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Shareholders Face Tyranny of the Majority Too February 7, 2009

Posted by federalist in Finance, Government.

Democracy suffers from a fundamental flaw known as the Tyranny of the Majority.  Carl Icahn today points out that corporations, as currently organized, suffer the same hazard: A large shareholder (an institutional investor in his example) can vote for management that acts in its special interest, and counter to the general interests of other shareholders.

[M]any institutions have a vested interest in supporting [particular corporate] managements. It is the management that decides where to allocate their company’s pension plans and 401(k) funds. And while there are institutions that do care about shareholder rights, unfortunately there are others that are loath to vote against the very managements that give them valuable mandates to manage billions of dollars.

In practice it doesn’t even take a literal majority to win votes: When the potential gains for a special interest far outweigh the costs to everyone else, the majority often does not muster enough energy to cast the scrutiny and opposition necessary to defeat the special interest.  (I previously called this phenomenon the Tyranny of Special Interests.)



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