The Separation of Ownership and Control inModem Corporations: ShareholderDemocracy or Shareholder Republic?A Commentary on Dalia Tsuk Mitchell'sShareholders as Proxies. The Contours ofShareholder Democracy

Professor Tsuk Mitchell has written a clear, informative, and well-organized account of how the adage, "the more things change, the more things stay the same," applies to investing in corporate America. She argues that despite a century's worth of changes in the laws governing the nexus between shareholders and corporate boards, most investors continue to own parts of companies without possessing any meaningful control over their investment-except for selling their shares if they do not like what management is doing with the company. This "love it or leave it" approach to shareholder guidance of the companies in which they invest creates a "myth of shareholder democracy,"1 the subtitle of her paper. As she put it in her title, it bestows "property without sovereignty," giving investors title to something without any real authority over it except for the right to get rid of it. Here the separation between "ownership and control"2 forms the crux of the matter.This separation raises the question of the investor's true identity or function. Are shareholders strictly investors (i.e., maximizers of profit) or potential participants in the direction of the companies in which they invest? Why can they not be both?3 Why can investors not buy in to companies and have a less drastic means of influencing board deliberations and actions than the silent threat of selling their shares when they are dissatisfied? The short answer is that while investors are free to sell their shares if the company performs poorly and returns are weak, ultimately, to enable the directors and managers to run the company at a profit, investors must agree to limit drastically their direction and management of the company. Why? The simple fact is that one invests not to create a company or even run it, but one invests to gain a decent return. To borrow from politics, it is the difference between voting occasionally and actually running for office oneself. Now, voting every two years for one's congressman and then going about one's business does not mean politics are forgotten. In fact, it is what one does between elections that makes the vote so important. But I would suggest that there is a categorical difference between what a citizen does between elections, and what an investor does between buying and selling his shares-and it is this difference that ultimately makes democracy a poor analogy for corporate decision-making.The problem is that corporations are not polities and shareholders are not citizens. Of course, one can take the metaphor of democracy too far and ask it to carry too much weight as an analogy for how shareholders should relate to the companies they invest in, but the democratic analogy breaks down almost from the outset: Corporations do not deal with their investors' lives, liberties, and property-as civil government does-but instead, corporations deal just with investors' property. Because it is wealth, and not personal rights, that are at stake, one can see why shareholders concede with little protest almost all authority over the company's uses of their investment.Moreover, one can readily see why a member of a political community would need to give consent to his government in order for that government to exercise authority over that citizen: This authority originates with the individual and thus can only be exercised by his consent. Legitimate government rests on the idea that individual human beings possess natural rights; as the Declaration of Independence states, "they are endowed by their Creator with certain unalienable rights."4 Because no one is born the natural ruler of anyone but himself, no one can rule another without that person's permission. Thus is born the social contract, whereby a community of rights-bearing individuals agrees to delegate their natural right to rule themselves to a group of their choosing but only for certain limited purposes.Now, what does this have to do with corporate governance? …