3.6 Conclusion

This Chapter has drawn an analogy between stock trading and corporate voting and used insights on market efficiency to study voting efficiency. The result is a taxonomy of mechanisms of voting efficiency, including informed voting, rational voting, independent voting, and sincere voting. The Chapter has also explored the limits of voting arbitrage through share trading, proxy solicitation, and vote buying. This has provided a framework for analysis of two issues that are currently being studied by the SEC and policymakers around the world: empty voting and the major influence of proxy advisers. The analysis has shown why policymakers should refrain from addressing empty voting with measures that reach beyond disclosure, except on an ex post basis in individual cases of abuse. In addition, the analysis has shown that policymakers should consider specific measures relating to proxy advisers in order to enhance voting efficiency. These measures should be aimed at promoting informed voting and independent voting, and at preventing conflicted voting.

The framework also provides a roadmap for future empirical research by generating a number of testable hypotheses. Among these are: (1) Sample size neglect causes shareholders of firms with strong track records of prior acquisitions to approve proposed acquisitions even if the prior acquisitions are not fully representative of management's ability to make the proposed acquisition a success; (2) Optimism causes shareholders of firms to approve proposed acquisitions that purport to exploit opportunities arising in a new era, and to appoint directors who claim they will exploit such opportunities; (3) Shareholders make attribution errors in director elections; (4) The presence of an opinion leader results in convergence of shareholder votes around the explicit or implicit recommendation of the opinion leader; (5) The greater the dispersion of share ownership, the greater the incentive to engage in epistemic free-riding and thus the greater the relative impact of an opinion leader; and (6) Absent conflicted voting, the more significant the cost and legal constraints to voting arbitrage, the greater the risk that a majority of the shares in a firrn with dispersed ownership will be voted for the incorrect, i.e. value decreasing, option.

To conclude, our understanding of voting efficiency may perhaps never equal our understanding of market efficiency given the unmatched wealth of data that the stock market churns out every minute. Yet, the importance of voting efficiency for the efficient allocation of resources in the economy compels us to try to improve our current limited understanding. Here, the taxonomy of mechanisms of voting efficiency should prove a useful analytical tool.