Comments on: Corporations Shouldn’t Be Democracies http://blogs.law.harvard.edu/corpgov/2007/10/07/corporations-shouldnt-be-democracies/ Sponsored by the HLS Corporate Governance Program Thu, 03 Dec 2009 00:10:43 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Shann Turnbull http://blogs.law.harvard.edu/corpgov/2007/10/07/corporations-shouldnt-be-democracies/comment-page-1/#comment-5230 Shann Turnbull Fri, 12 Oct 2007 12:28:05 +0000 http://blogs.law.harvard.edu/corpgov/2007/10/07/corporations-shouldnt-be-democracies/#comment-5230 Professor Lyn Stout has based her arguments on two errors of fact: 1. It is not true that “Successful corporations are not, and never have been, democratic institutions.” Dunlavy (1998) reports that “in 1834, the New Jersey Supreme Court disallowed one share one vote as specified in the corporate by-laws of a corporation as being inconsistent with the law”. Professor Stout pointed out that “In the 19th and 20th centuries, they built railroads, canals and factories. 2. It is also not true that the benefits of shareholder democracy are “unsupported by evidence”. Thomas & Logan (1982:126–127) state that: Various indicators have been used to explore the economic efficiency of the Mondragón group of cooperatives. During more than two decades a considerable number of cooperative factories have functioned at a level equal to or superior in efficiency to that of capitalist enterprises. The compatibility question in this case has been solved without doubt. Efficiency in terms of the use made of scarce resources has been higher in cooperatives; their growth record of sales, exports and employment, under both favourable and adverse economic conditions, has been superior to that of capitalist enterprises. References: Dunlavy, C.A., (1998), ‘Corporate Governance in Late 19th-Century Europe and the U.S.: The Case of Shareholder Voting Rights’, in Comparative Corporate Governance: The State of the Art and Emerging Research, eds. Klaus J. Hopt, Hideki Kanda, Mark J. Roe, Eddy Wymeersch, and Stefan Prigge, Clarendon Press, pp. 5–39, Oxford, http://papers.ssrn.com/abstract_id=10551. Thomas, H. and Logan, C. (1982), Mondragón: An economic analysis, George Unwin, London. Professor Lyn Stout has based her arguments on two errors of fact:
1. It is not true that “Successful corporations are not, and never have been,
democratic institutions.” Dunlavy (1998) reports that “in 1834, the New Jersey Supreme Court disallowed one share one vote as specified in the corporate by-laws of a corporation as being inconsistent with the law”. Professor Stout pointed out that “In the 19th and 20th centuries, they built railroads, canals and factories.
2. It is also not true that the benefits of shareholder democracy are “unsupported by evidence”. Thomas & Logan (1982:126–127) state that: Various indicators have been used to explore the economic efficiency of the Mondragón group of cooperatives. During more than two decades a considerable number of cooperative factories have functioned at a level equal to or superior in efficiency to that of capitalist enterprises. The compatibility question in this case has been solved without doubt. Efficiency in terms of the use made of scarce resources has been higher in cooperatives; their growth record of sales, exports and employment, under both favourable and adverse economic conditions, has been superior to that of capitalist enterprises.

References:
Dunlavy, C.A., (1998), ‘Corporate Governance in Late 19th-Century Europe and the U.S.: The Case of Shareholder Voting Rights’, in Comparative Corporate Governance: The State of the Art and Emerging Research, eds. Klaus J. Hopt, Hideki Kanda, Mark J. Roe, Eddy Wymeersch, and Stefan Prigge, Clarendon Press, pp. 5–39, Oxford, http://papers.ssrn.com/abstract_id=10551.
Thomas, H. and Logan, C. (1982), Mondragón: An economic analysis, George Unwin, London.

]]> By: James McRitchie http://blogs.law.harvard.edu/corpgov/2007/10/07/corporations-shouldnt-be-democracies/comment-page-1/#comment-5164 James McRitchie Mon, 08 Oct 2007 02:37:09 +0000 http://blogs.law.harvard.edu/corpgov/2007/10/07/corporations-shouldnt-be-democracies/#comment-5164 “'Corporations shouldn’t be democracies,' argues Lynn Stout, a professor of corporate law at UCLA, in a recent op-ed in the Wall Street Journal. Ms Stout writes at a critical time: shortly before the October 2nd end of a consultation period during which America’s Securities and Exchange Commission (SEC) is considering whether to amend its rules and require companies to pay the expenses of dissident shareholders seeking to replace the board or individual directors." Thus begins an editorial in The Economist. (In praise of corporate democracy, 10/2/07) (http://www.economist.com/business/displaystory.cfm?story_id=9895518) The editorial goes on to point out that Stout argument hangs on the fact that "America has more big companies than any other country," citing figures from The Economist for evidence, "so it must be true." Most of the powers she cites that UK shareowners have are due to recent reforms that have helped London to attract listings to the point that many on Wall Street feel threatened. Bigness probably has more to do with the size of domestic markets or the ambitions of founders, than shareowner rights of lack of them. Short-termist pressures "probably owe far more to the obsession of mutual-fund managers with quarterly earnings than the focus of activist shareholders on strategy," says the editorial, dispelling another contention by Stout. Finally, The Economist points to Stout's questionable reasoning when she argues that by “giving activists even greater leverage over boards, the SEC's proposed proxy access rule will undermine American corporations' ability to do exactly what investors, and the larger society, want them to do.” Why would shareholders get less of what they want if they have more power to decide who runs their firm? The editorial then continues to turn Stout's argument on its head. Ms Stout seems to fear the tyranny of the minority, in which activists (whether from hedge funds or union pension-funds) force management to act against majority interest. But the usual problem in democracy is the tyranny of the majority, and it is hard to imagine that this would not be the case with more corporate democracy. And if it is, the oppression of minority views, such as those of activists, would surely be exactly what Ms Stout wants. “’Corporations shouldn’t be democracies,’ argues Lynn Stout, a professor of corporate law at UCLA, in a recent op-ed in the Wall Street Journal. Ms Stout writes at a critical time: shortly before the October 2nd end of a consultation period during which America’s Securities and Exchange Commission (SEC) is considering whether to amend its rules and require companies to pay the expenses of dissident shareholders seeking to replace the board or individual directors.” Thus begins an editorial in The Economist. (In praise of corporate democracy, 10/2/07) (http://www.economist.com/business/displaystory.cfm?story_id=9895518)

The editorial goes on to point out that Stout argument hangs on the fact that “America has more big companies than any other country,” citing figures from The Economist for evidence, “so it must be true.” Most of the powers she cites that UK shareowners have are due to recent reforms that have helped London to attract listings to the point that many on Wall Street feel threatened. Bigness probably has more to do with the size of domestic markets or the ambitions of founders, than shareowner rights of lack of them.

Short-termist pressures “probably owe far more to the obsession of mutual-fund managers with quarterly earnings than the focus of activist shareholders on strategy,” says the editorial, dispelling another contention by Stout. Finally, The Economist points to Stout’s questionable reasoning when she argues that by “giving activists even greater leverage over boards, the SEC’s proposed proxy access rule will undermine American corporations’ ability to do exactly what investors, and the larger society, want them to do.” Why would shareholders get less of what they want if they have more power to decide who runs their firm? The editorial then continues to turn Stout’s argument on its head.

Ms Stout seems to fear the tyranny of the minority, in which activists (whether from hedge funds or union pension-funds) force management to act against majority interest. But the usual problem in democracy is the tyranny of the majority, and it is hard to imagine that this would not be the case with more corporate democracy. And if it is, the oppression of minority views, such as those of activists, would surely be exactly what Ms Stout wants.

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