Should those who option their shares be able to vote them?

The main “problem,” with encumbered shares having the same voting rights as standard shares held in an unencumbered fashion, is that an investor may have a substantial investment in a corporation through stock ownership, but actually be able to vote those shares to harm the company but profit massively using options and derivatives. A shareholder maintaining only shares has a long position in the company and would vote those shares to increase the value of those shares, while a derivatives only holder could not influence the corporation through voting (although could through manipulation of the share price through temporary bets). I am convinced that there is a disconnect that shareholders (such as I) with a long position could be threatened by those voting with a short position. Now, how can we fix it?

The rise of financially engineered instruments has obsoleted the one-share/one-vote standard in aligning control with risk is persuasive. However, I find that the practical implementation of any alternative is not only burdensome, expensive, and complicated, but also not likely to solve the problem of voter control. States would very likely not be interested in changing such alignments from the present system because they wish to attract the best corporations to incorporate in their states. Thus, it would probably require a federalization of corporate law in order to implement. Besides the costs to implement (with the resulting upheaval in the financial markets as the markets attempt to "understand" what to do), it is likely that the benefits, if any, would be short-lived as newly engineered instruments took over to again disconnect the risk from the share.

Perhaps the easiest change would be to forbid those who “borrow” shares from exercising the vote upon them, or those who “loan” shares from being able to vote. When street individual investors, mostly apathetic themselves, place their shares into an account, they should have to indicate whether they intend to maintain voting rights on those shares in the event that they were loaned. Of course, since shares are fungible, how would the market know which loaned shares to those borrowing them still have their attached rights? Would the shorter receive some discount on those shares because they are “less” valuable than other shares with attached rights? Thus, maybe the only real possible solution would be to prevent those who borrow shares from being able to vote on them, limiting the one-share/one-vote franchise to those with real ownership. The loophole remains, however, as one may own shares but still create massive options- or futures- based risk management or financial gain positions. It is quite impossible, thus, that any change to the present system could ever “correct” the current “problem.”

I would suggest leaving the market alone. Has there been a situation in which a company actually has suffered (and the long shareholders as well) from the actions of a shareholder with a short position? Probably. However, at this time, it does not seem to suggest that a new set of regulations and laws should “fix” something that can be balanced on its own. First, for every short investor, long investors exist that can counter. The company just needs to ensure that those long investors are informed and ready to participate. Second, the Board of directors controls the company. Shareholders merely react. Thus, the board can either structure transactions that minimize the role of shareholders (through a triangular transaction instead of a merger of equals, for example), or wage a public relations campaign to enlist shareholder support (such as HP’s acquisition of Compaq). Thus, while I see and believe that the potential for this problem to exist, I do not see it as such a threat that the system needs to be changed.