The Failure of Shareholder Democracy In America

This article reports on a study that concludes that shareholder democracy fails on all three functions that it is supposed to provide.  With the exception of startups, corporate investment is not funded by shareholders.  Investments are funded by retained earnings.  Stock prices also fail to provide feedback on company value.  Studies show that 90% of the time stock valuations are between 50% and 200% of a corporations actual worth.  Lastly, shareholders, represented by directors, do a poor job of disciplining management.  CEO compensation is poorly correlated with company performance.

There are several factors that explain the weak power and utility of shareholders.  In the 1950's stocks were held primarily by individuals.  The average period for holding a stock was 7 years.  Today the average holding period is 6 months, and 70% of the volume on the NY Stock Exchange is high frequency trading in which the holding period is less than one second.  Shareholders are more like renters than like owners of the companies in which they invest.  Impatient capital does not fund, discipline or measure the value of a company.

The primary beneficiaries of shareholder capitalism have been managements which have more control over boards than individual shareholders.  There is no good reason for limiting voting rights which determine board membership to shareholders.  Countries, like Germany, elect directors by giving rights to stakeholders and not restricting votes to those who rent stock. German companies have benefitted from this system and so has its citizens.  The doctrine of maximizing shareholder value for the renters of stocks has led to bad developments in America.  Management focus on managing the stock price has led corporations to pursue strategies that have not been good for other stakeholders.  The system of shareholder democracy in America is a failure that will not be easy to correct.  Managements love it, and directors have no interest in changing it.  Most Americans don't understand how it works, and why it has failed.  Consequently, politicians have little interest in change either.