Is Corporate Governance Anti-Democratic?

Assuming all the votes cast in an election are accurately tallied, the pronouncement of the winner would seem to be straight-forward. What it means to have won, however, is considerably more complex. Specifically, is winning getting over 50% of the vote, or should a mere plurality of, say, 38% suffice? It could be argued that a super-majority of 60% or two-thirds is necessary for there to be a discernible will of the people behind the winner. To claim that 51% represents the will of the people seems a bit of a stretch, since almost half of the voters cannot be considered to be of that will. Typically, much is read (or projected) into the 1% over the 50% in terms of a mandate. All of a sudden, 51% of the voters become “the people.”  Certainly a winning plurality of 38% cannot be said to stand for or represent the will of the people, for 38% is a minority in the total votes cast. Yet in Delaware’s corporate law, which is binding for most American corporations, a mere plurality is sufficient for a candidate to be elected to a board of directors. While this arrangement is not ideal, it is a legitimate basis even if some stockholder activists beg to differ.
Writing for the New York Times in April 2013, James Stewart defines losing a board election as “more than 50 percent of the shareholders withheld[ing] their votes of approval.” Stewart expresses his amazement that 41 boards retained directors whose pluralities in 2012 were tantamount to a resounding vote of no confidence--meaning that those directors got less than 50 percent of the votes cast. According to Stewart, those directors “actually lost their elections” and yet were allowed to remain on the boards. It sounds corrupt as well as anti-democratic. “As fiduciaries, we can’t sit by and let the board make a mochery of our fundamental right to elect directors,” John Liu, New York City’s comptroller, said in reference to Cablevision Systems. As manager of the city’s pension funds, which are invested as more than 532,000 shares in the company, Liu wrote to the company concerning three directors whose pluralities were significantly less than majorities. “The fact that all three directors remain on the board suggests that one of the few rights” afforded shareholders is “illusory,” he wrote. The company’s management did not respond. Moreover it nominated the three directors for yet another term.
Although Liu is on solid ground that insiders should not be allowed to subvert director elections. However, he is wrong in his assumption that plurality voting is not legitimate under democratic auspices. Plurality simply means that the candidate with the most votes gets elected to the given seat. Were a board to turn around and award the seat to a candidate who did not get the most votes, that would be illegitimate from the standpoint of democratic principles.
The question here is not that of legitimacy. More to the point, the question regards how much of the total vote on a seat should be sufficient for the candidate with the most votes to deserve the seat from the standpoint of the stockholders. If there are several candidates and none gets the percentage deemed by the stockholders to be sufficient, then presumably a run-off would be held.
Even though a plurality is a legitimate criterion from democratic principles, it may play into the dominance that many managements have over “their” respective boards of directors.   Where there is no stockholder-nominated candidate, management’s nominee can be elected all too easily even without much stockholder approval. Even the presence of stockholder-nominated candidates would not necessarily solve the problem; management could see to it that several “stockholder-nominated” candidates spread out the anti-management vote so the management-nominated candidate can obtain a plurality. Rather than being anti-democratic, that is merely politics.
From the stockholder standpoint, the political solution would be to up the bar on the percentage of votes cast that a candidate must have in order to be elected. Put another way, the dominance in corporate governance typically enjoyed by management (unless management really screws up) could be reduced by routinizing stockholder nominations and increasing the percentage needed for a candidate to be elected.

Source:

James Stewart, “When Shareholder Democracy Is Sham Democracy,” The New York Times, April 12, 2013.

The Basis of American Aristocracy: Wealth & Property

In the constitutional convention of the United States in 1787, the property-interests were well-represented. Even so, a fear of a plutocracy was voiced by those property-protectors as well. While one might conclude at first glance that the wealthy delegates were duplicitous, their position is not self-contradictory, even if the bias toward wealth is discomforting for those of us who value representative democracy.

Governeur Morris, on July 5, asserted that property is “the main object of Society.” (1) Rutlidge, on July 5, concurred, maintaining, “Property was certainly the principal object of Society.” (2) Hamilton, on June 26, argued that the “inequality of property constituted the great & fundamental distinction in Society.” (3) King, on July 6 averred that “property was the primary object of Society.” (4) In Morris’ view, property is thus “the main object of [Government].” (5) Hamilton articulated this view in the Federalist by writing that the adoption of the Constitution will afford additional security “to the preservation of [republican] government, to liberty and to property.” (6) “I am convinced,” he writes, “that this is the safest course for your liberty, your dignity and your happiness.” (7) So his statement that “the vigour of government is essential to the security of liberty” can be read as a plea for a General Government primarily to protect property interests. (8) Butler, on July 11, claimed likewise that government is “instituted principally for the protection of property.” (9) At the very least, these remarks evince a reductionism wherein society and government were viewed in terms of wealth. Shouldering a minority view on this point, Wilson, on July 13 in the convention, “could not agree that property was the sole or the primary object of [Government] & society. The cultivation & improvement of the human mind was the most noble object.” (10) This object, he suggested, is a personal right. (11) As much as this object is laudatory, it is not the object of government, which I contend is to provide and ensure order, which goes beyond the protection of property. If there is a higher purpose, government can express and operationalize societal ideals, which can thus orient whatever order government provides.

The primary result of the delegates’ property-centric view was the formation of a General Government of the U. States to counter the risk that State legislatures would act democractically at odds with the interests of the wealthy. Just a year before the convention, the Massachusetts legislature had attempted to act in the interest of debtors (i.e., unpaid soldiers who were still expected to pay on their farm debts; the representatives sought to stop this injustice at the expense of the creditors). Shays’ Rebellion was the unhappy result. Govereur Morris, on July 2, alluded to this affront on property interests in stating, “Every man of observation had seen in the democratic branches of the State Legislatures, precipitation—in Congress changeableness, in every department excesses [against] personal liberty [,] private property & personal safety.” (12) However, what if private property is acquired unjustly at the expense of another’s liberty? In other words, liberty may run counter to the interests of the rich.

Madison, on June 26 in the convention, remarked that “we had not among us those hereditary distinctions, … nor those extremes of wealth or poverty which characterize [the modern States in Europe]… . An increase of population will of necessity increase the proportion of those who will labour under all the hardships of life, & secretly sigh for a more equal distribution of its blessings… . a leveling spirit… the future danger.” (13) Leveling would actually be in line with liberty if wealth has been acquired unjustly, as for example, under duress. Moreover, too great an inequality of wealth can threaten the viability of a republic. For example, in 1985, the top five percent in the U.S. held $8 trillion in wealth. By 2007, they had $40 trillion. Besides being in part from the dot.com and housing bubbles wherein asset values were overvalued, the concentration of wealth cannot but undermine representative democracy wherein each person has one vote. Interestingly, even as they sought to protect their wealth from being leveled via representative democracy, the delegates also feared that the U. States would end up as a plutocracy (i.e., ruled by the wealthy who would be our aristocracy). Governeur Morris, on July 2, expressed the following. “Let the rich mix with the poor and in a Commercial Country, they will establish an oligarchy. Take away commerce, and the democracy will triumph. Thus it has been all the world over. So it will be among us.” (14) Madison reports that Morris feared “the influence of the rich.” (15) That the U.S. was even then an extended republic on the scale of an empire was thought, at least by Morris, to strength the ability of the rich to rule.  “The schemes of the Rich,” he maintained, “will be favored by the extent of the Country. The people in such distant parts can not communicate & act in concert. They will be the dupes of those who have more knowledge & intercourse.” (16) Govereur Morris, on July 2, maintained that “The Rich will take advantage of their passions & make these the instruments for oppressing them. The Result of the Contest will be a violent aristocracy, or a more violent despotism.” (17)

Madison reports that Morris’ “creed was that there never was, nor ever will be a civilized Society without an aristocracy. His endeavor was to keep it as much as possible from doing mischief.” (18) To contain such mischief (and to protect property-rights), the delegates wanted the proposed U.S. Senate to represent the interests of the wealthy (as well as wisdom and the state governments—a combination they problematically assumed would play well together in the Senate). Govereur Morris, on July 2, claimed that “The Rich will strive to establish their dominion & enslave the rest. They always did. They always will. The proper security [against] them is to form them into a separate interest.” (19) Accordingly, Davy, on July 6, urged that “wealth or property ought to be represented in the [second] branch.” (20)

The Senate was to be a conservative institution, wherein the vested property interests must sign off on any reform.  This could partially explain why passing health-insurance reform in 2010 was so arduous (and why extant health-insurance companies were able to kill off a competing public option). It could also explain why the wealthy could insist that their tax cuts be extended even as the U.S. Government was facing another deficit over $1 trillion also in 2010.

In short, the delegates to the constitutional convention were concerned that a “leveling danger” not be allowed to redistribute wealth even as they feared the advent of a plutocracy as essentially aristocratic governance. Government should protect wealth but not be run by it. In modern terms, this position might seem familiar as: CEO’s like Lloyd Blankfein of Goldman Sachs should not run the government, but the latter should not be used by those without to take from the wealthy. Yet as the CEOs’ agents in government essentially operate in the interest of the corporations and the wealthy, does not the government’s orientation to property already evince a plutocracy by a moneyed aristocracy? If so, Jefferson and Adams, who were for a natural aristocracy of talent and virtue rather than money (the latter being an “artificial aristocracy,” which the two founders believed was taking hold in the U. States even in the early 1800's), would doubtless demur. It is telling for us that government protecting wealth is virtually taken for granted among the American people even as the fear of an impending plutocracy and moneyed aristocracy is nearly absent. Any balance from the delegates’ two fears has dissolved in favor of property. The bias is so ingrained in American society and government that it has become invisible.

1. James Madison, Notes in the Federal Convention of 1787. New York: Norton, 1987, p. 244

2. Ibid., pp. 245

3. Ibid., p. 196

4. Ibid., pp. 247

5. Ibid., p. 244

6. Alexander Hamilton, Federalist #1, in Jacob E. Cooke, The Federalist, Hanover, N.H.: Wesleyan University Press, 1961, p. 7

7. Ibid., p. 6

8. Ibid., p. 5

9. James Madison, Notes, p. 268

10. Ibid., p. 287

11. Ibid., p. 287
12. Ibid., pp. 233

13. Ibid., p. 194

14. Ibid., pp. 233-34

15. Ibid., pp. 235

16. Ibid., pp. 235

17. Ibid., p. 235

18. Ibid., p. 251

19. Ibid., p. 233

20. Ibid., pp. 248

Partisan Journalism at Fox News: Stockholders and Democracy

Roger Ailes “is the most successful executive in television by a wide margin, and he has been so for more than a decade. He is also, in a sense, the head of the Republican Party, having employed five prospective presidential candidates and done perhaps more than anyone to alter the balance of power in the national media in favor of the Republicans. ‘Because of his political work’—Ailes was a media strategist for Nixon, Reagan, and George H. W. Bush—‘he understood there was an audience,’ Ed Rollins, the veteran GOP consultant, [said in 2011]. [Ailes] knew there were a couple million conservatives who were a potential audience, and he built Fox to reach them.’ For most of his tenure, the roles of network chief and GOP kingmaker have been in perfect synergy. Ailes’s network has dominated the cable news race for most of the past decade, and for much of that time, Fox News attracted more viewers than CNN and MSNBC combined. Throughout the George W. Bush years, the network’s patriotic cheerleading helped to marginalize the Democrats. . . . The problem wasn’t that ratings had been slipping that much— [Glenn] Beck’s show declined by 30 percent from record highs, but the ratings were still nearly double those from before he joined the network. It was that, with an actual presidential election on the horizon, the Fox candidates’ poll numbers remain dismally low (Sarah Palin is polling 12 percent; Newt Gingrich and Rick Santorum, 10 percent and 2 percent, respectively). Ailes’s ­candidates-in-­waiting were coming up small. And, for all his programming genius, he was more interested in a real narrative than a television narrative—he wanted to elect a president.”[1] The last sentence of the quoted passage is particularly revealing: “(H)e wanted to elect a president.”  With Beck’s 30% drop in ratings still leaving him with a profitable rating, Ailes’ motive was not commercial, neither was it to improve the network’s journalism. Typically, news networks are criticized for sacrificing good journalism for commercial interests. Here, journalistic integrity and profit played second fiddle to partisan objectives. 

The full essay is at "Partisan Journalism."

1, Gabriel Sherman, “The Elephant in the Green Room,” New York Magazine, May 22, 2011.

Stakeholder Management: Property Rights

Stakeholder theory can be interpreted as containing a series of prescriptive leaps in the direction of giving stakeholders a greater and greater share in the property rights of stockholders. The final leap issues in what can be called radical stakeholder theory, for it represents a fundamental challenge (or usurpation) of property rights. Perhaps the most astonishing thing about how stakeholder theory unfolds is its presumptuous claim that its prescriptiveness is merely description (i.e., pertaining to what is the case, rather than what is ideologically desired).

The full essay is at "The Stakeholder Subterfuge."