Majority Voting and Corporate Control: The Rule of the Dominant Shareholder

This paper incorporates a model of corporate control into a general equilibrium framework for production economies with incomplete markets. The classical objective of value maximization is extended, but is indeterminate. Instead, firms are viewed as being subject to shareholder control via some decision mechanism. As long as this decision mechanism is responsive to a unanimous preference by shareholders, shareholder control is consistent with but stronger than value maximization. Next, the particular institution of majority voting by shareholders is examined. It is shown that for generic economies, a majority rule equilibrium for a firm implies that production is optimal for the largest, or dominant, shareholder. Finally, a more realistic control mechanism is considered in which majority voting by shareholders is constrained by a group of shareholders, or Board of Directors, who control the voting agenda. The result is that shareholders not on the Board have no influence on the equilibrium production choice of the firm.