Good Shoes for Shareholders

Elections are upon us in Québec, with all the ensuing brouhaha and commotion. After having lived here for a few years, I have sprouted an interest in Québec, and Canadian, politics. This in spite of the fact that I cannot vote, since I am not (yet) a Canadian citizen.

But then again, I am told that voting makes no sense. Who tells me this? The Armchair Economist, also known as Mr Steven Landsburg, who argued in Slate Magazine back in 2004 that your vote does not matter. Not even if everyone thought like that – because everyone does not think like that. Mr Landsburg recommends that, instead of voting, you play the lottery.

What if you are a shareholder? Should you too start buying lottery tickets?

No. Do not buy lottery tickets.

Buy shoes.

Why? Perhaps to chase, shoe in trembling hand, an ill-behaved CEO down the hallway? Or to be well equipped for walking away, once you have called it quits on being a shareholder?

What you want to do with your shoes depends on your stake in the company.

Say your stake is high enough that you can initiate a shareholder proposal. The law in the U.S. and in Canada requires that you own at least 1% of the firm’s shares (or $2,000 worth of shares) to do so. Practically, this level of share ownership means that if you do not agree with the company’s choices, you can make your opposition widely heard (and propose alternative plans via your proposal) during the annual meeting of shareholders when shareholder proposals are voted on by shareholders. Your shareholder proposal may even spark the curiosity of the press so that the wider public takes heed.

More substantially, however, being an important shareholder opens the less visible channels of communication with the CEO and the board. You likely elicit their behind-the-scenes attention, which allows you to debate directly, one-on-one, with the leaders of the company. And chase them down the hallway, shoe in infuriated hand, if the need arises.

If you are an important shareholder then, your actual vote per se may not matter. Rather, what matters is the menace of your vote and the threat of the harm your opposition can do to the reputation of the company’s leaders. As long as you have the right to vote you are all set.

Things are a bit different if you are a small shareholder. You have limited options to voice your dissatisfaction when, as a small shareholder, you are not satisfied with the company’s actions. First off, you cannot initiate shareholder proposals and thus are hard-pressed to propose alternatives to the plans spearheaded by the company’s leaders.

What you can do is vote during the annual meeting of shareholders on any issues that are up for vote, such as shareholder proposals brought forth by important shareholders. The other notable item on the voting menu during the annual meeting of shareholders is the election of directors to the company’s board. Since the board of directors is responsible for laying out the big strategic plans of the company and monitoring as well as advising the CEO, you can, by voting in director elections, have a say, albeit a small one, in the company’s future. With more companies moving toward majority voting, your vote during director elections is more likely to matter.{{1}}

Last but not least, you can sell your shares and invest in companies that are more to your liking. This may be a more appropriate course of action when you are dissatisfied with the company’s choices and not willing to stick your neck out for the long haul. Hence the shoes. You put them on and make a disappearing act. Personally, I prefer doing this sporting the high heeled kind, although I realize that they are not of the sort that allows for a fast, sprint-style, exit.

As a shareholder who is able to walk on, you have a distinct advantage over a voter. Short of moving to a different electoral jurisdiction, which is an expensive undertaking that is not necessarily effective since political leanings can change over time in a given jurisdiction, voters cannot vote with their feet.

Your thoughts?

[[1]]Under majority voting, a director is not elected if more votes are withheld than cast in favor the nominee. Under plurality voting, a nominee is elected director if she receives the highest number of votes cast for an open seat.[[1]]

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