The current debate over whether the SEC should strengthen shareholder participation “rights” in public companies (subscribers see the Wall Street Journal editorial “Board Games” of November 27) is a replay of the old debate over whether society is better organized by “voice” (a broader participation in the management of the institution) or by “exit” (the decision to move oneself or one’s assets to some entity). That distinction discussed in Albert O. Hirschman‘s Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States in many ways distinguishes those favoring the politicization of society and those favoring liberty. The SEC faces therefore the choice of moving public companies closer to the political realm — making their internal decisions matters of political debate among the shareholder population vs. strengthening the ability of shareholders to discipline the corporation by selling off their shares but also by takeover. Note that “shareholder democracy” in such high-transaction costs situations means that it will never be a one-share, one-vote world. Interest group(ideological or economic or both) will dominate the process as they do in the political world.
And, indeed, that is exactly the purpose of those favoring CSR (corporate social responsibility). To these people, every institution within society should become a little government, a microcosm of societal policy, pushing toward “socially responsible policies.” The concept that the corporation is a special purpose entity to produce wealth and that the best discipline is buying and selling its shares has little support among the CSR crowd. As one individual, Anne Simpson, Executive Director of the International Corporate Governance Network, noted in a recent letter to the Financial Times “â€¦ U.S. investors, apart from their rights to sue or sell, are not in a position to protect their own interests.” We must vote not move elsewhere! All “public entities” must be democratic and thus the corporate “citizen” (aka “shareholder”) should have equal “voice” in deciding policy. That the modern corporation was created in part to separate ownership from management is not widely realized or respected by this crowd.
Let us hope that the SEC and Chairman Cox are wise enough to block this effort to further politicize business.