Corporate democracy with Sarah Haan

This is proxy countdown. I am your host today. Matt mascardi on today's countdown a conversation with Sarah Hahn. Corporate law, professor from Washington and Lee school of law. In the conversation. We cover president musk whose president of something irrationality of rational, apathy how proxy fraud in 1888 looks a lot like fraud in 2025. And how the totalitarian state of corporate democracy found a Rand McNally map to political democracy. Sarah Hahn writes at the intersection of corporate law and democracy on subjects like corporate governance, shareholder voting rights disclosure. I'm sure you've seen her work in Stanford, law review, Yale Law Journal, North Western University's law review The New York Times and obviously probably see, less Blue Sky blog. Sarah is actually working on a book on how the corporate democracy increasingly influences, the political democracy, as you see, Founders and CEOs, take more roles in politics. But enough from me, let's get right into it with Sarah here, Sarah Hahn. I can I start with a question? Yeah, good. If you live at the intersection, the corporate democracy and the regular democracy, where is President Musk? Well, Elon Musk is at the top of the Heap in corporate democracy, right? So one way to think about him is, Just as this sort of wild success story at trenching himself, at the top of several corporate organizations, public companies and private big important private companies. And so what is super interesting about Elon Musk is how he is now essentially trying to take that dominance in corporate democracy. And he's, he's now moving into Political democracy and he's doing it in this. I think really, you know, unprecedented kind of way because unlike tromp or, you know, some of these other guys who get officially appointed or elected, he's just he's doing something through back channels, which has a very corporate field to it, honestly, so he's the corporate Heist of them. All, what musk is doing is not New. It's just at a level in the political democracy. We've never seen. Is that was that right? well, so my take on corporate law generally is that it's all about power and that you really have to pay very close attention to how power is being exercised. What Elon Musk is doing. Now, in our politics is a giant power move, but, you know, he sort of circumventing some of the normal. I mean, he's not just trying to get elected, whereas, you know, he has to get elected to the board. He has to get his brother elected to the board of, right of of his companies. And then once he's elected to the board, then he can be named the CEO and then there are other votes that they have to get the shareholders to go along with. Like if they want to reincorporate somewhere else or what have you and so that all really involves formal electoral mechanisms whereas in our politics what is fascinating to watch is that he's just going through a back Channel and he's he seems to be exercising, tremendous power in our government and it, you know, it's speaks to how The power, maybe super seeds technical rules and right, I mean it's, you know, as I guess we move into a democratic breakdown. We'll just see that more and more. You won't have to get elected or even appointed go through any kind of process. You know, if the king says you get to decide who is fired and who keeps their job, you, you have that power. So it's really unsettling. I think, I think people are responding to how unsettling it is. The unset what makes sort of musk's role in political like the political theater right now, unsettling is that he is unelected, right? Like there wasn't we didn't go through that mechanism. It was back Channel. but even in the elected democracy of the corporate democracy, where he is hypothetically elected, Not only does it seem like they sort of, jury rig, all these things. Like I don't know what. Investor with think, his brother would not be compromised or or merits aboard position at Tesla But they don't seem to care at all. Like there is no, there's no Vote. And I can't gel like this. Same voters are in both places and some ways, but in one sphere, they don't care. And that's sort of musk's Behavioral sphere, right? Like where The he is a source of of capital appreciation or views himself that way and you should not care about what anything. Technical any process you shouldn't care, as long as Rocket goes up, right? I can't gel that with like, you know, like we feel unsettled by it. But why does why do investors not feel unsettled about it in their own democracy? Well, I mean, I think that this is a problem that we haven't solved yet, the corporate domain where we sort of believe that the Electoral mechanism works and is functional. And so we have basically, you know, the form of democracy but don't really the substance of it. And so, I think what you're describing is, you know, corporate laws, spent 200 years, trying to make it so incredibly hard and challenging and dispiriting and burdensome for shareholders to vote that they don't do it or they vote, you know, through an intermediary, they vote by proxy, they delegate their vote away they just do whatever management tells them and then we call that democracy but you know, nobody should Should be confused. I mean, that is You know, again, sort of the form, but without the substance of democracy and we've become habituated to that in the corporate space, but, you know, outside of the people who participate in that, when you move into politics, people are really passionate about politics. Then the most important thing about politics is participation and people being active. And so now I think, you know, he's Moving from corporate to political democracy. He is certainly facing down. A lot of people who think he don't, he doesn't belong there. And who think that he needs to be elected or have some sort of mandate any kind of mandate real genuine not a fake corporate mandate but a real genuine one. Sure do Duty right, as a legal construct and like a substance of legal construct. That every investor will talk about add nausea and it does not seem like 96% as the average four vote for a director at any company is the exercise of fiduciary duty. Why is the zealotry not ported back? Why do we not see it from investors in in proxy voting? well, I mean you know, the whole history of the the corporate economy has discouraged that kind of investment by asset managers and I mean In fairness, you know, I think it would be pretty challenging if you have a really diverse Diversified portfolio. You have many, many companies. It's challenging to participate. And I think people just sort of leaned back. There was honestly, you know, in the corporate law area, there was this sort of whole effort made to justify shareholder passivity, and to cultivate it. And to explain why it's specially rational and it's actually virtuous. And I think people just kind of bought into that. And so we conformed our ideas about fiduciary duty to this sort of understanding that. Oh whatever management wants to do. They pretty much should be allowed to do it, so just rubber stamp, always rubber stamp hand, over the vote delegate, your vote to management, and that's a system that we have inherited, it's only been in the last couple of years, you know, maybe decade or two that, we've really started to see push back by some asset managers. It's so unsettling to the whole system. What are they even? What are we, you know, why do we why? Why does anyone really think of it as a democracy in the first place? Like they're they're even Shifting the goalposts now, like X coal, patient of directors in Delaware companies are putting up the votes for exculpation of directors, which effectively allows the directors to get away with even less liability for the outcomes of their decisions, but they collect the same paycheck. The shareholder votes are vaguely binding but not really binding companies are moving from Delaware to Texas. Like I'm at a total loss like what is it, is it just total control that the company's going for like zero shareholder rights because like, I don't know what they think, they don't have already. It's already kind of skewed is like, so skewed that what are we talking about? Well, it's super skewed. I mean, I feel like we're sort of conflating two things but just to speak to your, your overall point. Yeah, it's about power. I mean, the who would like to exercise complete power over big companies because that is enormously beneficial to them in terms of setting their own pay and enjoying a lifestyle. You know, that's just incredible that. I mean most people, I think can't even fathom and also they direct all the resources of these big companies. You know, they really get to become shock collars across lots of different modes of life if you run a big public company. And so, yes, 100% of the objective here is to entrench a small set of individuals at the helm of these companies where they will be in perpetuity and and just be, you know, basically oligarchs, right? And so that's that's the end game. But then, you know, there are two, you know, if you think about sort of corporate governance, there are two major mechanisms. There are all of the Democracy or electoral mechanisms and then there's lawsuits And so you were talking about both of them in your question. But I mean really all the Democracy stuff is supposed to reinforce this idea that the shareholder engages in self-government when the shareholder invests their money, they get to decide what to invest in, and then they actually get a vote in the governance of the company to make sure that they're investment is being well managed, right? And so that is separate. And apart from this question about, you know, later if things go badly, would you hope that they don't? But if they go badly, you know, do you have a cause of action to sue in court in which case you hope a judge will step in and either you know enjoying something from happening. No you can't sell this company or engage in this acquisition or whatever or you know they'll just order the judge will order damages and so on you know it's not great to be in the lawsuit situation. You'd much rather be exercising your freedom and your You know, engaging in self-government by through the vote and shareholders vote a lot, right? They vote at least. Once a year, this is more than in political democracy. And then, you know, if the company, there's lots of things that if the company wants to do them, they have to go out and get the shareholders to vote on them and they vote on, you know, the equivalent of ballot initiatives. Those shareholder proposals, there's say on pay, there's, you know, lots of things going on in voting. So in theory, you know, there could be this very robust version of corporate democracy, but we haven't figured out this sort of technology and the logistics of making that workable. And there are a lot of people invested in US, never doing that. Because they like to be King's. Well, and that to me is interesting if the shift now. So, okay, so that's a good correction like, as in our clarification. Because the shifts to Texas is more about the legal structure than the voting. Like, the Democratic structure is not the argument. You'd say it's more the legal structure, right? Like almost molding yourself against like, legal incursion to your power. Both things are going on. I mean, you know, because the states law will Define lots of aspects of the governance and in many aspects of the election, the corporate election. And even this theoretically the shareholder proposal. But, of course, you're right. I mean, the real what's really going on here is that state law defines fiduciary duties? And fiduciary duties are a thorn in management side. They don't like them because they could be held accountable for doing wrong stuff and they don't, they want to do wrong stuff and not be held accountable or at least not be sued. And so, you know what, we're starting to see is this race to the bottom among the states. You know, looking for states, that have the most lacks fiduciary duty law, and the state seemed to be Rushing to provide exactly the kinds of laws that corporate managers, not investors what corporate managers want and we're seeing this in Delaware, you know, in a different not relating to controlling shareholders. But I mean, this is an old story because this is how we this is how Delaware came to dominance. You know, in the early 20th century in the first place is by catering to corporate managers that's a winning strategy. Tell a story about Elijah Philip's in the Fitchburg Railroad in the in the paper where he circumvents a proxycap rule at the time and it gets brought to court. And basically says, rather than fight it he says yeah well everybody does this. I like I'm not fighting. This is common practice, he's found guilty but Massachusetts repeals the law and there's no accountability for Philip's at all. That seems to be exactly what musk did with his pay package, which was your year. It's rejected in the court of law and he just served it back up to shareholders and said, see they said it's fine. And now there's now it's moving to Texas where they're going to say it's fine over here. There's no accountability. I don't lose my money. No money has changed chance, everyone's happy, it seems like we're replaying just sort of the same Ebbs and flows if you're talking to race to the bottom from for, for States, but it's also sort of like, really just at some point shareholders, have to say it. Do we care about accountability at all? Because if everyone's racing to the bottom, that's the cost, isn't it? Well yes, I mean yes history just keeps repeating itself. And of course, you know, we the one piece of history that we may be don't want to really repeat. But I am getting a little nervous about is the Great Depression, right? You had this sort of You know, Roaring Twenties lead up to a huge incredible recession and downturn that then catalyzes everybody to suddenly do something about. I feel like we're sort of moving, it seems like we're moving toward that moment again. But yeah, I mean, it's accountability. I mean you, you know, the Philips story that you're talking about you just basically it's the same old. Story company. It happens to be a railroad. It happens to be the 19th century. What is he want? He wants to be paid a fortune. You wants to give his son a great job. Alright. Also he's bad at his job. He's not good at running the real road. But what is he want? Nobody to notice? He would like to continue running the real Road and have nobody noticed that he stinks at it. And so, of course, First though, there are all of these, you know, citizens, if you will of the railroad all of these shareholders, the constituents of the railroad who've invested their money, who would like the railroad to be run effectively and and well and who don't want to pay him and exorbitant salary and don't want his son in some management job. And so when they push back right, then you then it comes to a head and you see whether there's going to be some sort of accountability, which is this is just I'm basically describing how democracy works, right? I mean, in politics, right? I mean, if you have somebody leading and they are bad at leading, is there going to be some form of accountability? Like, you know, if your leaders get on Signal and start transmitting our war plans to the whole world, right? For anybody to write is anybody going to scenario? Oh, is anybody going to be held accountable for that? I mean, but that is ultimately is the sort of the problem because like while while Phillips in the 19th century who okay? So like the executive is bad at running the company. Well, Tesla has had the most recalls in the last year of any car company, right? Like neuralink, like have almost all of his companies have basically been paid by the government to exist at all and they're seeing sales, shocks Philips wants to put his, you know, his son, give us a son. A cush job will, Kimball musk is on the board of Tesla's Brothers. Got a pretty cush job, just cash 20 million and his shares like last month or a month and a half ago, but there's no accountability, then only because Massachusetts repeals the law, it does seem like shareholders then were more cognizant or more willing to sort of push back. I want to well, run company where shareholders this time around voted For his Paypal packages a second time. Voted in Kimball musk a second time. It does seem like culturally something has happened. Where shareholders have given up the even The thought that accountability matters at all, which is why it's hard to be surprised that you lay out War plans on Signal and no one's going to be accountable. No one seems to care. What is that? Oh gosh, I wish I I had an answer for you. I mean, you know, I have written about the pathology of passivity and this idea that we have been cultivating in this country and in mainly doing this, through Market logic, and in my space, in my field in corporate law, we've been sort of cultivating. This idea that you know, people shouldn't really exercised their power. They should defer to a set of Elites, right? I mean call it what you know what it really is. There are these Elites and they get to run everything and you should just look kind of lean back and accept, you know, the money that comes UPS to you. You know, that's good and just accept that and I think we have, I think, you know In hindsight, maybe it was a mistake to accept that and it is everywhere. Now, this ethos and it seems to have pervaded The corporate, the, the economy associated with public companies. And so what I mean, you know, why won't they do anything? I think, because they're afraid, either afraid that there's going to be some blowback on them or they'll be out of the club or they just don't care that much or everything is really good for them, right? If you're talking about people who work in invest in the investment Community, they just, why would they Try to discipline somebody maybe that's going to be them in 10 years. You're describing. Effectively begins this slippery slope towards authoritarianism. We just see it in the corporate democracy and we're more okay with it because I guess the trade-off seems More tangible to the voters of the of the corporate democracy. Like it's like, as you said, if you've cultivated passivity, but they're paid for that passivity, still right? Like, for the most part, you're willing to just say, well, whatever. I'm like, my stocks gone up and like it's hard to be especially Universal owners. But you've sort of described this is where the Venn diagram gets kind of like real scary because you're like, you described sort of the overlaps between our okayness with authoritarianism and and the rise of dual class shares for instance, in sort of the corporate democracy with our casual and difference as we slide towards to destruction of institutions. In the political democracy. Like yeah, we completely free for you. Yeah. Well we've completely accepted authoritarianism in the corporate space and so you know what I have started saying in my work is that we developed essentially a parallel set of democratic institutions, where there was this authoritarianism, we may be call it democracy but that's not really what it is. We just accepted it. It's exactly what you described, right? The What people get out of it is they get the profits on their Investments, right? As the stock market Rises, everybody's, you know, generally happy and so they'll live with a little authoritarianism and it's only when the market turns down or when you know the future is not. So Rosy and it seems like maybe the people we put in charge or doing a bad job. Or, you know, other countries are suddenly moving ahead that, you know, maybe the bargain, The Contours of the bargain become clear to everyone and we realize, oh, we shouldn't have made that bargain. And I think, For the winners of that, bargain, the people who get to be in charge and fly around the world on their private jets and make all these decisions. Have you read careless people have you read this new book, careless people I bought it. I have the both the audiobook and the physical book because I was afraid Facebook with somehow or meta would somehow remove it from shelves. So I got it just to be just to be sure. Yeah, I'm just fashion and it I didn't expect it to end with shareholder proposals, by the way, I mean, it's sort of There are you know, elements of corporate democracy throughout the book, but it's mostly just a story of description of corporate leaders who just really couldn't give a damn about the things that are really important to the rest of us. But they are just living these incredibly Rich lives. You know, just It's it's so Stark, right? They are careless people in the mode of the great Gat Great Gatsby, right? And so here we so we're sort of in that time again, right? That I wish I had a happier, you know, story about it with, people have to care and they have to do something. Well that that that's actually the action item, right? Like in when we can end on the action item which to me is interesting because right now at this point in the corporate democracy like you know, there's voter turnout in the political democracy it you know. Is higher than it has been in the past, I think. But but a lot of it is driven Now by misinformation and like there's all other issues over there. But in the corporate democracy voter turnout might as well be zero. Like, 96% is the average vote for a director and almost every management proposal passes with the zero pushback on anything. The only time that isn't the case is when an activist is involved, and that's when somebody wakes up and says, oh, we need to, we might need to vote differently, right? Is the answer. To denormalize sort of authoritarianism. Something in the corporate democracy, like demanding for sunsetting of dual class, shares voting against directors at a higher and higher rate, like 2% of directors globally, give voted out. Can that number be more like 10 or 20%, right? Like to especially with the universal proxy card, which we haven't talked about yet but you mentioned as sort of like the way to sort of actually look at more like an election slightly like we do in the political democracy. Is there a place in the corporate democracy to sort of change? The tenor of what's happening. If somebody exercised their rights or do we feel like it's already too late? I'm in favor of sunsetting you know multi-class structures like you mentioned. But I think the solution is to some of these problems in corporate democracy is harnessing existing and new technologies to make voting easier. I think the problem is this is something I talk about in the article that you were referencing. And in my book, I talk about it more that, you know, the the problem with American corporate law is that it never really developed effective mechanisms of shareholder Collective action. And so, you know in politics we did develop effective mechanisms of collective action. We have a party system. So in politics, you know, your Democrat or your Republican, there are a few other small parties and those parties are extremely useful at creating policy agendas and fundraising for candidates identifying candidates putting them up. And they're just, you know, they play a really core role and you, as, you know, Corporate democracy, we never developed that. And so So we what we need to do is come up with some really creative outside-the-box thinking about how to make voting easier and more. I don't know, relevant for all the people who invest and this and I think it unfortunately will because it has become so complex. It will involve a lot of different Small fixes in the Universal proxy. Is one fix that I think is really meaningful. It's a step in the right direction. But unfortunately, if there's, we still have so far to go, I mean everybody now invest through mutual funds and You know mutual funds vote their shares on your behalf, you don't, you know, pass through voting is a little questionable. so, I'm still optimistic is a funny joke is what it actually when you read like the facts, it's not great at all. Yes, so many problems. and it still doesn't get to the problem of like, there's a There's a proxy advisory duopoly and there's effectively a shareholder ownership duopoly. So there's really, you know, when Vanguard and BlackRock own on average 20, 20 to 25% of every vote and glass Lewis. And I SS own on average, 98% of the advice Market. We're really only talking about four entities are doing all the electing. I don't know that, there's a technical solution that even gets around that even if every individual could do it, there's no way that they're going to get excited about and, you know, 22,000 active directors in the United States. Like, that's why you need a party. You need, you need something. I see what you mean. Yeah. It's the same in politics, right? I mean if you ever go to an election, I believe this is my experience. You go vote. And suddenly you're staring at a ballot sheet and half of the people who are running. You don't know who they are, right? How are you? How are you choosing who to vote for? I mean, I choose based on party, I trust the party to have developed and identified candidates, whose values match my values. I think that's just basically how politics works. We haven't done that in corporate democracy and that would make sense to me as the next stage of this, but I think it's a heavy lift. That was Sarah Hahn. Corporate law, professor at Washington and Lee law school reader. Most recent paper on ssrn called voting rights in corporate governance history and political economy as some of the stories we referenced and all the theories. She's got there and that final Theory, the idea of basically political parties for corporate voting is something that we're working on at free float. So stay tuned for that huge. Thanks to Sarah for joining in schooling. Me Damien, will be back next week to resume around up of the corporate democracy, until then goodbye.