causes, I present a cause that has not been recognized in the literature: one-share-one-vote helped protect all shareholders against the emerging problem of proxy abuse, by rebalancing voting power in firms to make it easier for large holders to challenge corporate managers harvesting small holders’ proxies.

Cumulative Voting

One-share-one-vote became increasingly common, particularly after 1850, but it disempowered small stockholders in relation to wealthy, large holders. This was politically problematic. Thus, a third, counter-balancing trend arose after 1870: the introduction of cumulative voting, often as a state constitutional right, to empower small holders. Cumulative voting allowed shareholders to aggregate their votes for director candidates, providing a means for small shareholders to gain information and a voice on the board. By 1900, a dozen states had added a right to cumulative voting to their constitutions, while other states mandated cumulative voting through statutory law. The meteoric rise of cumulative voting, and its constitutionalization as an individual “right” in many states, reveals how popular politics were shaping corporate law at this time. Corporate lawmaking wasn’t merely balancing the interests of managers and an undifferentiated mass of shareholders; it was balancing three sets of conflicting political and economic interests.

By the end of the nineteenth century, the pieces of modern corporate capitalism were mostly in place: a robust proxy system that tipped the balance of power towards managers, a rule of one-share-one-vote, which empowered large holders, and cumulative voting, which was supposed to enhance the voice of small holders but would turn out to have little practical effect. Corporate law settled into a framework that remained mostly stable for nearly a century.

Today, once again, significant change is underway. The new universal proxy exemplifies this change: introduced by the U.S. Securities and Exchange Commission in 2021, the universal proxy requires companies (or anyone soliciting a proxy) to place all candidates for election to the board on a single proxy form that resembles a political ballot. (See SEC, Universal Proxy, Exchange Act Release No. 34-93596 (November 17, 2021)). The 2023 proxy season will be the first in which all public companies must present shareholders with a full slate of candidates in contested elections.

Other recent developments have occurred in shareholder voting, including changes to broker voting rules and, at major asset managers, the emergence of pass-through voting and advanced voting instructions. These follow the popularization of dual-class structures, which give extra voting strength to stock held by large, powerful holders. These developments are rebalancing power among corporate managers, large asset managers, and small/beneficial holders. The fact that such power rebalancing has occurred twice, in the original Gilded Age and the New Gilded Age—both periods of notable wealth inequality—suggests a relationship between the politics of shareholder voting and the distribution of wealth.

The late-nineteenth-century period that shaped modern shareholder voting rights overlapped, on the tail end, with the first burst of intense corporate activity in American politics. It started with the presidential election of 1896 and continued until Congress enacted the 1907 Tillman Act, prohibiting corporate campaign finance. If history repeats, we might expect the voting rights reforms now underway to be followed by a surge of political activity by the beneficiaries of the change. The high stakes of shareholder voting explain the growing political backlash against asset managers’ power, including asset managers’ high-visibility ESG activism.