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Shareholder Rights June 11, 2007

Posted by federalist in Economic Policy, Finance, Taxation.

Shareholder activism and the evangelism of dueling academics like Lucian Bebchuk and Stephen Bainbridge have renewed the question of whether current laws do enough to secure shareholder rights.  In theory, Shareholders elect Trustees who oversee corporate Officers who are responsible for performance of a company.  It sounds like it should be a little democracy where the motto is “one share one vote.”

In practice many corporations are structured so that Shareholders get little say in anything other than whether they’re happy with the status quo.  Trustees often end up more beholden to the Officers they are supposed to be policing.  Activist Shareholders have been crying foul as they discover that they can’t always effect the changes they want through shareholder votes.

But the real “shareholder vote” was always supposed to be one’s right to sell shares and take one’s capital elsewhere.  And here we find the real rub: Institutional shareholders may have that luxury, but individual investors generally do not.  If they sell then they have to pay capital gains taxes.  I.e., there is a tax on the ultimate shareholder vote!

Real shareholder activists should be agitating for tax reform.

… Back to Federalism

This is a convenient point to note that the federal government has not only encroached upon the ultimate shareholder vote, but has also trampled the ultimate citizen’s vote: The right to vote with one’s feet.

If federalism were respected in this country then we would have fifty competing governments, each with the ability to offer a significant political alternative to its citizens.  Those who are unhappy with their current government could cast their electoral votes to change it, but they could also vote with their feet by moving to a state that more closely represented their interests.

Lamentably, since the federal government has usurped many powers that belong to the states, U.S. citizens have lost that right.  No matter which state you move to, the political regime is largely the same.  It’s as if there were only one company you could invest in.  Kind of communist, isn’t it?



1. Hamilton - June 29, 2007

Fred Thompson claims to have federalism as his guiding light and the basis for his political positions. To what degree do you believe that to be true and what are your feelings towards Mr. Thompson?

2. euandus - October 22, 2009

I suspect that the latest compromise regarding state banking regulation in the midst of pressure for financial reform in Washington points to the influence of large corporations on the Congress as a culprit in the on-going eclipse of federalism. Pls see my blog if interested. Thanks.

3. econometrician - January 23, 2010

For corporations it is a problem of the institutionalization of investment management. http://econometrician.wordpress.com/2010/01/23/there-are-too-few-greedy-fat-cats-among-corporate-shareholders/

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