3.3.4.1 Conflicted Voting

So far we have assumed that all shareholders prefer the same outcome, namely the outcome that maximizes the firm's future cash flows. Under this assumption, shareholders merely have different judgments on the question of what the suitable means are to achieving this outcome. In practice, however, shareholders may have heterogeneous preferences. Conflicted voting occurs when a shareholder votes with the purpose of satisfying preferences that are different from the common preference to maximize future cash flows.

A benign case of conflicted voting is the use of the voting right to express concern over the well-being of others. In the 1980s, for example, shareholders used precatory votes to discourage firms from doing business in South Africa, which at that time was suffering onder the apartheid regime.1 Even shareholders of the world's first firm with dispersed ownership, the seventeenth century Dutch East-India Company (the VOC), showed signs of what behavioral economists now refer to as bounded self-interest. Niall Ferguson relates how much of the VOC's success depended on the outcome of its battles with the Spanish and the Portuguese, and that by the time a truce was signed with Spain in 1608, the VOC had made more money from capturing enemy vessels than from trade.2 Apparently, a major shareholder named Pieter Lijntjens "was so dismayed by the Company's warlike conduct that he withdrew from the Company in 1605."3

In the greater scheme of things, it is encouraging that some shareholders use the voting right to express concern over the well-being of others. But to the extent that the efficiency of shareholder voting is measured in terras of shareholder value maximization, it may be problematic. When the policy measure proposed to promote the well-being of others is detrimental to shareholder value, the probability that shareholders who are sympathetic to the measure will vote for the 'correct' option will be lower than 0 5 The Jury Theorem (and simple logic) predicts that adding more shareholders of this kind will increase the probability that a majority of the shares is voted for the "incorrect" option.

The nature of this problem becomes more pronounced when we consider a less benign case of conflicted voting: shareholders' use of the voting right to satisfy their private interests. In firms with concentrated ownership, a controlling shareholder might, for example, vote to approve a related party transaction that is not entered into at arm's length, or vote to appoint a director loyal to the controlling shareholder 's interests rather than to the general interest of shareholders. Even in firms with dispersed ownership, individual shareholders may vote to satisfy their private interests, resulting in intra-shareholder conflicts. There is an emerging body of literature addressing these conflicts, and it is therefore not necessary to describe them here in detail.4

By way of example, consider the potential conflicts of interest arising between states as shareholders and ordinary shareholders. A few years ago, commentators expressed concerns about the rise of "sovereign wealth funds," fearing they may be driven by strategie rather than financial motives.5 The concern was that, for example, a Chinese sovereign wealth fund might use its influence over a U.S. technology firm to engineer a merger (or some joint venture) between the firm and a Chinese company to enable that company to obtain access to the firm's technology. If the merger were put to a vote, the fund's voting behavior clearly wouldn't be aimed at maximizing future cash flows.6

Following the financial crisis, attention has shifted from sovereign wealth funds to Western governments, which have obtained significant influence over some firms as a result of providing financial support. Consider the case of carmaker Renault, in which the French state holds a large stake and which, in 2009, received a multibillion-dollar government ban to mitigate the impact of the crisis. As reported by the Financial Times, Renault was recently ordered by the French government to keep production of its new Clio car in France rather than shift it to lower-cost Turkey.7 If Renault shareholders were asked to elect directors, we might expect the government to vote in accordance with its belief on which nominee is most likely to protect French jobs rather than its belief on which nominee is best equipped to maximize future cash flows.8 The larger the government's stake, the greater the probability of a majority vote for the option that fails to maximize shareholder value.9 Thus, we can see how conflicted voting may affect voting efficiency.10