The United States, and most of its allies, are lowercase-d democracies in that the officials who make big decisions tend to be either elected directly, or nominated by one elected official and confirmed by a majority of others. But there are variations in just how representative it is, by design—Presidential votes aren't precisely population-weighted; the Senate was originally designed to directly represent states (but now the House essentially fulfills this function, since Congressional districts can be designed to make favored candidates safe and to make the state's representatives tilt a little bit more partisan than the voters); the average tenure of Supreme Court justices is about 14 years; the people writing the text of bills, or coming up with specific rules to implement high-level laws, generally aren't elected; and institutions like the Fed are also designed to be deliberately immune to popular pressure.

This is all intentional. Democracy is partly a question of latency: do you want to represent the  popular view over time? Right this second? Do you want to do things that will be retrospectively popular, like dropping billions of sterilized flies over the Darien Gap in order to keep the screwworm from getting into North America? And is democracy only for the living, or should governments represent the interests of the dead? (It's always awkward to talk about this in the present tense, but the future tense makes more sense: if you strongly believed in something while you were alive, and that view got less popular after you died, would it be more or less democratic for future policy to reflect your will?) And that ignores the other big reason to avoid pure democracy: the median voter is not very politically aware, and tends to have a bizarre mishmash of views. Moderates are generally extremists who happen to be extreme in a bunch of different directions that average out, not people who are halfway between both parties. That means that for any randomly-selected issue, there will be a small cohort of voters who are very motivated to support one side or another for basically incoherent reasons. It's just much better for some complicated issue like water usage policy to be determined by a small group of unelected bureaucrats who spend all of their time thinking about it than to put it up to the 1% of the population that has strong opinions.

Shareholder democracy is a similarly tricky concept. The idea that companies ought to be run primarily in the interests of their shareholders has existed for a while, but it didn't become mainstream until fairly recently. Early in the history of corporations, a corporate charter was closer to a trade: they'd get the right to earn profits from some task (e.g. operating a canal, running a bank) in exchange for which they'd provide some service (transportation, financial access). Even countries that had a comparatively libertarian streak operated this way: here's a short story from the 1840s, written by a British railway lawyer, where a central part of the plot is that they'd need to get permission from parliament to actually build their railroad.¹

The late 19th century period of companies being dominated by either their founders or their bankers, depending mostly on whether or not they could service their debts, gave way to a mid-20th century model where companies once again had a broad sense of social responsibility, where their job was to do the right thing for customers and employees and only after that to consider paying a dividend. But that was an informal understanding, driven more by the threat of reprisals (whether political rhetoric or labor troubles) than by any statutory understanding. Legally, shareholders were still owners, they still selected boards, and boards still chose CEOs and determined company priorities. And that gap between de jure and de facto created an opportunity for shareholder activists to close the gap between what a company was worth as a holistic part of the economy and what it was worth as a profit-maximizer. If stocks don't perform all that well, the median shareholder isn't especially engaged, and an Icahn or a Pickens or a Peltz can buy up a chunk of stock, start agitating for change, and then make a quick exit.Either they find something at $10 that they know is worth $20, buy a bunch, and convince the company to accept a merger at $15, or—before a change in the tax code ruined this particular maneuver—buy at $10, and have the company take you out at $15, in exchange for a promise to go away.

Shareholder democracy was unusually viral for an economic idea, for the simple reason that every successful deal gave activists a bigger bankroll. In later interviews, Carl Icahn talked about how many of his statements were, fundamentally, a bluff: he'd buy 10% of a company, threaten to buy the whole thing at a small premium, and neglect to mention that he was margined to the eyeballs just to get that 10% stake, couldn't possibly swing the full deal, and might well have had to liquidate just to pay the interest if management had procrastinated enough. That was much less the case once he was a billionaire.

But by that time, companies had started working on their own activism defenses. Some of these were changes in corporate charters (staggered boards, or a "poison pill" where every shareholder except the hostile one gets to buy more shares at a discount). But the other changes they made were operational: treating shareholders as a more serious interest group and actually running the company on their behalf, buying back stock when it was cheap and being a bit more willing to lay off workers or raise prices when that was the profitable decision.

There are still plenty of activists, though their pitches tend to be less exciting than the earlier generation. It's less about buying something at 50 cents on the dollar and terrifying management into closing the gap and more about buying something at 85 cents on the dollar and sharing a nice powerpoint on a few little tweaks to capital allocation that would fix things right up.

But there's another kind of shareholder activism, a distant descendant of populist campaigns like Robert Young's in the 1950s. Retail investors are, implicitly, voting on policies at the companies they trade. The most common policy they voted on in the last year or two was: yes, put all of your cash into crypto. But they do other things, too. Opendoor has basically gotten permission from its shareholder base to step up spending in order to return to high growth, and, in a very weird episode of American financial history, Cracker Barrel was convinced to cancel a brand refresh by a bunch of outside investors. These investors are probably going to lose money in the aggregate, because they're the classic political centrists—strong but unpredictable opinions on a random assortment of issues. But they're also engaging in an act of self-expression. NPR and The New Yorker just aren't the world's leading manufacturers of tote bags, but the premium people pay is about offering their support, and advertising it. What this model of shareholder activism does is that it basically runs a temporary GoFundMe for shifts in corporate strategy: if the investor base collectively agrees to burn some amount of expected value, then fine, the company will make a strategic choice that costs them slightly less money than that and leaves them ahead overall after the inevitable secondary or at-the-market offering.

As with regular democracy, it's never perfectly representative. Of course, the big retail investors have more pull than the small ones. But also, these movements tend to get either catalyzed by or captured by their own internal elites. How could it be any other way? A messy, noisy, anything-goes political process can't really scale beyond an electorate that can fit in a picturesque town hall in New England. Even Athens, the birthplace of democracy, couldn't manage to keep it going, even though they pared the electorate down to a minority subset of adult men. Voters have influence in the aggregate, but the people who individually have influence are the ones who are making their own choices, not participating in an electoral process.

Governance questions come up in The Diff in many contexts. We've looked at:

• We've covered how some shareholder activists came out of the risk arbitrage world—why wait for a deal to happen before you start betting on which deals will close?

• We did a dive into an activist campaign on Texas Instruments ($).

• We've also done a more detailed exploration of prior eras of shareholder activism, before the current retail-driven model really took hold ($).

• And we've also looked at how much of the modern PE/private credit/activist system was pioneered by one bank in the 1970s.

• The Diff looked at the recent death of the crypto treasury strategy ($).

• We’ve also considered how Robinhood is a uniquely levered bet on meme stocks ($).

And how did meme stocks suddenly explode in popularity, anyway ($)? It turns out that, to understand some parts of the modern market, you need to understand Reddit, but you really need to understand Walter Ong and 4chan.

Join the discussion!

1  This is a delightful business classic, which I first read in the appendix to this wonderful piece. It has a lot of specifics about railroads, but also feels plenty current right now. Just replace parliament with Nvidia and you have the same feverish bootstrapping-funding-to-bootstrap-more-funding dynamic today.