The advocates of shareholder democracy portray the reforms likely to be adopted by the SEC early next year as a victory for ‘owners’ over ‘management.’ Unfortunately, there’s really no such thing as an “owner” of a modern widely-held public corporation. Instead, there are many different classes of people with ownership stakes with different interests, time frames and ideas about governance.
In short, it won’t be a matter of management being forced to adopt the general will of the shareholders. It will operate like all real democracies: through special interest log rolling, intense fighting between committed ideologues and rationally ignorant masses.
The problem is described in Clark Judge and Richard Torrenzano in today’s WSJ:
Top executives, no matter how well they run their business, will be forced to mount counter-campaigns to fend off a range of well-funded players with multiple agendas. They will be besieged by institutional investors with grudges and union pension funds with political agendas, as well as powerful special interest groups.
The surface discussion will be about “say on pay,” or “global warming disclosure,” or “sustainability reporting.” The underlying substance—and the critical change in corporate governance—is about placing people on boards who answer to constituents, not investors.
Judge and Torrenzano go out to list six new “features” (that is, problems) that will be part of the new prozy fights. But they don’t address the unwarranted assumption behind the reforms: that corporations subject to greater shareholder say are governed qualitatively better. In fact, what scant evidence we have suggests that corporations work better when managers are answerable to general governance principles than the expressed will of shareholders.