Redistributive policy

Why Piketty’s plea to limit shareholder power won’t reduce inequality

Renowned French economist Thomas Piketty has come out with another book, this time examining polarization in modern democracies (Political Divides and Social Inequalities, Harvard University Press 2022). The vast amount of data collected shows that identity wars are not inevitable, he argues, as long as ambitious redistribution policies are in place. Piketty himself has proposed several such policies to reduce inequality. Still, there are good reasons to be skeptical of their effectiveness.

From the eclectic mix of policy proposals that Piketty made in his previous book Capitalism and ideology, his call for a massive 90% wealth tax made headlines. His corporate governance overhaul proposal has received less attention so far, but is equally noteworthy.

Piketty argues that the voting rights of large shareholders should be significantly reduced. One option he is considering is that a holder of more than 10% of the shares would only be entitled to one-third of the excess votes. As a result, a founder with, say, a 40% stake, would only be entitled to 20% of the votes. This would imply a massive shift in the balance of power in businesses around the world.

At the origin of this proposal is the idea that companies should not only serve the interests of shareholders but of all stakeholders, in particular employees. This idea has long been central to the debate on corporate governance. It has received renewed attention in recent years, spurred by developments such as the financial crisis, climate change and the global pandemic. Nothing new so far.

What is striking, however, is the scope of Piketty’s proposal. So far, the recent governance debate has focused on redefining corporate purpose and mission of directors. And on employee representation on boards, as former presidential candidate Elizabeth Warren also advocated. Piketty, too, pleads for employee representation, but goes further and also calls for limiting the voting rights of shareholders.

Voting is a means and an end, he argues. A means for society to progress through continuous deliberation among its members. And an end in the sense that a just society offers its members the opportunity to participate in decision-making processes. Hence his plea for what he calls “participatory socialism”, and his proposal not only to redistribute wealth, but also to control.

But if voting rights are withdrawn from large shareholders, to whom are they allocated? Only to the remaining shareholders – institutional investors such as Blackrock and Vanguard, whose recent focus on corporate responsibility is aimed at preserving long-term shareholder value. Not to the employees, who, at least in theory, could use these votes to cancel proposals concerning them.

Piketty casually suggests that if employees are represented on the board, they could buy shares to further increase their influence and tilt the balance of power in their favor. But here it confuses different levels of corporate decision-making. Even if employees held half of the seats on the board of directors, shareholders could appoint the other half by majority vote. Since employees generally do not own a majority of the shares, they will also not be able to elect other directors.

Turning the shareholders’ meeting into a battleground between employees and investors is unlikely to yield good results. The board is much better placed to weigh stakeholder interests and make decisions based on that.

Ironically, policymakers and scholars have long debated the merits of “one share, one vote,” but they have focused on whether to prevent major shareholders from having a disproportionate share. high right to vote. This debate has been invigorated by tech companies such as Facebook and Snapchat going public with dual-class actions. Last year, a record 32% American companies have gone public with such a structure to ensure that their founders retain control.

The key question in this debate is whether it’s a good thing or a bad thing for founders to claim disproportionate power for themselves. On the plus side, they tend to have superior knowledge, strong incentives, and a long-term horizon. But they can also abuse their power to the detriment of minority shareholders, which is why many investors are skeptical and why major indices like the S&P Dow Jones have ruled out new dual-class companies. So far, however, the evidence for this trade-off is inconclusive.

Piketty, meanwhile, goes in the opposite direction and argues that large shareholders should disproportionately have moo right to vote. So closer to a situation where one person has a vote, as in some of the first companiescooperatives or even democracies.

What impact would this have on decision-making in today’s listed companies? There is some merit in the idea that the outcome of the vote is determined by a large number of voters with diverse perspectives increases its accuracy, compared to a situation where a single shareholder decides what is good for the company. But in practice, it is far from certain that the remaining shareholders would use their increased voting power to make better decisions from a shareholder perspective, let alone from a stakeholder perspective.

So yes, Piketty’s proposal can reduce the concentration of voting power in companies. But no matter how well intentioned it is, it is unlikely to reduce social inequalities.