In this essay, we contest one of the main arguments for restricting corporate board voting to shareholders. In justifying the limitation of the franchise to shareholders, scholars have repeatedly turned to social choice theory—specifically, Arrow’s theorem—to justify the exclusive shareholder franchise. Citing to the theorem, corporate law commentators have argued that lumping different groups of stakeholders together into the electorate would result in a lack of consensus and, ultimately, the lack of coherence that attends intransitive social choices, perhaps even leading the corporation to self-destruct. We contend that this argument is misguided. First, we argue that scholars have greatly overestimated the relative likelihood of cyclical outcomes with an expanded electorate. Second, even if a nascent intransitivity were to occur, there is almost no chance that it would manifest itself in inconsistent corporate decisions, much less ones that would cause a firm to self-destruct. Moreover, the exclusive shareholder franchise, like any other preference aggregation system, may avoid violating one of the conditions of Arrow's theorem only by violating another—a tradeoff that has never been explicitly acknowledged or defended. Ultimately, we argue that Arrow’s theorem fails to support the limitation of corporate voting rights to shareholders.
Vanderbilt Law Review
Grant M. Hayden & Matthew T. Bodie, Arrow's Theorem and the Exclusive Shareholder Franchise, 62 Vand. L. Rev. 1217 (2009)