Shareholder Democracy and the Economic Purpose of the Corporation

I. IntroductionInterdisciplinary scholars often speak at cross-purposes. At times, their efforts may elicit little more than bemused indifference. But scholars with an interest in the corporation clearly need to communicate across disciplinary boundaries. We will never have a complete understanding of the corporation as a social, political, and economic entity unless we understand it coherently in all its dimensions, and we will never understand it coherently in all its dimensions unless we examine it rigorously from all perspectives. History is a source from which scholars across the humanities and social sciences draw insight, and so a symposium on understanding corporate law through history provides a rare opportunity for scholars from various disciplines to exchange alternative points of view.Colleen Dunlavy has undertaken an extensive study of the governance mechanisms of nineteenth century corporations.1 As she has carefully documented, the common law rule of one-vote-per-shareholder persisted well into the nineteenth century.2 This is surprising because it seems to contradict the usual alignment of wealth and economic power in a market-based economy. Professor Dunlavy attributes the persistence of the one-vote-per-shareholder rule to the social conception of the corporation in early nineteenth century America as a "body politic" and to norms that treated shareholders more like citizens in an egalitarian polity than modern-day investors in a profit-making business venture.3There is no disputing Professor Dunlavy's facts-the one-vote-per-shareholder rule was much more prevalent at the start of the nineteenth century than it was at the end of it-but one might demur at her explanation. This Comment suggests an alternative view: The persistence of the one-vote-per-shareholder rule in the early nineteenth century and the transition to one-vote-per-share by the end of the nineteenth century may have had more to do with the economic purpose of the corporation than with the early nineteenth century social conception of the corporation as a body politic. Indeed, from this perspective the social conception of the nineteenth century corporation was bound up with its economic purpose, and it changed as the economic purpose and function of the corporation evolved.II. The Corporation as a Market InstitutionThe corporation is a market institution and, like all market institutions, it is a social construct with important social, political, and moral implications. Corporations make decisions that affect the allocation of scarce economic resources, the distribution of income, domestic political outcomes, and the scope of human rights. They decide, for instance, how much steel to buy, how many SUVs to produce, how to finance their employees' retirement plans, whether to outsource customer service operations, and whether to transact with suppliers that use child labor. In spite of all the important social and political implications, they do not make their decisions democratically, at least not as the term is commonly understood. Indeed, as Professor Dunlavy points out, under the one-vote-per-share rule that predominates in the United States today, decision-making power among the shareholders of the corporation is distributed quite plutocratically.4 In theory, a shareholder's voting power is in proportion to her property rights in the corporation; the larger her stake, the greater her influence.Of course, it is well known that in most public corporations today shareholders exercise little control over the directors and senior executives.6 Under state corporation statutes, responsibility for the management of the corporation is vested in the board of directors.7 In practice, the board of directors necessarily delegates many decisions to the senior executives and is usually dependent on the senior executives for most of the information that it uses in making any other decisions.8 Unless they happen to own a controlling stake, shareholders thus usually have little, if any, influence over the corporations in which they own shares. …