In a new article, we challenge one of corporate law’s most persistent narratives: the concept of “shareholder democracy.” With people on opposing sides of recent high-profile battles at companies like Disney, Tesla, and Exxon invoking “shareholder democracy” to support their positions, we suggest that the rhetoric around the concept may obscure rather than illuminate how corporate governance works.

We identify three problems. First, corporate governance lacks basic features of democratic systems:  robust checks and balances, protected rights for minorities, and mechanisms for constituents to determine policy. Second, share ownership tends to be concentrated, with stocks held disproportionately by wealthier individuals; most Americans own few if any shares directly. Third, the current system puts substantial voting power in the hands of institutional investors and proxy advisers that may have different interests than individual shareholders.

We develop our analysis along several theoretical dimensions. Corporate governance structures diverge from democratic principles in more areas than voting rights. For instance, corporate law provides no equivalent to the political concept of loyal opposition – employees who disagree with management are generally expected to resign rather than voice dissent. Similarly, while political democracy typically protects minority rights and provides for public debate, corporate governance often treats shareholder disagreement as a disruption, with dissidents frequently labeled as “insurgents” or “barbarians at the gate.” Although our article challenges the notion of shareholder democracy, it recognizes that a broader critique of corporate-governance mechanics sheds light on the disenfranchisement of everyday shareholders.

Examining the history of proxy voting reveals how current corporate governance practices emerged from a complex interplay of practical necessities and power dynamics. Early modern English corporations required shareholders to vote in person, reflecting their origins in political institutions where voting rights were considered too personal to delegate. However, despite this rule, by the early 1700s, proxy voting was typical at most English company shareholder meetings. With early proxy voting, the proxyholder generally had to be a shareholder. Over time, though, as corporations grew larger, proxy voting became a business necessity and management began soliciting proxies. This seemingly technical change fundamentally altered the nature of corporate governance, creating new opportunities for management control.

Meanwhile, discrimination in employment significantly affected share ownership. When companies began offering employee stock ownership plans (ESOPs) in the mid-20th century, widespread discrimination in hiring and promotion meant that minorities and women were often excluded from these wealth-building opportunities. In our article, we document examples such as General Motors’ practice of limiting its ESOP to salaried employees while simultaneously restricting African Americans’ access to salaried positions. Such practices created what we term “minorities double jeopardy” – exclusion from both employment opportunities and share ownership – with the detrimental effects on stock ownership continuing to this day.

An examination of modern institutional investors reveals subtle but important shifts in corporate power. The dominance of the Big Three asset managers concentrates voting power and fundamentally changes how corporate governance functions. These institutions typically use small stewardship teams to oversee voting decisions for thousands of companies. This creates incentives to rely heavily on proxy advisers, effectively outsourcing governance decisions to entities that have limited accountability to either shareholders or the public.

The analysis of recent innovations in corporate governance provides important context for current debates. Pass-through voting programs, where large asset managers allow their clients to choose among pre-selected voting policies, might appear to enhance shareholder democracy. However, these programs may simply shift power between different types of institutional decision-makers without addressing more fundamental questions about corporate accountability and control.

The implications extend beyond corporate law into broader questions about economic democracy and social power. As corporations increasingly influence important aspects of public life – from climate policy to labor rights to technological development – the gap between democratic rhetoric and corporate reality becomes more significant. Continuing to frame corporate governance in democratic terms may actually impede efforts to make corporations more accountable to the public.

By showing how shareholder democracy rhetoric has historically been used to resist both government regulation and broader stakeholder participation, we provide essential context for current discussions about corporate accountability. Our article creates space for more nuanced discussions about corporate governance reform. Our analysis suggests that meaningful change may require moving beyond simple analogies to political democracy and developing new frameworks that better reflect the unique challenges of complex corporate governance in contemporary society.

This post comes to us from Sergio Alberto Gramitto Ricci and Daniel J.H. Greenwood at Hofstra University’s Maurice A. Deane School of Law and Christina M. Sautter at Southern Methodist University’s Dedman School of Law. It is based on their recent article, “The Shareholder Democracy Lie,” forthcoming in the Florida Law Review and available here.