Investor Suffrage Movement

Recent market crashes and financial scandals are symptomatic of a capitalism in which shareholders have lost control over the corporations they own. To reassert control, shareholders must overcome obstacles that prevent them from voting their shares. The solution is to form a “proxy exchange” through which investors can conveniently secure, transfer, aggregate, and exercise their voting rights.Recent market crashes and financial scandals are symptomatic of a capitalism in which shareholders have lost control over corporations. To reassert control, investors must overcome practical and legal obstacles that prevent them from voting the shares they beneficially own. They can do so by implementing a novel “proxy exchange.” Unlike an exchange for trading stocks or futures, this exchange will be for transferring voting rights. It will allow investors to conveniently secure, transfer, aggregate, and exercise those rights.Today, the notion that shareholders can select their own proxy resembles the remark attributed to Henry Ford that people can buy any color of Model T they want—so long as it is black. Before each annual meeting, corporate managers mail to shareholders proxy assignment cards allowing them to appoint those same managers—or the managers’ agent—as their proxy. That is the only choice the cards offer—take it or leave it. The system is so broken down that managers seek proxy rights more to ensure a quorum at the shareholder meeting than out of fear that they might actually lose a vote. Only in rare circumstances does a proxy fight arise in which a competing group also sends out a mailing to shareholders soliciting a grant of proxy rights. That situation is akin to offering automobiles that are either black or gray.For investors who beneficially own shares through an intermediary, such as a mutual fund or pension plan, the situation is even more stark. Because the intermediaries legally own the shares, it is they—not the investors—who decide how to vote those shares.A proxy exchange will dramatically change all this. Imagine investors going to a secure website and, with a single mouse click, transferring current and future voting rights in all stocks they beneficially own to anyone they choose—a charity, professional association, investment adviser, trade union, advocacy group, faith-based organization, family member—anyone willing to accept them.What will recipients do with the voting rights they receive? Some will receive enough rights that it will be worth the effort to actually vote them. They will do so through the same secure website. Others will receive fewer voting rights. Rather than vote them, they will use the website to transfer the rights on to other trusted parties. In this manner, small blocks of rights will be aggregated into medium blocks, which will be aggregated into large blocks. Large blocks will be voted through the website. In this manner, fragmented voting rights that are now worthless anachronisms of U.S. capitalism will suddenly become valuable.Corporate governance is the biggest problem facing capitalism today. The costs of the current system—fraud, diversion of resources, cronyism, and just plain mediocrity—are incalculable. Legislative responses like the Sarbanes–Oxley Act of 2002 do some good but impose significant costs of their own. A proxy exchange is a market-based solution that will succeed by putting owners back in charge. It will be a new market for corporate control—a market more efficient and far less costly than hostile takeovers or traditional proxy fights. If implemented, investors will benefit; financial institutions will benefit; and society as a whole will benefit.