The Shareholder Democracy Lie

Speaker: Prof Christina Sautter, SMU Dedman School of Law

Discussant: Dr Akshaya Kamalnath, Australian National University

Shareholder democracy is frequently splashed across the headlines, with both companies and shareholder activists leveraging the term for their own benefits. But from its inception in the 1920s, the shareholder democracy rhetoric has never been rooted in principles of equity and equal opportunity. This presentation debunks the shareholder democracy rhetoric, brings to the forefront the structural failure of shareholder plumbing, and exposes the myths of equity and equal opportunity in shareholding. 

Stemming from its Greek roots, democracy means rule by the people or power of the people. But shareholder democracy is neither rule nor by the people. Especially now that the overwhelming majority of shares are held and voted by institutions rather than by individuals, shareholding does not provide power to the people. Rather, it concentrates the power in the hands of relatively new institutions such as the Big Three, other powerful funds, and proxy advisory firms.

This presentation shows that shareholding is not democratic. It debunks the analogy between political democracies and shareholding. It exposes the roots of uneven share ownership and the current make up of share owners. It also reminds the reader that hegemonic powers hold up collective decision-making, impairing democratic processes.

Collective decision-making falls short of being a process rooted in equity, even when the demos (the people) vote pro-capite. The Ancient Greek ekklesia, the venue where Athens brought together citizens to democratically debate and deliberate on matters of joint concern, was formally democratic. Yet, much like modern-day shareholding, the ekklesia was based on elitism and governed by hegemonic forces. Athens excluded from collective decision-making anyone who was not male or a citizen of age; so, women, slaves, and men who were not born in Athens could not partake in decision-making.

Inequity in shareholder democracy goes even further than in its namesake political democracy. Historically, access to shares was a prerogative of white people. Share ownership has been predominantly male. Coverture impaired women’s access to share ownership in early modern English and American corporations. Discrimination in employment opportunities in the 20th Century caused selective access to share ownership across demographics. Employee stock ownership plans (ESOPs) combined with discriminatory employment practices have contributed to keeping historically underrepresented groups out of the stock market. 

Uneven access to shares has been compounded by institutionalization of investments along with the increasing power of proxy advisory services, which effectively govern a monstrous voting power without holding any stakes in the issuers. Preponderance of institutional investors over individual investors accompanied by the governance dominance of proxy advisory services disenfranchise human shareholders. Moreover, the current U.S. federal proxy regulation framework is rooted in a model designed to suit the governance infrastructure of past centuries. Despite being adopted under the guise of shareholder democracy, the current proxy system fails to provide a collective decision-making mechanism informed by a principle of equity and equal opportunity. As a result, people are driven away from voting even when they own shares directly, leaving little to no relevance to the role of the demos in corporate governance.

This presentation connects the dots to reveal an uncomfortable reality: shareholder democracy is a lie told to appease citizens and investors while entrenching the power of the elite. A careful assessment of shareholding and its dynamics prevents scholars, professionals, and lay people from being captured by a rhetorical device that taints a fair and fruitful debate on the current corporate governance model and its features.

Read 'The Shareholder Democracy Lie' [PDF]

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