When Democracies Collide

A review of “Voting on Public Goods: Citizens vs Shareholders” by Robin Döttling (Erasmus University Rotterdam), Doron Levit (University of Washington, CEPR, and ECGI), Nadya Malenko (Boston College, NBER, FTG, CEPR, and ECGI), Magdalena Rola-Janicka (Imperial College Business School, FTG, and CEPR). The prizewinning paper of the 2025 John L. Weinberg/IRRCi Research Paper Award. 

In a recent article for ProMarket, the authors of Voting on Public Goods: Citizens vs Shareholders offered a timely and compelling overview of their prize-winning research. Their argument was clear and disconcerting: while shareholder democracy can help overcome public policy shortcomings such as inadequate climate policies, it can also trigger a political backlash that might undermine some of the goals it seeks to advance. In a world of politicised ESG investing, this insight has immediate resonance.

The ProMarket article laid out three central takeaways. First, it argued that when regulation is weak or constrained, shareholder democracy can provide a useful substitute as pro-social shareholders prompt companies to target socially beneficial goals next to financial profits. Second, it explained that shareholder pressure for socially responsible corporate behaviour can crowd out political support, prompting a backlash that reduces public subsidies for those same initiatives. Third, it noted that ESG backlash is not merely rhetorical or symbolic; it may be a rational political response to perceived overreach by investors, especially when their preferences differ from those of the broader public.

For those engaged in the deeper currents of corporate governance theory, the paper delivers something equally valuable: a structured framework for understanding what happens when two democratic systems – one-person-one-vote and one-share-one-vote – collide in the provision of public goods. The results are both elegant and unsettling.

Presented at the 2025 Corporate Governance Symposium where it was awarded the John L. Weinberg/IRRCi Research Paper Prize, the paper by Robin Döttling, Doron Levit, Nadya Malenko, and Magdalena Rola-Janicka builds a rigorous model of how shareholder preferences interact with political decisions when it comes to public good provision. Their contribution is not just to highlight the rising influence of investors on ESG issues, but to ask: what happens when shareholders become too influential?

The answer, as their model shows, is that shareholder democracy may substitute for public policy when the state is constrained or inefficient. But it also risks distorting outcomes away from the preferences of the median citizen. This is because shareholder voting power, tied to share ownership, is inherently skewed toward the wealthy, and their preferences regarding social outcomes may diverge from those of the general population.

This misalignment – the authors call it the “preference representation problem” – is particularly acute when shareholder influence is amplified by high levels of diversification and delegation to asset managers. Shareholders with small stakes in many companies (so-called “universal owners”) internalise fewer of the costs associated with corporate public good provision, and may therefore vote for more ambitious ESG initiatives. But these same initiatives can provoke a political backlash, as the model endogenously predicts. The political system, sensitive to the preferences of the median voter, reacts by scaling back subsidies or imposing new frictions – a dynamic that mirrors the real-world rise of anti-ESG legislation in parts of the United States.

In this sense, the paper offers a powerful theoretical explanation for what many observers have sensed intuitively: that the growing assertiveness of institutional investors on climate and social issues can provoke regulatory pushback. Crucially, the model clarifies when such backlash is simply a substitution for imperfect public policy – and when it becomes counterproductive.

Beyond these core results, the paper explores several extensions that are likely to be of special interest to corporate governance experts. It challenges the assumption that pass-through voting always enhances representation: when fund managers aggregate the preferences of small shareholders, they can actually amplify the voice of less wealthy investors. Disaggregating those votes may lead to less, not more, democratic alignment. The model also introduces the possibility of greenwashing: shareholders deriving a "warm glow" from wasteful or symbolic ESG activity, which can further reduce welfare and fuel backlash.

What emerges is a nuanced view of shareholder democracy. It is not always good, nor always bad. It is context-dependent, shaped by the distribution of wealth and preferences in the population, and by the institutional mechanisms through which shareholder influence is exercised. In some cases, it can efficiently fill the gaps left by dysfunctional regulation. In others, it can lead to outcomes that neither maximise welfare nor reflect democratic consensus.

For corporate governance experts, the implications are far-reaching. The paper invites fresh thinking about the role of institutional investors, the design of voting systems (including pass-through voting), and the limits of firm-level ESG initiatives in delivering broad societal outcomes. It also reminds us that even the most well-intentioned interventions in the corporate sphere do not exist in a vacuum: they interact with politics, and politics pushes back.

The richness of the paper lies not only in its core results but in the breadth of its implications. It offers a theoretical foundation, real-world relevance, and thoughtful extensions that speak to current debates across economics, finance, law, and public policy. It is therefore no surprise that the paper was recognised with the 2025 John L. Weinberg/IRRCi Research Paper Prize. 

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