first of all thank you for being here so numerous as usual also well I was a bit pessimistic and not because the topic is not interesting but because it is a very complex that is how it is possible to protect the voting rights in a company so it's a very complex topic which requires a technical analysis analysis which we were hear from a professor teaching in Harvard and who also taught at the London School of Economics and has been dealing with the theoretical economy for many years a professor on the part I limited myself to a bit of provocation because it's the voting rights of shareholders a lot the protection of shareholders would we're going to discuss the PES is a topic which is nevertheless correlated I like to say I'd like to tell you that we can say is that the protection of shareholders in Italy doesn't have a very long tradition of a war when its small shareholders we could even say that the Italian legislation protects a large shareholders instead of small shareholders the financial history of Italy as you may know the negative episodes in terms of protection of shareholders and then if you listen to the various debates yesterday and today for example the presentation by Professor Guido Rossi or judge de beagle well they spoke about relations between democracy in the market and the results or the scenario which has been depicted is not very optimistic so we're really looking forward to the presentation by Professor Harrington and perhaps I may mention what we got our sea state this morning when he financial instruments the various shares which are present and which in some cases have already caused some trouble on the market we will hear about this complex topic I just wanted to make a very shortened introduction and to speak about the protection of shareholders in Italy hoping that perhaps during the debate after the presentation of professor Hart there will be the possibility of making comments or asking questions and perhaps ask professor Hart that what he thinks about the issue of the protection of shareholders not a flaw - professor Oliver Hunt thank you very much well let me begin by saying I was in this room yesterday a little later it was very very hot and I hope it's a little less hot today but if you fall asleep I shall understand although I'm gonna try to stop it happening so the theme of this conference is markets and democracy and a lot of activity in market economies takes place within firms and you can think of firms as being small or mini societies and like any society they have to be governed in some way and that's really the question I'm going to be interested in how should they be governed who should control who should have the voting rights we're going to sort of concentrate on that question and there's some natural constituencies of a firm so the if you like you could say these are the the citizens of a firm they're often call they don't know they're in English state stakeholders and the people one thinks of the groups are shareholders or investors these are the people who hand over their money to the company and in return they meant to get a dividend but it's not a firm promise it's really a discretionary payment by the firm then we have the workers the people who work in the firm the consumers the people who buy the product or products or the firm suppliers or another group and then creditors these are also people who hand over money to the firm but they are promised something firm in exchange they're promised a fixed payment not a discretionary payment so the first point I want to make is that if we think about democratic principles it's not obvious how to proceed which which of these groups should get votes what's the Democratic solution it's not clear so they all get both some get more votes than others we don't really know this is where economics can be helpful so economists look at this problem in a particular way and I think their their way of looking at it gives you some insights and some guidance so in particular the way an economist thinks is as follows that a vote is useful for a personal group because it gives them some protection against being taken advantage of and it also allows them to influence events so for example you know if I have a vote and you're running the company or the manager and you're thinking of doing something I could if I'm the only person with the vote I could stop you I could say no you're not allowed to do that and that might protect me against some action you're going to take which might be bad for me now votes though are a scarce resource the value of my vote is going to be lower if you have a vote somebody else has a vote right because maybe I would like my vote too I'd like to use it to make the company do a particular thing but if somebody else has a vote they might be able to stop that happening so votes are a scarce resource and the value of you of your vote is greater the fewer other people have bullets so that sort of suggests that you've got to be rather careful about allocating them there they're really a scarce commodity like any scarce commodity you've just got to try to allocate them to the group to whom they're most useful so in economic terms so if we think of those various groups that I talked about let's just see which ones most need protection so I would say and I'm slightly changing the order here but let's start off with consumers so consumers could care about what a firm does because consumers would like the firm to charge a low price they'd like the product to be high quality okay so they certainly care but they do have some action they can take if they're not happy which is they can go to another firm so you know if you don't like the car that Fiat is supplying you can go and to get a car from Ford workers at the firm also care a lot about what the firm does what wages it offers what the conditions of work are and this kind of thing but they also have alternatives if things get too bad they can leave and get a job elsewhere now of course that can be quite costly so I don't want to pretend that that's a trivial matter for a worker but at least they have their human capital which they have not given up to the firm and they can take it as somewhere else creditors if a creditor is mistreated because the firm doesn't pay what it promised then the creditor can do something about it it can push the firm into bankruptcy which is an unpleasant event for a firm but shareholders this is a group which is very very unprotected so if you think you're a shareholder you've been promised a dividend because you handed over some money to the company or to somebody else you expect to get a dividend from the company but now let's suppose that the managers decide not to pay any dividends you know this year or maybe next year for a while because they say you know we need the money to carry out various investment projects what can you do about it if you don't forget votes what happens if you don't have any votes what can you do the answer is nothing because it wasn't a contractual promise it was a discretionary payment now people often say that oh yeah but you could can you hear me alright it's sort of slightly it's okay they say oh well you can sell your shares but this is really a fallacy because yes you can sell your shares but who's going to buy them or to put another way how much will anyone pay for them if these are shares in a company that isn't going to be paying dividends they're not going to be worth very much so effectively shareholders are very vulnerable they can be in principle it's expropriated completely now this is where votes come in if they have votes they have some protection because if the management or the board of directors is not acting in their interest they can in principle do something about it now it's not such an easy matter by any means but they can try to vote them out replace them with some group that is more sympathetic to them or another thing they can do is maybe some somebody will come along and try to make a bid for the company and for their shares and they can sell their shares to this person and since they have votes let's say they have votes the votes will then be assembled into a block by this bidder and he or she can then use them to change the management of the board of directors of the company and start paying dividends so I think the first at a first sort of cut of this was the economic sort of tells us is that it's quite reasonable that the shareholders should have the votes which is indeed very common but we've said that we've got to that conclusion not by just saying that's the Democratic way rather we've said that they they are useful to protect shareholders and without such protection protection shareholders may be unwilling to hand over their money in the first place now the situation is not completely cut and dried or completely straightforward in some situations it may not be so important to give to have outside investors who have votes maybe the company doesn't need too much outside capital and so you can afford to allocate the votes to some other group because I didn't want to suggest that these other groups are completely protected they're not let's take workers if the company does something bad to them it may be quite costly for them to find another job and so some of their skills may be specific to this company so you know if there is also a case for giving them votes and if the company doesn't need outside capital maybe we might expect this to be efficient and indeed we see situations like this leading examples are professional partnerships so for example consider a law firm you might have a group of people who decide they want to set up a law firm they're going to be partners in the firm they don't they haven't enough money themselves to set it up and they're going to care they care very much about how it's going to be run so they want to control it so the partners would have the votes this is in fact what we see with law firm partnerships and they won't have outside investors they hold all the income claims themselves and they also have the votes and there are other examples like medical practices you know you have doctors who form a partnership and they have the votes they are the owners so people often don't think of these as examples of worker managed firms you know an author's who do you think of lawyers as being very rich and so on but in fact they are workers they are working at the firms and yet they are they also have the votes they are also the owners and then there are also other examples like this on the consumer side so think of a group of people who would like to have a neighborhood swimming pool and they might put the money down they have enough money themselves to afford the pool no it's not doesn't make sense for each of them not to have their own pool so they're going to share the pool and what might be a good way of running method of organizing the governance the governing of that swimming pool it might well be that they are all members of the pool and they have votes they're also shareholders they're member shareholders so the shareholders of the pool are also the people who use the pool who swim who consume the product so this is an example of a consumer cooperative and there are lots of other examples around mutual insurance companies daycare centers some schools alike that now typically these companies are small because they don't need much outside cattle they're not always small there there's a very well-known example of a large company that is a worker cooperative worker manage and that's maunder them but by and large they're small because they have difficulty in raising capital because if they want to raise capital either they have to get it from the workers or the consumers whoever the owners are or they have to go outside but if they go outside they face the problem I talked about earlier that those people need for taxis and so it makes sense actually to hand the votes to them and and not to be a worker or consumer cooperative anymore the point is that typically the the workers of the consumers are not all consumers are not in the best position to put up money for new investment either they don't have the money themselves they don't have enough or for from the point of view of risk they don't want to put all their wealth into the enterprise that they're working in or or buying from so what I want to so this is sort of the first part of my talk the conclusion is that sometimes we're going to see companies which not are not owned by their shall help shareholders all more to precisely their shareholders are also the workers or the consumers but for mostly for large companies it's going to make sense to separate out the role of being the investors in the company from being the consumers of the workers and the suppliers and since you have a definite a separate class of investors because they're very unprotected it makes sense to give them the votes okay now in the second part of the talk I want to discuss I want to focus on large companies where the votes are indeed in the hands of shareholders so we might be thinking of Fiat or in Tessa or Vodafone companies like that there's still an interesting question to be asked which is how do you allocate the votes among the shareholders so one possibility is that every share should have the same number of votes let's say each show gets one vote so that's called a one share one vote rule and that's very common particularly in the United States or the United Kingdom it's less common in continental Europe including Italy where it's also it's quite often the case that you see companies with more than one class of shares so there might be two classes in one class has more votes per share than the other class so that's often called a dual class structure it's a deviation from one share one vote and in fact there has been recently in Europe a big debate about this the European Union considered whether to make it mandatory for companies to have a one share one vote rule and they decided against it against mandatory a mandatory rule and we'll come back to that I want to present two examples I want to show you again I was I want to say that if you're thinking about democracy you know what's democratic you know we think in a case of a society one person one vote is democratic of course people didn't always think that right they sometimes it's just to rich people they gave votes to men and not women they gave votes in the United States the whites and not blacks and so on so it's been a process a very painful process to reach one person one vote we think of that as democratic but now what does that mean in the case of shareholders should it be one share one vote or one person one shareholder one vote that actually is not seen much but as I say we sometimes see two classes of shares with different voting rights so I'm going to give you an example first to show why it might be bad to have two classes why one show one share one vote might be economically efficient so again I want to make the point that economics can help just talking about what's Democratic doesn't really tell you what's good what's bad but economics can tell us both what is sometimes good about one share one vote and what is sometimes bad about it so let's start off with an example where we have a company which is I may not be on the right page okay I'm on the right page now so this is a company that is currently being managed in such a way that it produces profits or dividends think of dividends people expect a stream of dividends over the next 10 20 30 years and let's suppose the value of that dividend of a stream in current money is a hundred euros all right so this is a rather small company but you can think of you know multiply by a billion if you like so let's suppose that there are this company has a hundred shares okay so if the company's worth a hundred euros euros then each share is worth one euro and let's start off with the case where each share comes with one vote all right now I'm going to look at takeover bids so in my analysis one share of one vote will be good or bad because of the possibility of a takeover bid so let's imagine someone wants to buy this company and they're going to make a hostile takeover bit they're not going to go through management they're going to go straight to the shareholders what would they have to do well the natural thing is obviously to make an offer an offer at more than 1 euro per share it seems if they offer less than 1 euro per share why should anybody sell their shares since the shares are currently worth one share 1 euro each so this would be an unattractive also you won't accept that but if you're offered more than 1 euro per share and it's the only offer on the table and then the choice is each person can sell their share to this bidder or not well if they don't you know they want the bid to succeed because currently the shares are worth a euro and if the bidder loses I'm going to assume that management continues and so your shares will be worth a year a euro someone's offering you more than that it seems like an attractive idea and so economic analysis economic logic suggests that every shareholder will sell to the bidder who will then accumulate all the shares and since each share has a vote the bidder will have all the votes and can vote out management and get control and now in a sense well in a very important sense this is the right outcome because the company was worth a hundred years what we've concluded is someone can buy it for a bit over a hundred euros and that means that if it's worth more to that person than 100 euros the sale will take place and that's a economically good because the value of the company will have gone up you know it's going to the most the person who values it most and shareholder rights are fully protected because somebody cannot buy the company for less than it's worth okay I'm assuming here that the bidder has to buy all that make an offer for all the shares so that's what's good about one share one vote now let's compare let's see what might happen if that company had a different voting structure it had a dual class a dual class setup so let's now change the facts a bit let's suppose that the company has two classes okay Class A and Class B Class A has 60 shares each with one vote and Class B has 40 shares each with two votes so this is now we've got a class the Class B is the superior voting class because it has two votes per share but when I say when I say Class A has 60 shares in Class B has 40 shares what I mean by that is that when dividends are distributed they go each shareholder gets the same amount so that 60% of the dividends go to the Class A so you know if a hundred euros is distributed each class a shareholder gets a euro and each Class B shell gets a euro so 60% going to class a 40% going to Class B so the the dividends are distributed according to the number of shares you have but if you have a if you're a Class B shareholder you all have more votes now the same situation where currently the company is worth a hundred euro euro so this is what people expect in the turn in in in the form of dividend so again since the dividends are allocated pro-rata to the shareholders what this means again is that each share is worth a euro I want to now again consider how somebody could try to buy this company up and what I want to argue is it's no longer necessary to offer more than one euro for every share in this company because what you can do is just offer that deal to the Class B shareholders so if you look at the numbers there the Class B shareholders if you just buy their shares you're going to have 80 votes 40 shares to vote you'll get 80 votes which means you have the majority of the votes because the Class A only have 60 so you can get control you don't have all the votes but you have more than you have more than 50% so you can vote out the Board of Directors and replace them with your own people and you've done it just by buying the Class B shares now so what I'm suggesting is that what you could do is just offer a little more than a euro to each of the Class B shareholders and they will say to themselves look I'm being offered a good deal here my shares are currently only worth one euro this person is offering me a little bit more I'm gonna sell they all sell the bidder has 80 votes has control now now what's happened to the class a shareholders this is the important point they have not sold their shares because they weren't offered anything by the bidder so let's just assume they carry on being shareholders in this company which now has this bidder who controls it through his or her ownership of Class B it could be that this new person who's going to replace management is actually less efficient at running the company and so the Class A shareholders may find that their shares are worth less than a euro now just to give you an example you might ask the following question why would someone who's less efficient bother to buy this company and the answer is there lots of reasons so it could be that this person again am i I'm on the right one okay this person might have what the next one all right this one no okay all right my Italian clearly needs to be improved the this person might have what we call in the business a private benefit so I'll give you an example this could be let's suppose the company being purchased makes tires four cars and the company that's bidding might be a car company now I don't want to say any negative things about fear so let's assume that it's General Motors General Motors is going to buy this tire company and their idea is once they've got control they're going to sell tires to the parent company to General Motors at a low price so that's a way actually of siphoning off the profit from the original company to General Motors now if you are a class-a shareholder of the tire company you're going to find that you're now an investor in a company that isn't making much money because it's selling its tires very cheaply to General Motors such things happen and I think they happen in Italy quite a bit anyway so this car and it could be that General Motors could be quite a poor manager of the tire company so they may actually be the wrong people to run it but it's attractive to them because of the low price of tires and what I'm saying is that they can get control by just buying 40% of the company and offering a nice deal to them and diluting the claims of the class a shareholders so this is an example okay so what I want you to take away from this example is that under one share one vote this didn't happen because you had to buy everybody out and you had to make an attractive offer so you couldn't die Bute the shareholders but once you have two classes you can play them off against each other basically you make an offer to the class with most of the votes and you may hurt the other class but there's nothing they can do about it okay so here one share one vote is good but this is not always the case so I now want to change the example to show you that sometimes one share one vote may be bad so life is difficult we can't there's no simple result this is always good this is always bad it depends on the circumstances so let's consider it to consider the same setup of a company which is currently worth a hundred euro euro spurt I want to suppose it's no longer a tire company let's assume it's a newspaper it could be the news a newspaper come it could be the New York Times okay the New York Times produces a pretty good newspaper it's great high quality it is informative there's a lot about politics it educate could be said to educate a certain section of the American public and let's suppose it's running along and it's worth a hundred euros now someone might have the idea that the New York Times should be changed in such a way to make it more popular so I don't know what its readership let's say it's a million now but you know you could make it perhaps have five million people buy it if you made it a little less sophisticated so perhaps we should have more pages on gossip you know gossip columns or perhaps interviews with film stars more interviews with film stars or models or this kind of thing and you could make the New York Times more profitable now so here's an example where somebody with that idea might come along and offer the shareholders let's suppose that currently it's a one share one vote company so there are lot of shareholder that there are hundred shareholders each share has one vote somebody could offer a little more than a euro to each of the shareholders and they will think to themselves well you know currently my shares worth a euro someone's offering me more I care a little bit about the New York Times but maybe I didn't even read it I'm an investor in it but I don't actually read it myself it would be a little sad if it disappeared but you know what I also care about money I fear people do think that way so this bid maybe the person would have to offer you know a euro 50 to get their shares but it's kind of attractive because they're going to make money by selling their shares to this outsider who gets control and changes the New York Times and in my example I want you to think that the New York Times was really creating some value for society which wasn't reflected in the share price so I was saying it does a good job of educating people and telling people about politics so you could imagine it sort of improves the way the u.s. is governed because people are more educated and know which politicians to vote for and this kind of thing so once someone gets control and changes it that's lost that social benefit is lost and yet in my Maat what I want to say in that example is it might be in the interest of any one shareholder to sell to the bidder particularly if by the way the bidder says you know my bid is unconditional so you know I might say to myself I hope the other people don't sell but I'm gonna sell for a euro 50 because this bidder has promised to pay me that even if his bid fails so then that's a way of really putting the pressure on people to kind of be self-interested in self so ok so I claim that when a company creates social value that wasn't true in the previous example one share one vote may not be so good because yes it protects the private info interests of the shareholders but it encourages them perhaps to ignore the social interest now let me go back to suppose this company had two classes of shares Class A and Class B same numbers as before the Class B shares have their 40 of them they have two votes each one could imagine that maybe those shares the superior voting shares were owned by a family maybe the family that set up the New York Times well there is such a family the Salzberg a family and indeed they the New York Times is a company with two classes of stock and the Salzburg has owned the if I thought I think it's the right family they own the superior voting stock and they are often under pressure to move to one share one vote in fact right now there's a campaign or at least last year there was a campaign I think it failed because of course they decide and they didn't want to give up their control why should they but the point is that if they own if this family owns the Class B they can just say no because the bidder even if he got all the Class A shares that would only be 60 votes the family has 80 votes so they can veto the sale of the company to someone who's going to make it a more popular or less educational newspaper and in my example that might be a good thing because this company is creating a social benefit one that the family cares about but the ordinary investors don't care about quite so much now this is very topical not only with respect to the New York Times but also the Wall Street Journal so some of you have may have followed that in the last few months or a little longer now I suppose I mean Rupert Murdoch I wanted to buy The Wall Street Journal and The Wall Street Journal actually was family owned the back the Bancroft family owned and Wall Street Journal and there were two classes of stock they had the superior voting stock and they could they had enough votes to reject his offer now it turns out they didn't they accepted it and one of the things that was going on is that the Bancroft family is quite dispersed now so although it perhaps once upon a time was a close-knit family it isn't anymore and there were some people who wanted to get out they wanted money they didn't care so much about The Wall Street Journal a Rupert Murdoch promised that he wouldn't change the Wall Street Journal too much and indeed he he said he would respect editorial independence and don't worry the editor can do whatever he likes and I think about four months later the editor was fired which was quite surprising really to everybody except those who know Rupert Murdoch fed the bankrupts obviously had decided not to worry too much about that okay so there was they could have stopped it though they chose not to all right I'm going to conclude by resistor conclusion that all right so the last bit is in a way a little more light-hearted because it's we move away from firms to politics which is always more amusing so I just want to say we can use these kinds of ideas about what's good or bad about one show effort one vote and put it in particular I want to think about what's good about it the first example we can apply that to the following question would it be a good idea in political elections to allow people to buy and sell votes so this is far fetched a bit far-fetched which is why this is a little more humorous but it is sometimes suggested you sometimes hear people saying you know markets for everything you know we could buy why shouldn't we buy and sell everything kidneys votes let's have votes why not well let's see let's try to understand whether that would be a good idea so essentially what I want to argue is the following let's take an example let's think about the American election presidential election which is coming up and let's imagine that Barack Obama wins the Democratic nomination and then McCain John McCain you know who's kind of a bit old gets very tired and can't run in the fall so instead you know he drops out and instead a third party candidate emerges and let's suppose it's Ross Perot now Juara a you may remember Ross Perot is the man who ran as a third party candidate in the United States in 1992 he's extremely wealthy so let's suppose he decided this was his opportunity to try again and we were in a situation where we had a market for those people could buy and sell votes then I I would claim that the following might well happen so I'm going to assume that somehow Barack Obama would be a better president than Ross Perot but I and I I want to assume that if there was just a vote between them Barack Obama would win but I want to claim that if you can buy and sell votes then Ross Perot is probably going to win and the reason is that he's much much richer than I assume he still is than Barack Obama and so what he could do is he could offer each of us well actually I'm not an American citizen at this point so I can't vote but let's suppose I am trying to become one so I might be able to vote by then so he might offer me something for my vote now I might and and everybody else and people like me might I might think the toy I might think well I don't want him to win but on the other hand my vote if he buys my vote it's not going to affect the outcome my vote and he's offering me something for he's offering me more than Barack Obama is offering me because he's so much richer you can afford it and so I might be tempted to sell my vote to him sort of hoping that everybody else doesn't and so if everybody else does as I am doing then I certainly should sell it may as well make money you know but either way really it makes sense for me to sell to Ross Perot because I'm extremely unlikely to be pivotal my vote my little vote and the trouble is if everybody reasons that way we also our votes to Ross Perot and he votes himself the president of United States even though it could be a very bad outcome and the reason of course he's willing to do that is this private benefit he may even think that he's a worse president although he probably doesn't but they it may just be so wonderful to be President of the United States that he's willing to pay for it so this I think is what is wrong with with having a market for votes in politics and what's really going on here to connect this to my example of one show one vote is it's really like having if you have a market for votes you've created sort of dual class a dual curve structure because the people the shareholders the people who are receiving the dividends are the citizens of the United States they can't sell that income stream those are the benefits or the costs from living in the United States and the only way you could get rid of that is to leave the country even then of course you were living in the world and so you're going to be affected by what the United States does but the point is that the if you like the income claims or the dividend streams are inalienable when it comes to politics the only thing that can be sold is the votes but we saw why at least in my first example it was quite dangerous to separate or could be my General Motors example it was dangerous to separate the votes from the income claim you don't you want to bundle them together and a one-person one-vote rule in politics make sure that they are bundled together okay let me then conclude I say that just to summarize the talk then I started off by saying that you've got these different groups of stakeholders you've got this scarce resource votes and you want to allocate them to the group that needs the most that needs the most protection and I think that is a very strong argument that that is shareholders that people who hand over their money and just a promise something they in return but sometimes when a company doesn't need outside investors it is makes sense to have those shareholders also have another another role in the firm such as being the workers or the consumers so to bundle together the those who hold the profit claims and those who are doing something else and this would be true of companies that don't need a lot of outside capital and there are plenty of examples of that around worker or consumer cooperatives and I gave example of law firms swimming clubs or tennis clubs or this kind of thing so one conclusion is that you know it all depends there isn't a single best way of running a company you're gonna you're going to see different types of companies around and indeed we do see that then there was the question of in a large company where because it needs lots of capital it's it's decided to allocate the Vosges to the shareholders and the workers and the consumers our separate groups then the question is do you want one share one vote or something more complicated and the answer is sometimes you want one share one vote but not always we saw in my example of the New York Times or The Wall Street Journal it could be helpful to have family ownership and control which can be facilitated through dual class so one size does not fit all it affect to see different kinds of companies with different voting structures out there and probably therefore the answer is not to have mandatory rules about how you should design your company but let people choose if you want to set up a family newspaper that's and you want to have retain control that's up to you another recent example is Google Google for some reason I'm not sure it's such a good idea for them but they decided that the founders of Google decided when they went public that they wanted to retain control so they had a superior voting class which they hold now I don't think it's a particularly good idea for them but it's their choice presumably the people who bought their shares should have bought them at a bit of a discount because they know that the management team is entrenched on the other hand since everyone thinks they're geniuses of the first order no one seems to care perhaps at this point they may gain the foot care in the future when perhaps it turns out they answer amazing at everything but okay the but so recently the I I mentioned this the European Union considered whether to have a mandatory one share one vote rule for public companies in Europe and decided against it and I think that's probably wise because we've seen it's not always a good thing let people do what they want and it may well be overtime that many companies of their own accord gravitate towards a one show one vote rule because it's sort of relatively efficient but we should let them make that decision themselves okay but look a internal velocity repository system well with reference to the one vote one share system mentioned by professor Hart and just to adapt it to our capitalism I remember what Erica Kutcher said shares that should not be counted they should be weighed and this is a philosophy which has dominated large industrial groups for many years and then I remember how important syndicator agreements are and I know that there are many large groups of which are controlled by a limited number of shares in well these are some points which I would like to offer to the audience foreign a debate so these are comments about our Italian system which has some abnormalities as compared to the systems which have just been described as so I would say that we can open the debate if you have any questions or comments to make please go ahead and use the microphone please learn italiano forgive me and lazy of my erosion eco a Aloha well thank you very much for this very brilliant contribution but you feel allow me professor there was an obstacle that was not duly considered I'm talking on behalf of the small Italian shareholder and since we're talking about democracy I would like to say that in public company shareholders meetings there is no democracy at all in Italy as we've heard from mr. barrini in Italy they're big groups that do actually control companies this may be a de facto situation or an official one one of the most important Italian banks has recently approved the balance sheet with little more than the representation of 20% or the equity shareholders when you go to the General Assemblies of Italian companies well you see 2030 people there you know and sometimes like in the any assemblies shareholders do not even have the right to reply to what is being told to them so the vote of small shareholders is equal to zero so professor art which is your opinion regarding this totally anomalous situation and which remedies would you suggest thank you very much this is a very good question and I don't disagree at all with the the tone of the question it turns out that Italy isn't very different from the United States in this regard I mean I read about shareholder meetings in the United States they're very undemocratic often some of them have been extremely short and important people from the company didn't appear I think it was was at Home Depot there was some company I think it was where there was a lot of criticism the chief executive pay and they basically yeah they management has a great deal of ability to organize the meeting as they wish this is in the United States and they did it in such a way that shareholders couldn't really complain I think as I said was an extreme 20-minute the meeting or something so I don't want to pretend for a moment that what we have now under one share one vote is a democratic in the way we want in fact I think and again I know more about the US and Italy but I'm sure you know you described it as being bad in Italy but I just want to say that there it's most shareholders in the US do nothing they don't pay attention to what's going on and it's not unreasonable because you know you get stuff in the mail and you know you're busy where your vote isn't going to matter you know as to vote for some board you're just approving there's no contest usually and so you don't even bother to really think about the issues and and in addition if you go to the meeting which is ooh me you know could be 3,000 miles away you know you're going to just be one small person and they they may not even call up on you or whatever I think what we so I think a lot can and should be improved there but it is happening actually there are some encouraging signs because in the last few years in the US shareholders have begun to become more active and there's now a kind of movement beginnings of a movement there's a lot of bad publicity you know in the newspapers for people who are supposed to be the big issue one of the big issue is being CEO compensation so you know there's been so much criticism of that that CEOs who previously didn't have to worry about shareholder reaction now have to worry a lot and they also have to worry about a press reaction but in addition to that there have been calls for boards to pay more attention to what shareholders want to the motions they pass or if they to make it easier for them to select an alternative board so they've been all sorts of proposals to make it possible for a small share hold or not so small but not so big either to put up an alternative slate of Directors to compete against the incumbent board that used to be extremely difficult and it's still very difficult but and I'm not sure most of the proposals haven't been implemented but which i think is bad news but the good news is that there's been a lot of discussion about it and a lot of press coverage and so companies are being forced to pay more attention to their shareholders they can't get away anymore we're just ignoring them a recently a current example which I think is very interesting is what's happening with Yahoo which as you may have read turned down an offer by Microsoft and some of the shareholders of Yahoo are very unhappy about it and led by Carl Icahn who is the kind of person who takes stakes in company so he doesn't sometimes he makes a takeover bid sometimes he just acquires a significant shareholding and then he tries to change what management does well he has announced that he's going to put up a competing slate for the Board of Directors so there's going to be an election every year companies Yahoo has an election for the board and normally there's no contest but this year there's going to be a competing slate I have been using the word slate it's a group so you know 10 12 people whatever he's got management have the 12 people they want to be elected and Carl Icahn has another group which includes my colleague Lucien Babcock actually at Harvard Law School so shareholders this time will have a chance to vote and there's been such a lot of discussion of this in the media that maybe they'll vote for Carl Icahn hoping that he's going to start talks with Microsoft again so these are all signs I think that over time the mic just so my view is a lot has needs to be done there have been lots of abuse of shareholders and small shareholders by companies in not just in Italy but in the US I think the UK is a bit better but these things can change it's evolving and I think we just have to try to push more in that direction rather a lengthy answer but a very good question you have suggested also the hypothesis of selling a political vote I believe that such a hypothesis would be a complete disaster for democracy you gave us the example of Ross Perot and buying votes to become the president I mean Ross Perot is certainly better off then mr. Urbana so he buys the votes at the next American elections and is elected president of the United States well selling a share of a company actually does mean selling a vote however and the political scenario this cannot be allowed the political vote cannot be sold otherwise it would be a dictatorship this actually may happen in some situations but we cannot legitimize it I told that was really Mike that was my point that was the point I was trying to make so I totally agree with you but but that was the purpose of my example was to say that politics is different from the firm I mean the the political situation is different because in the firm if someone buys the company he or she is by the shares the income claims along with the votes particular if you have one share one vote when I buy your vote I'm also buying your interest in the company in the political context we can't do that because if I live in the United States you can't buy my community interest in the United States I am a citizen there so all you can do is buy my vote and I argued that's very bad so the whole point of my example of Ross Perot was to make exactly the point you've made I think it would be a bad thing I'm against it but I'm not against buying shares and votes in the in the corporate context I'm not an economist I'm a political scientist but I wondered if I could push this asymmetry between companies and voting constituencies a bit further on the issue of these dual companies with dual tiered stock doesn't this signal that there's some overriding private or public benefit that good that's being protected here now in the case of the Financial Times it might be intellectual capital as in the case or or for an educational function intellectual capital in the case of Google in the case of Fiat for instance it could be not only a family interest but a desire to keep the company in Italy and not sell out for multinational I wonder if this is something that this depends always on a value judgment even after all the Wall Street Journal and The Financial Times are in the same universe of companies it's only a question about how they're going to be managed that makes a difference is the way that economists try to measure this public or private good or is it simply another way of saying that the asymmetry between companies and constituencies means we should be cautious about recommending one person one folks in the case of companies you want one share one go yeah one sure I think I mean that's a difficult question to answer I think it's it's hard to measure the social value it's not impossible you could try to measure how much people are getting from the New York Times say or the Financial Times or whatever it is over and above how much they have to pay there are some techniques for doing that I'm you could one thing you could do is you could ask them you know you could ask an individual how much you know would you be willing to pay each day for this you know make it you have to make it clear to them they won't have to actually pay it but you know they only pay a dollar twenty-five the New York Times whatever the the FT costs these days but you know they might indicate to you that actually it's much more valuable to that and to them and that but I think so you could try to do it but I think the more important message of the economic analysis and of my talk is that it's really pretty much up to the people who set these things up to decide how important it is to them so you know it could well be that when you set up let's take Google because it's a recent example I assume that the managers the the Brin Brin and the other guy I'm very bad on people's names but those people through the to who's who in who discovered who set it up who founded it for some reason because they have this view of the Google way of life they wanted to protect that and they thought the best way to do it would be for them to have control and not to allow some external person to buy out the company now the counter argument would be that if they're running the company well the shares would be so expensive which by the way they are now that nobody in their right mind would try to take it over because you know you'd have to pay a huge amount for it and you know if rupert murdoch tried to take over google you know my assumption is that once he got control some key people would leave and he would find that the google magic was dissipated disappeared and he would be owned had left holding something which was much less valuable he would have spent a huge amount for something which is no longer so valuable under his ownership or management he's not stupid in fact far from it so he wouldn't do that and so that's actually the usual argument that if you're running a company well you don't need special protection but obviously they didn't think that was good enough perhaps in the future and I think it was their right you have to say to them if that's the way you want to you know if you want to sell off shares to the public with with lower voting rights fine they know what they're getting they'll pay accordingly for it but it's really up to the people who set up the company as opposed to society to say no you should have set it up another way or you can't set it up that way freedom of contract I think is the lesson here the message whenever the number of votes is large enough it seems to me that the probability that your single vote is pivotal it's essentially negligible and therefore by exactly the same argument that you are applying before the vote is going to be driven by any small private benefit you might draw out of it so I'm wondering whether this kind of mechanism not a kind of indignant of the of the voting mechanism as a way to generate efficient efficient results well I think the point there are two points here the first is that when it comes to contests for control and people actually making bids for the company takeover bids then suddenly those votes actually become valuable because because you have one person who's trying to buy them and they want 50% of them they're no longer negligible and so particularly if you have a contest between two people so let's just imagine let's go back to my political example even though I don't like I don't want to clave this is not the way we should do things but suppose we did have people candidates could buy votes and suppose we had Ross Perot against Barack Obama then they'd both be bidding for votes there'd be a market for them and there would be a price and you could sell to the highest bidder and you get some money out of it because even though your vote is negligible the person who's assembling the two competing teams for them every vote matters because they're trying to get more than the competitor so we do indeed see that when there are contests for control and you have two classes of shares though the class with the more votes per share sells at a premium in fact it's sometimes sells at a premium and in anticipation of a control contest so that's the sense in which it's not negligible anymore now when it comes to actually voting in a board election there is indeed a problem so you know if we go back to the Yahoo example there's going to be an election for the board I think at the end of July and you have these two competing teams the incumbent team and then the team led by Carl Icahn and people are going to have to decide how to vote and they could write and quite rationally decide not to bother however I think because the thing that there's been a lot of publicity and people may believe that with one team their company's going to be more valuable they may decide you know it's worth it this time I will check the box or send in the email or whatever is required go to the website it doesn't it only takes a few minutes so it's not very costly to do it and so when it you know the benefit may be enough to them or they just are interested or something it's the same thing with national elections there's a for economists Alan Krueger was talking about this yesterday there is a bit of a mystery as why to why people vote because and then some of them take it very seriously even though their vote is very unlikely to matter although of course elections have been getting closer and closer and so people now feel well actually might I might make the difference but even when that wasn't happening people vote I think the reason they vote even though it probably doesn't matter it's because they think it's important civil sort of duty to vote most people of course we're not enough people vote but so the answer to your question is if sort of yes and no in some cases in some situations negligible but even if it is if the issue is important enough and the cost of voting isn't very great people may still do it I come from Germany and you certainly know that in an our country co-determination plays an important role when it was introduced many people argue that this will be very disadvantageous for Germany because the rights of the fair whole will be reduced I cannot see that it was a big disadvantage for Germany and for the development of the German economy that they haven't introduced this co-determination do they have an explanation why it is in this case or it has not been so disadvantaged as some people assumed it would be it's a very good question and I'm afraid I don't have a very good answer because I don't know enough about the German situation I mean I'm aware of what you're describing we probably would need to have some German expert here maybe you are such a person who could say either yes that's right or no actually it hasn't been as good I mean some German companies have certainly made mistakes but it's probably not because of that and I'm thinking of same offense buying Chrysler which seemed to be a disaster but I'm sure it's not because of that all I can say is you know it's a fact that people adjuster things and many things that might not be a particularly good idea if they're implemented turn out not to be as bad as was feared or people find a way around it but I have to say that if somebody had come to me and said is this a good idea I would say no and I would say you know if a company might decide of its own accord that it would be good to have workers on the board they might all union representatives or is or they might decide to have I think it's a two board is it a two board structure it's a complicated thing but this coat they they could have done that voluntarily if it had been efficient they didn't and by the way one thing which I think is worth noting is it's not as if sometimes people haven't thought of something and it may be actually good when someone it may be people are required to do it and they think you know what this was a very good idea but if that was the case we would expect to see companies in other countries imitating the German model which we have not seen so my guess is that it may not have been as bad as people feared but it probably hasn't been very good but I cannot back that up so I it's a very good question and I'd like to know more about it after the Monday principio una Sione Envato lot of a seawall a al mentally ill P so specifically determine RT the principal one care went out in those cases in which you want to increase the weight of specific stakeholders but there are some possibilities such as a cooperative form where we have the personal principal not the proprietary personal so that we have one individual one head one vote and thereby you can ascribe a different weight to the different shareholders however if you have a high number of shareholders this system does not work and you cannot apply to anybody to participate in the actions neither I mean the shareholders cannot be obliged to take part participate in assemblies so in this given situation how significant is control I mean for those who do not want to participate and for those who participate knowing that their vote is not determinant well usually they rely on an efficient system to control the company the chairs of one carried out by concept equivalent to the American ICC by the Bank of Italy by independent bodies antitrust institutes and so forth so we have the impression that the big financial scandal so the last few is we due to the fact that the general interests of big companies should pursue was not sufficiently safeguarded by those who could have done it via these controlling Magnus and as a matter of fact salt in politics those who do not vote and those who vote knowing that their vote is not determinant do not feel sufficiently safeguarded by those who should actually check and control politicians activities I mean we have some constitutional measures to check how the parliament is working we have the magistrate's we have some forms of administrative control well we have the impression that this controlling system is not very efficient and effective what do you think of this oh I think a lot of this could be summarised by I think it was Winston Churchill who said democracy is the worst system that we have except for everything else and this is roughly what I feel about this so allocating votes to shareholders or whoever if you want to decide you're going to have a consumer cooperative that's up to you and sometimes as I have explained that may be good idea but it may not work that well so several people have raised important very valid questions about this when you have large numbers of people there a collective action problems economists are very well aware of this and we all know that people are passive and may not bother too much about what management is doing and so on and so forth but there's no magic cure to this all you can do is try to set things up to to minimize this now one of the things which is actually good about companies is and I know this is a controversial position but I it's been implicit in my talk and let me make it more explicit the possibility of something somebody making a bid for a company is a very that's a very powerful mechanism and a very powerful constraint on management because management might be kind of confident that with all these little shareholders you know they're all asleep they're not really they've got jobs they're not paying attention of the company because they're all negligible but the whole point that somebody can come along and make a bid for the company and turn it in if it's being badly run run it properly and make a lot of money out of that because they'll now be a big shareholder that is a powerful incentive for outsiders to kind of monitor companies now companies are at an advantage their relative to political societies you can't do that with a society right we don't and it's very similar to the discussion we were having about vote buying you could if you have vote buying and selling you could imagine you know somebody didn't like the way America was being run and there are many such people right now could make a bid for America they would just go it doesn't have to be Ross Perot it could be Osama bin Laden actually he's also a rich person could go and launch a hostile bid and buy up the votes of American citizens and and making self president now for the reasons we've been talking about that is very bad that would be a very bad idea to have such a mechanism because the person isn't buying the income claims along with the votes they're just buying the votes so they could do an enormous amount of damage so this mechanism is not available in society so in in politics we have to rely on other mechanisms like the press so people are less apathetic and more inclined to vote because there are lots of stories about the candidates and everybody feels excited about the election in a way that they don't about a typical corporate election which is very very boring so in the corporate context we have hostile takeover bids instead so these are so let's not figure so one point is we shouldn't forget hostile takeover bids for the corporate context they'd be a bad idea for the political context but the other thing is life is highly imperfect and we're just trying to find the best sort of imperfect solution after the Monday any other questions if not thank you very much professor Hart