The Influence of Direct Democracy on Agency Costs: Lessons from Corporate Governance

Abstract

This doctoral dissertation seeks to improve the usage of direct democracy in order to minimize agency cost. It first explains why insights from corporate governance can help to improve constitutional law and then identifies the relevant insights from corporate governance that can make direct democracy more efficient. To accomplish this, the dissertation examines a number of questions. What are the key similarities in corporate and constitutional law? Do these similarities create agency problems that are similar enough for a comparative analysis to yield valuable insights? Once the utility of corporate governance insights is established, the dissertation answers two questions. Are initiatives necessary to minimize agency cost if referendums are already provided for? And, should the results of direct democracy be binding in order for agency cost to be minimized? This comparative analysis is valuable because no existing research can be found which uses corporate governance to draw insights that can minimize agency cost in constitutional law, particularly by improving the use of direct democracy. After having explained the theoretical framework, this dissertation looks at circumstances where the right to veto (e.g. referendums) cannot help principals to reduce agency cost. Building on the corporate governance debate, this dissertation argues that introducing initiatives in constitutional law can reduce agency cost by separating individual issues from general elections. It also argues that giving legislators exclusive control of the agenda can, over the course of decades, lead to a situation where legislators accumulate more authority than citizens wish to delegate. Because initiatives also carry the risk of diluting the accountability and responsibility of the legislators, the dissertation proposes a system of ‘penalty defaults’ in favor of initiatives. By creating a default restrictive on legislators (namely a default rule allowing for initiatives), the constitution can ensure that initiatives are possible in the normal situation in which they actually reduce agency cost. At the same time, legislators are well situated to push for an end to the use of initiatives if they are being abused too frequently. The dissertation then argues that referendums should be binding on the legislature in two cases: one, when they relate to ‘rules of the game’ decisions; and two, when the legislators 283 have a conflict of interest. This is based on insights from the almost universally accepted right of shareholders to approve or reject fundamental corporate decisions initiated by the board of directors or whenever they have a conflict of interest. The last issue covered by the present work is whether or not initiatives should be binding in order to minimize agency cost. The U.S. and the UK have both been successful in attracting investors and managerial talent despite considerable differences in the ability of shareholders to initiate decisions. In light of this, these two legal systems and the pertinent academic literature on corporate governance are examined in order to identify when initiatives should be binding in order to minimize agency cost. Based on this analysis, it is argued that binding initiatives should only be allowed for making ‘rules of the game’ decisions especially when the legislators have a conflict of interest. Interestingly, this dissertation recommends that initiatives should also be allowed on ‘ordinary business decisions’, but such initiatives should be non-binding in order to minimize agency cost.