Nearly half a century ago, Albert Hirschman formalized two ways in which members of organizations could express their displeasure: exit and voice. Exit is market-based expression, and is typically quiet, impersonal and cheap. Voice, by contrast, is political expression — it is usually loud, messy, and expensive. From an efficiency perspective, exit is thus generally favored as a matter of institutional design.
Corporate law largely track Hirschman’s theory. Shareholders’ voice rights are, by default, quite constricted, and the business judgment rule imposes an important limitation on seeking judicial remedies. In most cases, unhappy shareholders’ only practical method of expressing their discontent is to exit the firm by selling their shares.
But Hirschman warns that in certain circumstances, such as where the barriers to exit are sufficiently high, it is preferable to adjust institutional design to facilitate or strengthen members’ voice rights. Corporate political activity presents exactly such a case, because the standard shareholder remedies – suing, voting for the board of directors, and selling their shares – are either unavailing or exceptionally costly. I treat this range of options in more detail elsewhere, but below I will briefly describe these problems with a focus one key area in which corporate political activity differs markedly from other types of corporate action, and then turn to an important objection. Read More