Empowering Shareholders, or Overburdening Companies? Analyzing the Potential Use of Instant Runoff Voting in Corporate Elections

I. INTRODUCTIONAlthough hotly debated today, one of the prevailing theories in the mind of the public as to why the shareholders of a corporation possess the right to vote in corporate elections is the fact that shareholders own the corporation.1 Even though one academic has written that this theory is the worst argument for shareholder primacy, the notion that shareholders should vote in corporations because the corporation belongs to them is strongly entrenched in the minds of the general public; in fact, this theory of shareholder primacy often creeps into judicial opinions, showing that even judges are influenced by the theory.2 Although more sophisticated theories have attracted attention in recent years, the shareholder empowerment movement today can be viewed as rooted in the innate idea that shareholders deserve the right to effective control as the true owners of the corporation.3One of the results of the shareholder empowerment movement has been the adoption by various states of majority voting laws that prohibit a corporation from changing to a plurality voting scheme4 without shareholder approval after shareholders have voted to enact a majority voting5 scheme.6 Majority voting provisions ensure that the directors who are elected to the board have the approval of a majority of the shareholders rather than just approval of a plurality, which is easy to obtain when there are no other legitimate candidates.7 Therefore, requiring a majority vote for directors may improve the ability of shareholders to remove ineffective, underperforming, or lackluster directors.8 In proxy seasons of the mid-2000s, majority voting for directors was one of the most important corporate governance initiatives sought by shareholders.9 The push for majority voting by shareholders, spearheaded by activist investors seeking corporate governance improvements, successfully put pressure on boards to adopt such measures.10In the noncorporate context of political elections, a similar voter empowerment movement has given rise to the popularity of Instant Runoff Voting (IRV).11 Proponents of IRV believe that plurality voting schemes suppress new ideas and new candidates, devalue the vote of each voter, and encourage negative campaign tactics.12 However, when more than two legitimate candidates run in a majority vote election, often no single candidate will receive a majority of the votes, leading to a costly and inefficient return of voters to the polls. IRV has been touted as a clean solution to this problem, allowing for a majority vote while preventing the need for voters to return to the polls for a runoff.13However, IRV has not yet caught on in the corporate shareholder empowerment movement.14 This Note addresses how IRV can be used in corporate elections and whether corporations and shareholders should support IRV. First, in Sections I.A-I.D, this Note lays out the mechanics and history of IRV and analyzes the history of IRV in political elections. Part II offers a possible IRV scheme that corporations could utilize for their director elections that combines short-slate elections with IRV. Part III explains the benefits that IRV may provide to a corporate election. Conversely, Part IV lays out the disadvantages of using IRV in the corporate context. Finally, Part V explains that, while IRV may prove to be a useful option for smaller companies looking to increase shareholder empowerment, it likely presents too great a financial burden and logistical challenge for larger companies to implement.A. Mechanics of IRVIn an IRV scheme, voters are asked to rank candidates on their ballots instead of casting a single vote for one candidate.15 Every IRV scheme employs a majority voting threshold, meaning that a winner must receive greater than 50% of the vote in order to win.16 If no candidate has a majority from the initial vote, the candidate receiving the fewest first-place votes is excluded from ballots and the first-place votes are recalculated. …