Corporate Democracy

by Odysseas Papadimitriou on January 21, 2010

dictatorIn an article printed in The New York Times last November, Andrew Ross Sorkin addressed the issue of corporate governance by exploring the proposed takeover of the British confectioner’s company Cadbury by the American company Kraft.  The article explains that because British Boards of Directors act, essentially, in an advisory capacity, the decision to sell the company is based on the shareholder’s desires.

Since the article was written the takeover of Cadbury by Kraft has been complicated by various developments, but the issues discussed by Sorkin still hold.  Sorkin used the proposed takeover as an opportunity to discuss the differences between the power of corporate governance in England and in America.  In the British system, shareholders have much more control over the future of their investments, while in the American system, much of the control of the company is ceded to a Board of Directors and so takeovers, like that of Cadbury by Kraft, generally require the Board’s blessing to move ahead.

While we applaud the journalistic integrity of Sorkin for presenting both sides of the debate with due reflection, we are of the opinion that the debate over whether a company ought to be controlled by its investors or its Board is, innately, dangerous in its implications.  What is really being discussed here is the viability of democracy.  While the discussion elucidated by Sorkin centers on, specifically, whether shareholders have the wherewithal to figure out how their company should be run, in a larger sense, the implication is whether  the average person has enough sense to be responsible for their own vote.

At Wallet Blog, our position has been that average people should be empowered to make decisions concerning their own welfare.  This includes the ability for them to take a position, by voting, on issues that will affect them fiscally.  This is true of national and state elections, and it should also be true for corporate decisions.  Otherwise, the implication is that the average person can’t be trusted to make decisions for themselves and that a “Board of Directors” of sorts is necessary for other decisions involving a vote.

The bottom line is this: if our country were run the way we allow our corporations to be run then we would have a dictatorship instead of a democracy.  A small group of powerful figures would decide national policy for the citizenry at large.  That’s what ”democracy” means under the American Board of Directors system.  We wouldn’t tolerate such a system for our government because we don’t believe it’s a viable way to run a country.  Why debate, then, whether it’s a viable way to run a corporation?  If we think that democracy is an acceptable way to pick our nation’s leadership, then it should be an acceptable way to run something less dire like the operations of an American company.

In discussing corporate governance, it’s all too easy to suggest that we are embracing a different set of values for a particular situation, but the fact of the matter is that if we believe in democracy, we ought to advocate for its merits whenever possible, and we should, likewise, protest anti-democratic principles as a matter of course.   The British system isn’t just different from our own, it’s more democratic, and it might, perhaps, serve as a model for America to revamp its own Board of Directors system which is ultimately run from the top down against the very democratic principles upon which our nation was founded.

Discussion

Alexandros Krie
Dear Odyssea,
The BoD is elected by the majority of the General Assembly, not forced on shareholders like a dictatorship. The same goes for any elected government of a democratic country. They elect a government to run the country. As long as everybody can vote or run for office (aka as long as every shareholder can vote or be eligible for BoD) I do not see how having an elected BoD making the decision for a takeover is much different from an elected government making an equivalent decision.
January 21 at 15:47 pm
Odysseas Papadimitriou
This is a good point and it certainly appears that way. But the question is why do we need a board of directors to make a hugely important decision when we can have the shareholders vote directly?

Please read this http://www.walletblog.com/2009/03/the-current-board-of-directors-system-must-go/ for my views on why the board of directors system needs a complete overhaul!
January 22 at 03:44 am

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