Problems in Comparing Political and Corporate Democracy

Why did shareholders come to vote for board members (representative democracy once removed), rather than for managers (pure representative democracy)? The answer to this question is not clear, but before going farther down this path of conjecture, it may be helpful to examine Dunlavy’s assumption that useful comparisons can be drawn at all between the corporate and the civic polity. Corporations and political states are marked by differences so fundamental that it is dangerous to extrapolate lessons from one realm to the other. Four key contrasts between corporation and state demonstrate are: (1) investing in a corporation is a completely voluntary endeavor; (2) representative democracy plays only a limited role in a corporation; (3) the shareholder vote, with the important exception of takeovers, is generally an empty exercise; and (4) shareholders have an important power that political voters lack: the power of easy exit through the sale of their shares—that is, the power to leave their polity.

First, investors choose to invest in the corporate form. They can also invest in partnerships, limited liability companies, or sole proprietorships—or not invest at all. Even more importantly, each of these alternative business forms gives the investor the potential for a much greater voice in the management of the business.

There is a second basic difference between corporate and political self-governance: the shareholder does not vote "to make value choices, to reaffirm common membership in a joint enterprise, or to give meaning to collective commitments," as voters do in the political realm. Instead, one votes "to keep directors within their role requirements, [and] to ensure that they are not stealing from the corporation or distorting it to some other purpose." In short, shareholder "democracy" exists only to "police the professionals." It makes little sense to say that the political model for voting should carry over to the corporate context when the reasons for voting in each of the two settings are entirely different.

There is a third way in which corporate and civic democracy differ. Shareholder democracy is extremely undemocratic in actual practice because, unlike political democracy, it offers voters no real choice at all. Because of corporate election structure; shareholders have no choice between nominees. The incumbent board puts forward a slate of candidates. There is almost always only one candidate for each vacant director seat. Shareholders do have the power to withhold votes, and have occasionally exercised it by opposing nominees for directorships in recent years. But the protest via non-voting had no legal significance, because the default rule in most states gives the board seat to the winner of the highest number of votes, even if this is only a small plurality. Even if a board candidate receives less than a majority of votes cast—or, indeed, even if the candidate receives just one vote and no competing ballots are cast—the candidate is still elected. The typical election is uncontested; thus, shareholders have no real choice. Each vacancy has but one nominee, and shareholders’ failure to vote for that nominee has no binding legal power on either the corporation or the board of directors. Margaret Blair and Lynn Stout justifiably have concluded that "shareholders in public corporations do not in any realistic sense elect boards. Rather, boards elect themselves."

The fourth and final disconnect between voting in the corporate context and in the political sphere: shareholders, unlike the political electorate, can exit cheaply. Shareholders can "vote with their wallets" and exit from a corporation when they disagree with management’s decisions. This is known as the "Wall Street Rule": shareholders dissatisfied with management will not attempt to make changes, but instead will sell their shares. The shareholders’ power to sell contrasts sharply with the high cost of exit for the voter in the civic polity. There is no easy exit from citizenship. Discontented members of a particular state may choose to leave it, but the costs of uprooting a household generally far exceed those of selling shares in a corporation.

Dunlavy tempts us with the political analogy, challenging us to find points of connection and disjuncture between corporate and civic polities. These comparisons are illuminating, but the analogy is by no means perfect. Given shareholders’ right of exit and the lack of shareholder interest in democratic representation in any ordinary sense, shareholder voting rights are really not that much like political voting rights. Shareholders are different from citizens; the purpose of their voting power is distinctive and limited, and their elections function very differently from those of the civic polity. Similarly, the board of directors, although sharing the characteristic of a representative democracy once removed, differs fundamentally from the Electoral College. The board provides independent directors to address areas of management conflict, while the Electoral College serves no such additional function. Comparison of political voting to corporate voting provides a useful vehicle for understanding the characteristics of each more fully. The danger lies in taking principles from the civic polity and applying them to the corporate polity without considering the different context of each.

Corporate Democracy Vs Civic Democracy

Corporate democracy though deals with all the members of the corporation starting from shareholders to all its stakeholders[employees, customers, other stakeholders and also society at large]but in the current study the focus is only on the shareholders. Since the shareholders are the one who vote, the comparison will be rather between shareholder democracy and civic democracy. Colleen Dunlavy makes such comparisons in Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights, shedding light on what a corporation’s being more or less "democratic" might mean. She uses history to point out that it is not natural or obvious that votes should be allocated on the basis of share ownership. Indeed, in early corporate America, each shareholder (rather than each share) received a vote. This allocation, she implies, is more truly democratic than allocating one vote per share.

This Comment briefly describes Dunlavy’s treatment of democracy in the political and corporate world, and goes on to discuss how similar kinds of democracies exist in both spheres. It then focuses on one little-explored element of the political-world/corporate-world comparison by developing the striking parallel between the operations of the Electoral College in the national political setting and of boards of directors in the corporate world. The Comment then steps back from this subject and argue that comparisons between the corporate and civic polities, while intellectually tempting, ultimately falter because participation in a corporation fundamentally differs from participation in a nation. Shareholders are not citizens; their investments are voluntary and relatively liquid, and their proxy ballots lack the meaning and power of citizens’ votes. Its exploration of the Electoral College/board of directors’ analogy ultimately dead-ends because the board of directors, unlike the modern Electoral College, plays a real and useful role in governance. All of this confirms that Dunlavy’s reflections are helpful and provocative. Their primary value, however, lies more in illuminating the role of the shareholder within the corporation than in raising a sustainable critique of corporate law’s failure to protect "shareholder democracy" itself.

Shareholder democracy has many advocates today; most of who take for granted the idea that this form of "democracy" means that each share of stock equals one vote. Dunlavy characterizes the current one-share-one-vote model of shareholder democracy as "plutocratic" because it allows the wealthier (or, at least, larger) shareholders to have more of a voice in governing the corporation. She contrasts this approach with the older, more truly "democratic" version of shareholder democracy, under which each shareholder was given equal voting power regardless of his or her level of share ownership—or at least there was a cap on the voting power that came with the ownership of large numbers of shares. In examining the meaning of "democracy," Dunlavy draws a parallel between civic and corporate polities. Each involves a "body politic" (nation or corporation), and each must distribute power among its constituents. She is interested not in the vertical relationships so familiar to corporate law scholars—those between manager and employee, or manager and shareholder. Instead, she urges us to consider the horizontal by virtue of the one-vote-per-share principle, larger shareholders inevitably have a greater say in corporate governance than do smaller shareholders. One might say that although all shareholders are theoretically equal, some are more equal than others—in striking contrast to the operation of our modern political system, which is built on the principle of "one person, one vote.”

By comparing civic and corporate democracy, Dunlavy provides an intriguing method by which to analyze and ultimately critique current corporate voting structures. Fundamentally, Dunlavy asks, if we are to have corporate democracy, why settle for anything less than the full democracy that we enjoy in the political sphere? Indeed, with this question in mind, it becomes tempting to identify and critique other "undemocratic” features of the corporation. Both corporate and political democracies employ two different democratic mechanisms: direct democracy and representative democracy. Direct democracy means letting voters decide issues directly. State elections often present "directly democratic" referenda on issues ranging from bond issuances to measures to cut social services to illegal immigrants. Similarly, in the corporate world there are instances of "direct democracy," when the shareholders vote directly on a particular issue. The most notable example involves corporate mergers. Direct democracy, however, is the exception rather than the rule in both the corporate and political worlds. The main work of the shareholder is to select corporate directors in regularly held elections. Likewise, in the political arena voters’ select key representatives. The election of representatives involves indirect or representative democracy because elected officials—and not the voters themselves—make the critical day-to-day decisions for the polity. Beyond direct and representative democracy, political elections—specifically presidential elections—and corporate elections share a third style of self-governance. In order to select the President Citizens vote for electors who make up the Electoral College. These electors in turn vote for the President and Vice-President. Similarly, within the corporate world, shareholders vote for directors. These directors then choose managers—the chief executive officer, the chief financial officer, and other officers who actually manage the corporation. In both cases, it is the elected individuals who select the ultimate manager.