Wednesday, June 25, 2008

Democracy: The Modern Idol

The Stimulus:

In a post ( ) to his blog on June 18, Carl Icahn wrote about "the myth" of corporate democracy. He complains that "many corporate boards and managers are doing an abysmal job." He believes this is a result of poor corporate governance, and claims that "the average shareholder can do nothing about it." Further, "It is the board’s responsibility to hold a CEO accountable, and remove the CEO if he or she is not producing results," but this often does not happen, writes Icahn, because "boards are often too lazy and/or passive to rock the boat, especially since the company will continue to pay and pamper and even indemnify them under almost any circumstances."

"Worst of all," he writes, "the board itself is not made accountable because corporate board elections are generally a joke." This is because " . . . in corporate America there are no true elections. It is tyranny parading as democracy . . . Perhaps, with enough public support, the lawmakers and regulators will take note." (Emphasis added.)

Icahn also quoted Winston Churchill, implying that political governance and corporate governance are one and the same: "To paraphrase Winston Churchill, 'democracy might not be the greatest system there is but it is the greatest system mankind has invented so far.' "

And the Response:

In politics, democratic elections allow the citizens to choose representatives to run the day to day business of the government. What those representatives may do, however, is strictly limited by the US Constitution. We live in a Republic, not a Democracy. In a Democracy, a majority could vote to do anything under the sun. It is mob rule. In a Republic, the rights of the individual are protected from violation by majorities. Thank the Founding Fathers we live in a Republic, and not a Democracy.

A corporation, however, is not the same as a political government. It does not exist to protect individual rights. It exists to make a profit. It draws up a business plan to do so, and anyone who wants in can buy shares of the company's stock, assuming there are shares for sale, at a price they can afford. In buying the company's stock, the investor agrees to abide by the company's rules. Including any rules about electing boards of directors. There is no guarantee he will make money on his investment.

No doubt there are CEOs and boards of directors that do abysmal jobs. But Icahn's claim that the average shareholder can do nothing about it is not true. At the very least, if a shareholder does not like what the board or CEO are doing, he can sell his shares in the company. If he prefers not to sell, he can vote (either in person, or by proxy) for directors he thinks will do a better job. The fewer shares he has, the less voice he has in such elections. Which is what he agreed to when he bought the shares in the first place. That is contractual justice.

Evidently Icahn is not satisfied with contractual justice, but instead wants government interference in the economy, like any statist. Odd, for a man whose blog is headed by a statement about fighting tyranny.

It is not clear exactly what Icahn wants the government to do in this particular intervention. His statement that "in corporate America there are no true elections. It is tyranny parading as democracy," suggests that he doesn't like how boards are elected. If that is so, he should either not have bought stock in those companies in the first place, or he should sell his shares, or he should work, in accordance with the company's rules, to get the rules changed. The one thing he should not do is appeal to the government to interfere in a business enterprise. That is not within a government's rightful sphere of influence. It is a common tactic, though, of people who can't get what they want legitimately, to try to get it illegitimately - through the government.

At the end of his post on corporate democracy, Icahn wrote "I will discuss in future entries how simple it [removing terrible management] can be and what has constrained us from taking action." Perhaps in these future entries he will suggest legitimate ways, and leave the government out of the equation. Let us hope so, at any rate.

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