The idea of a shareholder democracy has been used to promote free enterprise and portray it as democratic, accountable and equitable. However the term shareholder democracy is clearly a distortion of the term ‘democracy’. Rather than meaning a sharing of power and decision-making, it generally refers to widespread access and participation in the stock market.
In the US there is a long history of using propaganda techniques to make out that market transactions are equivalent to some sort of democratic expression:
In the 1920’s, Wall Street made its first audacious bid to entice small investors, with banks setting up securities affiliates that promoted stocks with the subtlety of carnival barkers and blurred the distinction between saving and speculating.
Tempted by easy margin requirements and the moonshine rhetoric of unending prosperity, people dabbled in mutual funds called investment trusts, which invested in other trusts, in an endless chain of speculation.
The resulting popularity of share investment and widespread participation in the late 1920s, which fuelled the boom preceding the crash, allowed the market to be portrayed as some sort of democratic process or expression.
New York Times columnist Thomas Friedman, uses the term ‘democratization of finance’ in his 1999 book the Lexus and the Olive Tree. He points to the way the public were able to buy corporate bonds from the late 1960s, invest in securitised home mortgages in the 1970s, buy junk bonds in the 1980s, and invest in third world debt in the 1990s – either directly or more often through mutual funds and pension funds: ‘This gave you, me and my Aunt Bev a chance to buy a slice of these deals that had previously been off-limits to the little guy.’
The new trend towards internet-based share trading which offers greater access to shares to those who do not have a stock broker has also been hailed as a democratic, levelling trend. E*Trade promoted its services as part of a revolution akin to women’s liberation. It claimed to be ‘leveling the playing field and democratizing individual personal financial services.’ Share ownership was equated with power. E*Trade asserted in its advertisements that ‘the power is in your hands’.
The view that the stock market is democratic because it reflects people’s choices through their investments has been propagated by free market missionaries who argue that in the stock exchange people ‘vote every hour, every day through their mutual funds, their pension funds, their brokers, and, more and more, from their own basements via the internet.’ Donald Schwartz noted in the California Management Review that ‘both law and literature pay formal homage to the notion of shareholder democracy’.
The notion of shareholder democracy is also promoted as a way of countering the perception that powerful corporations are not accountable to anyone. Corporations are represented as being subject to democratic governance through the voting procedures at shareholder meetings and the exercise of investment and disinvestment. Although it is obvious that managers determine much of what corporations do, not shareholders, corporate managers like to point to the supposedly democratic processes of shareholder meetings. In theory, shareholders can exercise their displeasure with management performance or activities by selling their shares. ‘This not only protects their interests but works as a sort of voting mechanism. A large-scale sale by shareholders will punish managers through its effect on the securities market and on the market for corporate control.’
In this way, corporate managers are able to deflect attention from their own power. Thomas Frank points out that: ‘Belief that a democratic system functions may provide a false sense of comfort to the public, to wit, that the mangers—who, after all, exercise substantial power over our lives—are responsive to a governance process that we understand from another context.’
By representing shares as the major source of wealth of a nation’s elites and showing that this route to wealth is accessible to anyone, the inequality produced by the free market is legitimised (see reality of shareholding for counterarguement). Shares are portrayed as a major mechanism for wealth sharing and widening social inclusiveness. Pension and superannuation schemes, managed funds and employee share schemes, give working people access to this route to riches and enable business people and financial journals to extol the spread of share ownership as a sign that capitalism is indeed benefiting everyone.
However, it is a distorted picture that business interests paint, because ownership of a few shares in a mutual fund is not a route to wealth. As share prices rose in the 1990s, it was the already wealthy people, who owned most of the shares, who became wealthier. A US Federal Reserve study found that as the share market boomed between 1998 and 2001 the net worth of the top 10% of families increased by 69 percent ($833,600) whilst the net worth of the lowest 20 percent only rose by 24 percent ($7900).
Similarly, despite widening share ownership in Australia, inequalities have increased. During the 1980s and 1990s as share prices rose so did the gap between rich and poor because of the concentration of shares in the hands of the wealthiest people. Between 1993 and 1998 the share of the wealth owned by the richest 10 percent of the population rose from 43.5 percent to 48 percent whilst that owned by the top 1 percent went from 12 percent to 15 percent. During the same period, the middle-income, share-owning Australians have a declining share of the wealth.
Far from spreading wealth more equitably, share ownership has concentrated it in the hands of those who are already wealthy. Nevertheless the myth of the great shareholder democracies spreading wealth to the underclasses is perpetuated. And although share ownership is spreading that ownership does not confer any real accountability or power over corporations as corporate propaganda would have us believe.
Edward Wolff points out in The American Prospect that ‘It is the very rise in corporate profitability – which comes at the expense of workers’ wages – that has fueled the record boom in the stock market… In other words, as the returns to work have atrophied, returns to capital have climbed, shifting ever more power to the rich and contributing to the rising inequality of income in this country.’ Yet somehow many of the new class of small shareholders has been persuaded that rises in the stock market matter more than employment levels, wage increases and social capital, when it comes to government policy.