The Shareholder Democracy Lie

Abstract

This Article critically examines the fallacious nature of “shareholder democracy” rhetoric and its implications for corporate governance, political democracy, and societal wellbeing. While corporations and activists frequently invoke shareholder democracy to advance their agendas, this concept fundamentally misrepresents the reality of corporate governance and share ownership in America. We systematically debunk the shareholder democracy myth by analyzing historical developments in shareholding, examining barriers to share ownership, and investigating the current state of corporate voting.

The term shareholder democracy first gained popularity in the 1920s, when Wall Street firms and the NYSE used it to attract retail investors while simultaneously helping management resist government regulation and labor organizing. We trace the historical development of proxy voting from early English corporations through American securities regulation, revealing how the proxy system, despite being presented as a pathway to shareholder democracy, facilitates management control and institutional investors’ influence, while limiting human shareholder participation.

A detailed examination of share ownership inequality demonstrates how centuries of discrimination, including slavery, Jim Crow laws, and employment discrimination, have created enduring barriers to share ownership for minorities and women. We document how discriminatory practices in employment particularly affected access to employee stock ownership plans (ESOPs), creating what we dub a “double jeopardy,” which describes how minorities were excluded both from employment opportunities and the accompanying share ownership benefits. This historical exclusion continues to impact contemporary patterns of share ownership and wealth accumulation. 

Currently, institutional investors and proxy advisory firms dominate corporate governance. So-called “de-retailization” of share ownership has concentrated voting power in the hands of the “Big Three” (BlackRock, Vanguard, and State Street), who collectively constitute the largest shareholder in almost all S&P 500 companies. This institutional dominance is compounded by the outsourcing of voting decisions to proxy advisory firms like ISS and Glass Lewis, which exercise enormous influence despite having no direct stake in the companies they evaluate.

Shareholder democracy is a dangerous myth that obscures the fundamentally undemocratic nature of corporate governance and share ownership in America. This mischaracterization has significant implications beyond corporate law, as corporate power significantly influences political and social institutions. Acknowledging the fallacy of shareholder democracy rhetoric is essential for developing more accurate and effective approaches to corporate governance reform and addressing broader societal inequalities.

Through this comprehensive analysis, this Article contributes to both corporate governance scholarship and broader discussions about economic inequality, demonstrating how the myth of shareholder democracy has helped perpetuate and legitimize fundamentally undemocratic corporate power structures.

Keywords: shareholder democracy, political democracy, retail investors, institutional investors, proxy voting, pension funds, democracy, corporate governance, proxy advisory services, mutual funds, Big Three, shareholder meetings, shareholder proposals, 14a-8, share ownership, employment discrimination, inequality, stock market, financial markets, women investors, non-White investors, access to opportunity, history of corporations, Securities Exchange Act of 1934, 34 Act, hedge funds, undemocratic shareholding, Arjuna Capital, ExxonMobil, pass-through voting, BlackRock, rhetoric, public companies

JEL Classification: K2, K20, K22, G3, G30