Shareholders as Proxies: The Contours of Shareholder Democracy

Abstract

All the stockholders act like a flock of sheep.We put a man on the moon, but we can't manage the consequences of shareholder democracy.2I. IntroductionOn March 31, 2006, just as the spring annual meeting season began, The Corporate Library released a study of eleven of the largest U.S. companies revealing that committees authorized a total of $865 million in pay to CEOs who presided over an aggregate loss of $640 billion in shareholder value.3 Around the country, corporate directors and executives felt, some for the first time, the wrath of organized, discontented shareholders who demanded more say about director elections and executive compensation. In the annual meetings that followed, shareholders considered proposals to limit or, at the least, monitor directors' and executives' compensation, as well as proposals to permit shareholders to withhold votes from directors (especially those serving on compensation committees) as a means of requiring them to resign. In some companies, shareholders were even asked to vote on proposals that would require a director to gain a majority of yes votes to be elected.4 As one commentator put it: There is a whiff of revolution in the air. America's shareholders are growing restless, and the bosses of the companies they own seem increasingly nervous as they peer out from behind their boardroom curtains.5Some might celebrate this new (or renewed) shareholder activism as an important milestone in empowering shareholders to negotiate corporate governance structures that would benefit them and other investors.6 Others might caution against giving shareholders too much power.7 And many will agree that despite these developments, there is no reason to believe that the way corporations, their directors, or their executives behave would dramatically change in the absence of financial incentives that require them to do so.8 In this respect, a pointed comment in The Economist a couple of years ago rings true: is the world's most prominent democracy, and its most successful exponent of shareholder capitalism. But when it comes to shareholder democracy, America has barely moved beyond the corporate equivalent of the rotten borough.9 In this Article I turn to history to explore why.I should emphasize at the start that I do not attempt to evaluate whether the active participation of shareholders will improve how corporations are run. Nor do I engage in the debate as to whether shareholder democracy is a useful concept in characterizing the relationship between shareholders, their directors, and their corporations. My goal is limited to exploring the historical roots of current discussions about the shareholders' role in publicly held corporations.Proponents of shareholder democracy might want to fault those who caution against it for the fact that meaningful shareholder participation in corporate affairs, independent of financial incentives, seems to remain out of our reach. But, as I argue, the reality of the shareholder's role in public corporations is a product of a broader phenomenon-a century-long suspicion of the individual shareholder-participant and a corresponding ambivalence toward shareholder (participatory) democracy. History shows that attempts that appeared to foster shareholder democracy, independent of financial demands, were never really about promoting the shareholders' active involvement in managing the affairs of their corporations. Rather, reformers used the rhetoric of shareholder democracy to promote broader goals and visions. In the process, they gradually made shareholder (participatory) democracy much talk about, well, nothing.Currently, the ability of shareholders to affect corporate change is limited. First, the individual vote in large public corporations makes little if any difference. At least in part, this is why most shareholders vote for what the incumbent board wants (or why most proxy solicitations by the board are successful). …