Why Shareholder Democracy Is a Bad Idea

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The first question anyone should ask about a change to how elections—whether for governments or corporations—are conducted is whether the results will be better government or worse.

The next question is whether the proposal makes the government or board of directors more representative of the preferences of the voters or less.

Many of the proposals to reform elections at the governmental or corporate level fail both these tests. They result in leadership that is less capable and less representative.

At the corporate governance level, the problem is that things like say-on-pay introduce complicated elements into proxy elections. These complexities make it difficult for ordinary shareholders, typically equipped with only a passing interest and knowledge of the issues at hand, to form preferences, much less vote their preferences.

They not only need to understand the performance of executives and the incentives created by various compensation schemes, they have to be able to think strategically about how other shareholders are likely to vote. Instead of a binary choice between "own" and "don't own" shares, investors have to anticipate the way other current and potential shareholders will use their votes.

Much the same thing applies when reformers attempt to reform democracies by encouraging proportional representation rather than first past the post. Voters now must act strategically rather than more simply voting for their guy. They are asked to predict the outcomes of coalition negotiations rather than simply say which party they prefer.

Special interests and ideologues have a tremendous informational and strategic advantage in these circumstances. Union dominated pension funds will cut deals with management at the cost of otherwise disinterested shareholders. Special interests will reign over political issues that most affect them.

The problem is that raising the costs of ignorance and the rewards for specialized expertise does not result in a huge increase in the number of better informed voters. It just results in domination by those who are better informed because they are able to capture special rewards in exchange for their status.

My brother Brian Carney touches on this in his discussion on the Alternative Voting system now being debated in the UK:

The trouble is, most people are not political connoisseurs. They know what they like, and what they expect from government, and they know too, roughly, which party is most likely to cater to those preferences. The average citizen has relatively little interest in trying to calculate the optimal means of ordering their preferences to accomplish some secondary goal in case their favored candidate doesn't win. All those possibilities simply add to the complexity of the task of keeping tabs on the political class.

The supporters of AV will see this as ignorance or apathy on the part of this average voter. But it's far from clear that a democracy like the U.K. should prefer a system tailored to the political connoisseur. In fact, there's more than a whiff of elitism around the notion that a more complicated system is a better system. For these sorts of politicians, and their supporters, voter ignorance is a problem to be fixed, and a more complicated voting system is one way of fixing it. They imagine that a system like AV, which favors voters like themselves, will actually help make other voters more like them.

But this is a failure of imagination. The truth is that for most voters, a certain amount of ignorance and apathy is perfectly reasonable. Most voters will never cast the deciding tally in any election, and for them voting more closely resembles a kind of religious ritual than an exercise of democratic prerogatives. Wishing for your fellow citizens to more closely resemble yourself—in their preferences, in the degree of attention that they pay to politics and the nuances of various races and the advantages of certain strategies of tactical voting—isn't democratic. It's something more like the opposite.


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