Michael Kinsley notes that Google thumbed "its nose at one of the major pieties of our day: shareholder democracy."
No one is forced to buy Google shares. People do it voluntarily, even downright eagerly. This is so even though what they are buying are so-called Class A shares, which might more accurately be labeled second-class shares. First-class shares, mischievously called Class B, are held by the company's two founders and other executives. In terms of dividends and so on, the two classes are identical. But Class B shares get 10 votes each while Class A shares get only one. This means in effect that the company can raise money, and the founders can get fabulously rich by selling stock to the public, but even with a tiny minority of the shares the founders will control the company. And the public shareholders can't do anything about it.
Kinsley approves, staking out a surprisingly libertarian position:
Democracy is actually a second-best solution. If we're going to McDonald's, and we all have to get the same thing, it should be decided by majority vote. But it's even better if we each can get what we want. And you can be fairly confident that a majority of McDonald's customers prefer hamburgers, while a majority at KFC prefer chicken. You don't have to require a vote.
Advocates of shareholder democracy believe it will lead to companies that care more for the environment, treat their workers better and so on. Well, maybe, maybe not. In a world of perfect corporate democracy, in which large public companies are required to pursue only those goals that can be agreed upon by the owners of a majority of the publicly traded shares at any moment, the most likely result would be companies focused exclusively on maximizing profits.
Requiring shareholder democracy actually stifles it. Why shouldn't shareholder democracy include the right to decide whether or not you want shares in a company that practices shareholder democracy?
And then he slaps paternalistic corporate governance regulation: "unlike Google, you can't free yourself of the SEC by simply calling your broker." Wow. Rarely does one see such common sense in the LA Times. Yet, while I applaud Kinsley, I can't resist pointing out that there is still a subtext of shareholder primacy in his analysis. Why, for example, should shareholders be able to vote on corporate goals? As my director primacy model of corporate governance explains, the corporation is a vehicle by which directors hire equity capital. Shareholders are entitled to use the vote to ensure that directors use their capital to pursue wealth maximization rather than personal self-interest, but shareholders have no right to set corporate policy or otherwise exercise the rights of ownership. As I explained in my article Director v. Shareholder Primacy in the Convergence Debate:
Large-scale investor involvement in corporate decisionmaking seems likely to disrupt the very mechanism that makes the public corporation practicable; namely, the centralization of essentially nonreviewable decisionmaking authority in the board of directors. The chief economic virtue of the public corporation is not that it permits the aggregation of large capital pools, as some have suggested, but rather that it provides a hierarchical decisionmaking structure well-suited to the problem of operating a large business enterprise with numerous employees, managers, shareholders, creditors, and other inputs. In such a firm, someone must be in charge: “Under conditions of widely dispersed information and the need for speed in decisions, authoritative control at the tactical level is essential for success.” While Roe argues that shareholder activism “differs, at least in form, from completely shifting authority from managers to” institutions, it is in fact a difference in form only. Shareholder activism necessarily contemplates that institutions will review management decisions, step in when management performance falters, and exercise voting control to effect a change in policy or personnel. For the reasons identified above, giving institutions this power of review differs little from giving them the power to make management decisions in the first place. Even though institutional investors probably would not micromanage portfolio corporations, vesting them with the power to review major decisions inevitably shifts some portion of the board’s authority to them.
As the paper further explains, corporate law therefore provides a whole host of devices that insulate directors from shareholder influence. The drive for shareholder democracy thus not only interferes with choice (Kinsley's position), it also threatens to undermine the very structures that make corporations work.
