Why Shareholders Don’t Want Shareholder Democracy

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Have you ever noticed how few public companies are run on anything like a democratic basis?

They have some of the trappings of democracy. Elections for directors; ballots on important—and sometimes unimportant—questions of corporate governance or strategy; investor meetings that sometimes resemble a New England townhall.

But, in practice, their democracy is a lot like the democracy in a one party state—you get the vote, but only party candidates and platforms stand any chance of winning.

To some advocates of good corporate governance, this is a scandal. It almost looks like there's a bit of authoritarianism lurking at the heart of the free-market. If democratic capitalism is good enough to run our country, why isn’t it good enough to run our corporations?

In reality, however, corporate governance gives far more respect to individual liberty than any political democracy does. Unlike being a US citizen and a resident, it is quite easy to withdraw your membership from a corporation—simply sell your shares. No corporation can force you to accept its strategy or leadership. If you don’t like it, you don’t have to be a shareholder.

This is a type of freedom political democracies do not offer. If you don’t like the leadership of your city, state or country, you cannot easily opt out. If you think the laws are badly made or the economic policy wrongly directed, you cannot simply say you want no part of it. Democracy is a compromise form of freedom meant to accommodate the fact that there is no readily available form of exiting.

It’s easy to see why the comparison to authoritarian regimes is also wrong-headed. Remember the Berlin Wall? Even the least well-run companies cannot hold their shareholders hostage.

If there were a genuine demand for shareholder democracy, there would be a huge arbitrage opportunity available to corporations willing to become more democratic. You could increase your share price simply by giving shareholders more rights. If Facebook is worth $50 billion with Mark Zuckerburg at the helm—imagine what it might be worth if the shareholders were the real bosses!

What? What’s that you just said? Oh, right. That would be a disaster.

Shareholders don’t want shareholder democracy because they have a more powerful and less costly tool—the right to sell.


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