“It has been said that democracy is the worst form of Government except all those others that have been tried from time to time.” — Winston Churchill

In November, the SEC and NASDAQ implemented new requirements relating to the process of nominating directors of publicly traded companies. The goal was to put independent directors in charge of the nominating process, with the expectation that this would reduce the number of self- perpetuating boards of directors who felt greater allegiance to management than to the shareholders. There are reasons to have shareholders vote. For example, it is the most effective way to have a disparate group of company owners select managers who will run the company in their behalf.

But shareholder voting is not the same as political voting, for a number of reasons.

For one thing, shareholders in publicly traded companies can “vote with their feet” by selling the stock.

When a company is newly formed and the number of shareholders is small, it usually is simple to find consensus on what the company should do and who should run it As the number of shareholders increases, so do the voting formalities, and the chances for there to be significant differences of opinion among shareholders on what the company should be doing.

But when a company’s shares become publicly traded, the shareholder democracy question becomes somewhat different. When there is no market for a company’s shares, a shareholder can only protect the value of his or her investment by voting on management to run the company well. When the shares can be traded, an investor who disagrees with how the management is running the company can protect his or her invested capital by selling the shares to someone else.

Voting shares, then, becomes more like voting for who should be president of a dub. The only people voting are the ones who decided that they wanted to be in the dub, and they are the only ones to whom the outcome is directly relevant.

Second, unlike politicians, corporate office holders can be held accountable for what they do or fail to do.

Politicians run the risk that if they leave votes upset, they will be voted out of office, but (except for bribery and similar outright crimes) they do not run a risk of liability for making bad decisions.

Corporate directors and officers, by contrast, are legally required to act as fiduciaries for shareholders, and to act in the best interests of shareholders. They can be held liable through the litigation process for failing to do so.

Finally, for publicly traded companies, it would be hard to imagine a more lethargic voting block than the mutual fund industry that holds such a large proportion of shares.

The mutual fund industry makes money by aggregating investment assets (such as individual and corporate retirement accounts), and then charging a fee based on the percentage of assets under management. Unless the value of the assets declines to zero, there is always a percentage fee that mutual fund managers will be paid, in good times and in bad.

A mutual fund manager can increase fees by increasing the value of assets under management, either by being a good investor and seeing the shares held by the mutual funds rise in price, or by being a good marketer and convincing investors to place money with the fund. Focusing on investing, including taking an active voting interest in who runs companies, would require many mutual fund managers to work harder than they would like.

(In the recent mutual fund scandals, some managers found additional ways to make money, by stealing it from existing clients. Please e-mail me at bdravis@downeybrand.com if you have an explanation for why any pension fund administrator has acted effectively as a fiduciary if the administrator continues to invest with one of the funds implicated in the scandals.)

Unlike mutual funds, some institutional investors, such as public pension funds like CALPERS, take corporate governance seriously, and have taken an active interest in corporate governance for a long time

Without shareholder democracy, investors would have to rely on litigation alone to vindicate their interests. Strengthening shareholder democracy, by itself, does not help investors much, but it helps.