Why Piketty’s Plea to Limit Shareholder Power Won’t Reduce Inequality

Michael Schouten is a research associate at the Amsterdam Center for Law & Economics and a corporate partner at De Brauw Blackstone Westbroek. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

The famed French economist Thomas Piketty is out with yet another book, this time examining polarization in modern democracies (Political Cleavages and Social Inequalities, Harvard University Press 2022). The vast amount of data collected shows that identity wars are not inevitable, he argues, as long as ambitious redistribution policies are put in place. Piketty himself has proposed several such policies to reduce inequality. Yet there’s good reason to be sceptical about their effectiveness.

Of the eclectic mix of policy proposals Piketty made in his previous book Capitalism and Ideology, his call for a whopping 90% wealth tax has generated the most headlines. His proposed corporate governance overhaul has received less attention so far, but it is equally remarkable.

Piketty argues that voting rights of large shareholders should be reduced significantly. One option he considers is that a holder of more than 10% of the shares would only be entitled to one-third of the excess votes. As a result, a founder holding, say, a 40% stake, would be entitled to a mere 20% of the votes. This would imply a massive shift in the balance of power in companies around the world.

At the root of this proposal is the notion that companies should not merely serve the interests of shareholders but of all stakeholders, particularly employees. This idea has long been at the centre of the corporate governance debate. It has received renewed attention in recent years, driven by developments such as the financial crisis, climate change and the global pandemic. So far, nothing new.

What’s striking though is how far-reaching Piketty’s proposal is. So far, the recent governance debate has focused on redefining corporate purpose and director duties. And on employee representation on boards, as has also been advocated by former presidential candidate Elizabeth Warren. Piketty, too, argues for employee representation, but goes further and calls for limiting shareholder voting rights as well.

Voting is a means and an end, he argues. A means for society to progress through continuous deliberation among its members. And an end in the sense that a just society offers its members the opportunity to participate in decision-making processes. Hence his plea for what he terms ‘participatory socialism’, and his proposal to not only redistribute wealth, but also control.

But if voting rights are taken away from large shareholders, to whom are they allocated? Merely to the remaining shareholders—institutional investors such as Blackrock and Vanguard, whose recent emphasis on corporate responsibility is intended to preserve long term shareholder value. Not to employees, who at least in theory could use such votes to strike down proposals affecting them.

Piketty casually suggests that if employees are represented on the board, they could buy shares to further increase their influence and tip the balance of power in their favour. But here he conflates different levels of corporate decision-making. Even if employees held half of the board seats, shareholders would get to appoint the other half by majority vote. Since employees generally won’t hold a majority of the shares, they won’t be able to elect additional directors either.

Turning the shareholders’ meeting into a battleground between employees and investors is unlikely to yield good outcomes. The board is much better positioned to weigh the interests of stakeholders and make decisions on that basis.

Ironically, policymakers and academics have long debated the merits of ‘one share one vote’, but they’ve focused on whether major shareholders should be prevented from having disproportionally high voting rights. This debate has been reinvigorated by tech companies such as Facebook and Snapchat that have gone public with dual class shares. Last year, a record 32% of US companies went public with such structure to ensure their founders retain control.

The key question in this debate is whether it’s a good or a bad thing that founders award themselves disproportionate power. On the positive side, they tend to have superior knowledge, strong incentives and a long horizon. But they may also abuse their power to the detriment of minority shareholders, which is why many investors are sceptical and why major indices like S&P Dow Jones have excluded new companies with dual class shares. So far though, the evidence on this trade-off is inconclusive.

Piketty, meanwhile, goes in the opposite direction and argues that large shareholders should have disproportionally low voting rights. So closer to a situation where one person has one vote, as in some of the early corporations, cooperatives or indeed democracies.

How would this impact decision-making in today’s listed companies? There’s some merit in the idea that having the voting outcome be determined by large numbers of voters with diverse perspectives increases its accuracy, compared to a situation where a single shareholder decides what’s good for the company. But in practice, it is far from certain that the remaining shareholders would use their increased voting power to take better decisions from a shareholder perspective, let alone from a stakeholder perspective.

So yes, Piketty’s proposal may reduce the concentration of voting power in companies. But well intended as it may be, it’s unlikely to reduce social inequality.

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