Trading and Shareholder Democracy

The recent shift of power from corporate boards to shareholder meetings applies the logic of political democracy: it aligns the preferences of those who make decisions with those for whom decisions are made a form of corporate democracy. However, unlike the political setting, a key feature of the corporate setting is the existence of the market for shares, which allows investors to choose their ownership stakes and makes the voter base endogenous. In this paper, we analyze the two-way feedback loop between shareholder voting and trading in the stock market, compare the effectiveness of shareholder voting with delegation to the board, and study the implications of index investing and ESG proposals.