Shareholder Democracy

Public corporations are supposedly governed by a weighted vote of shareholders.  Since I have already commented on the deficiency of our political institutions, I think it is only fair that I do the same for these institutions.  Most of the criticism comes from people who are hostile to capitalism.  They will always make up a minority interest.  Most of the shares are likely to be owned by people who want to make money and don't have a problem with capitalism.

One exception is when the employees acquire a majority interest, and then the company is run for the benefit of the employees.  This will necessarily be contrary to the interests of the other shareholders, who will be interested in profits.  Usually this will decrease the value of the stock.  If the employees want to acquire a company in this manner they will usually need to be organized.  Individual employee shareholders would likely sell their shares to some organization or individual who would want to end employee ownership and hence increase the value of the stock.  Because they knew that they intended to do this, they would be willing to pay more than the going rate.  This is why employee ownership usually takes the form of ownership by the union that represents the employees of the corporation.

Because what we might call the anti-corporate party is the permanent minority most elections are not competitive.  Anyone who owns stock or even shares in a mutual fund will receive a proxy notice from time to time.  This is to announce a meeting of shareholders and has a list of candidates for the board.  Little information is provided about the candidates, and shareholders are given the option of voting for all of the candidates presented or withholding support for some of the candidates.  The shareholder meeting occurs at one location for all shareholders in the entire world, so most shareholders will likely vote by proxy meaning they will have someone who is to represent their interests at the meeting.  Usually it will not pay for a shareholder to send a representative to the meeting, so the company kindly provides representatives on their behalf.  This is the purpose of the proxy notice.

On the bright side most firms are parliamentary in that the CEO answers to the board.  However, the only accountability of the board itself is considerably weakened by the process that I have described above.  The institutions of shareholder democracy are nowhere near as good as they might be in this age of the internet.  I suspect that the reason for this is that strengthening the democratic institutions would likely give what we I have called the anti-corporate party more of a voice.  The majority interest will see this as a waste of time at meetings.  In the business world time is money.  All the representatives and executives need to be paid.  The longer the meeting, the greater the cost.

The only realistic, pro-capitalist opposition to the interests of management comes from corporate raiders.  If a corporation is run particularly badly, which is to say unprofitably, a wealthy investor or group of investors will see an opportunity.  They can buy shares of the company at its lower price, which will enable them to actively participate in the next meeting and replace the management.  This is a called a hostile takeover.

Needless to say, the management of any firm will be hostile to a hostile takeover, and management in general will be opposed to hostile takeovers.  They will take steps against it.  They can buy shares of the corporation's stock so as to raise its price, thus making it more difficult for the would be raiders to acquire a majority interest.  They can assert provisions in the bylaws of the company that will compromise the raiders ownership interest in the company should they acquire a majority interest, thus making the corporation a less attractive target for takeover.  They can also ask the government to intervene by passing legislation that will have the same effect.

Interestingly enough, one of the things that corporate raiders often like to do is to take large companies, break them up into smaller companies and sell the pieces.  This is often portrayed as a criminal act, akin to vandalism.  The fact that it is seen as such reflects the success of pro-management, anti-capitalist propaganda.  The fact that the smaller pieces would sell at a higher price reflects the fact collectively the various pieces would earn more in profits than the entire company managed as a whole.

To illustrate this, we can imagine each corporation as a pyramid.  Management is at the top, their subordinates underneath.  Now, imagine breaking that large pyramid into several smaller pyramids.  The surface area of the bases of the pyramids will be increased, but the people at the top will be lower.  What happens here is that market transactions replace management.

There are natural advantages to markets and natural advantages to management.  The market will not unduly favor itself, because a market is not a person.  However, a manager is.  Managers have a collective interest in undermining market institutions to create larger firms than markets would produce.  Creating a larger pyramid will give managers of the smaller pieces opportunities for career advancement.  They can climb to higher levels in the future.

Bailouts are another way of protecting management.  If a firm goes bankrupt, its assets may need to be sold to pay off the creditors.  In this respect bankruptcy is much like a corporate raid, accept that the owners are replaced as well as perhaps some of the management.  If smaller bits of the corporation would collectively fetch a higher price, then in the interest of the creditors, the corporation must be broken into smaller pieces so as to minimize their loss.  Actual bankruptcy is somewhat more complicated than this, and in some cases bankruptcy laws may protect management from creditors who might otherwise force the company to sell its assets in this manner.

I should note that the resources that are necessary to keep corporations afloat must come from somewhere.  When the government gives money to one corporation in order to prevent a company from going belly up, this necessarily involves giving it access to resources that would otherwise be in other hands, most likely firms that are run more profitably.

I should say a few things about organized labor here, since they are also stakeholders here. Organized labor has a vested interest in larger sized companies.  If firms are small enough, they are unlikely to be represented by organized labor.  Organization has some costs and if there are not enough employees, it won't pay to form an organization.  Once workers have organized and formed a union, the union leaders will have a vested interest in maintaining large corporations.

The more leeway that the management has to run firms unprofitably, the better off the unions will be.  This will give management more discretion over wages, rather than having these be determined by the market.  The existence of unions depends to a large extent on this discretion.  Unions often assume other functions, but one of the chief ones is in collective bargaining.  They negotiate higher wages for their members.  Where there is no discretion, there can be no negotiation.  If wages are set by a market, which would be the case if firms were forced to behave profitably, the company cannot choose a price to pay workers.  If they pay too little, they would loose workers, who would find better opportunities elsewhere.  If they paid too much, the business would fail to earn a profit, and the management would be replaced.

To be fair, I must point out that unions are also involved in training and education of workers.  It is difficult to see how this function could be performed as well or better by any other party.  Unions have a vested interest in increasing the productivity of their workers.  The union leadership makes its living off of the dues of its members.  If the members don't get enough in return for those dues, they won't be interested in paying them.

The companies can train and educate their own workers, but since the workers aren't tied to the company, the benefits of educating the workers might not be realized by the company.  The government can and does provide education on general, widely applicable topics.

However government isn't very efficient in this regard.  Workers are given too much control over the schools, because they are well informed about the way the schools are run and can vote.  I should point out that the bloated inefficiency of schools is mostly in the administration.  I am not trying to argue that teachers are overpaid.  If teachers were paid more, we would be able to attract better teachers.

Workers can also pay for their own education in some cases, but generally they won't have the information that they need in order to ensure that they are getting good quality education.  Part of this information consists of the education itself.

To sum up forces move in our political system and in corporate governance that lead to bloated management.  Organized labor can be a force for either good or evil.  In general the industries that have less unionization tend to grow faster than the parts that have stronger unionization, leading me to conclude that unions are more likely to be too strong than too weak, but this is a matter of some dispute.  Unionization in an industry may go along with bloated management.  It is possible that it would be different if these two factors could be decoupled.  We should generally oppose efforts to block corporate raiding and to bail out firms that would otherwise go bust.

I'm suspicious of efforts to have the government step in and try to solve this problem.  Maybe it would be different if we had better political institutions.  However, there are too many ways for government to enhance the economic power of management at the expense of everyone else.  Labor and management can work together in government to achieve things other than quality.