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Exit and Voice in The Intelligent Investor

June 23, 2011

Benjamin Graham‘s The Intelligent Investor is a pretty awesome investment book.    In the latest, revised edition, published by Harper and updated with commentary by Jason Zweig, there is a fascinating note on Graham’s revisions to the chapter on shareholder activism:

“(The) original section…dealt with shareholders’ voting rights, ways of judging the quality of corporate management, and techniques for detecting conflicts of interest between insiders and outside investors. By his last revised edition, however, Graham had pared the whole discussion back to lesss than eight terse pages about dividends.

Why did Graham cut away more than three-quarters of his original argument?  After decades of exhortation, he evidently had given up hope that investors would ever take any interest in monitoring the behavior of corporate managers.”

Smart man.  If ever there was an example of the superiority of exit as compared to voice in terms of changing the way that corporations function, it would be shareholder’s meetings.  Zweig, oddly enough, plays the idealist, recommending that if a shareholder sees bad management practices at a company, that shareholders should “vote against every director to let them know you disapprove,” “attend the annual meeting and speak up for your rights,” and, in his most inspired recommendation, he urges investors to “find an online message board devoted to the stock…and rally other investors to join your cause.”   If those suggestions don’t make you snicker, how about this platitude:

“Understanding and voting your proxy is as every bit as fundamental to being an intelligent investor as following the news and voting your conscience is to being a good citizen.”

What’s most stark about these passages is the fact that in the first 500 pages of the book, Zweig (and Graham) make a compelling case for the obvious, and simple, solution for those investors holding the stock of a poorly-managed company – sell, for chrissakes.  Exit.  Leave.  There are a million other companies out there you could own that provide better value for money, that don’t require a quixotic quest to rally and unify thousands of investors.  And yet, the moment Zweig even thinks about voting and democracy, context-dependence leads him to completely abandon his value-free arguments on how to be a successful investor and embrace value-laden notions of how to be a “good corporate citizens.”

One of the coolest aspects of the competitive government “movement,” if you will, is the attempt to reframe the debate about politics so that people can think about government as an industry.  There are tons of idealistic democratic activists out there who would laugh at the concept of going to a shareholder’s meeting when they could just sell their shares. If only they could all be given a copy of Exit, Voice, and Loyalty.

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