Why and how to democratise capitalism using stakeholder networks

Contemporary capitalism is forcing the degradation of democracy by strengthening plutocracy and autocracy. Plutocracy is government by the wealthy. Corporate directors are not elected on the democratic basis of one vote per member of the company but by one vote per share. This means that the wealthy get the most votes to govern corporations.

However, when shareholders neglect to vote or provide directors with their votes by proxy, plutocracy is replaced with autocracy. Autocracy is when the power to govern is self-sustaining. Autocratic capitalism is most prevalent in the US and the UK where institutional investors may collectively hold the majority of shares in many large corporations. This introduces autocracy as institutions typically are not active owners and often provide their proxy vote to corporations. The ironic result is that capitalism is undermining democracy in those countries that provide a role model and where democracy appears to be most well established and robust.

Many of the largest corporations control economic activity greater than that of most democratically elected governments around the world. Such corporations possess the resources to subvert democracy at local, state and national elections. The degradation of democracy by this means is not unknown in even the most powerful and nominally democratic nations of the world.

US politicians are reliant on corporate largesse to fund their election at local, state and national levels. In addition, corporations have more extensive and powerful resources than citizens do to lobby government for favoured treatment. In this way, democracy is degraded, as it becomes a tool of corporate plutocrats and autocrats.

Control of large enterprises on a plutocratic or autocratic basis is not required for organisations to operate successfully, as illustrated by mutual associations, cooperatives, town councils, community-controlled health and education institutions, and so on.

The introduction of plutocratic voting for corporations was initially considered to be a “dangerous innovation” in the US and ruled to be illegal, according economic historian Professor Coleen Dunlavy. Dunlavy reports that in 1834 the New Jersey Supreme Court disallowed "one share one vote" as specified in corporate by-laws as being inconsistent with common law.

One judge stated that the by-laws acted “to lessen the rights of the smaller stockholders, depreciate the value of their shares, and throw the whole property and government of the company into the hands of a few capitalists, and it may be to the utter neglect or disregard of the public convenience and interest.”

Dunlavy describes how in many other jurisdictions around the world various forms of sliding-scale voting were used in the 20th century to provide a balance between plutocracy and democracy. When I began my career as an corporate raider in the late 1960s, plutocratic voting with one vote per share was very much the exception. The general rule in Australian was sliding-scale voting that prevented any shareholder obtaining more than 20 or 25 per cent of all votes cast. This provided a compromise between plutocracy and democracy. Sliding-scale voting protects minority investors when there is dominant shareholder as is still the case in the majority of Australian listed companies and in most other countries around the world except in the UK and the USA.

The problem today is that corporate “disregard of the public convenience and interest” can become excessive. Corporations have become very much more powerful with the ability to buy favours from government to further entrench their power and influence to challenge the integrity of democratic processes. However, at the same time their excessive power has resulted in excessive laws and regulation that control many of the details of their behaviour and operations. This degrades the efficiency of both corporations and the economy with the dead weight of regulation.

Corporations also aggravate the degradation and diminishing of democracy by encouraging and participating in privatisation. Public-sector enterprises are accountable to governments elected on a contested democratic basis of one vote per citizen. Privatisation replaces democratic control with plutocratic control and/or autocracy. De-mutualisation also diminishes democracy for the same reason.

The eroding of democracy through privatisation and de-mutualisation is justified on the basis that private ownership is a more compelling driver for efficiency. But if this argument is to be accepted, the efficiency gains must be at least sufficient to offset the cost of generating sufficient profit to provide the incentive to attract investors without increasing prices.

Some might argue that inefficient operations with responsive democratic control are preferable to efficient but less responsive private control by plutocrats. However, both efficiency and democracy can be achieved together with stakeholder governance discussed later.