Category Archives: Corporations

Democracy in corporate boardrooms

In this blog I have written mostly about politics and how innovation could reinvigorate our democracies. I have neglected to apply this principle to the corporate and financial sector. This is actually odd because I spent most of my career in the financial sector not as a “politics student”, or advisor to organisations involved in democratic innovation (what I now do).

An interesting article by Stuart Kirk of the Financial Times (May 25, 2024, “It’s time to let shareholders choose the CEO”), raises the question of democracy within corporations. He challenges the current approach “where elected board members are responsible” for CEO selection. Investors, who own the company, “are never given a list of candidates and asked to vote”. Many of these shareholders own their stakes via mutual funds or pension funds and do not even have the right to vote–that right is executed by the fund manager on their behalf.

Kirk argues that opening up the process will broaden the list of prospects. He also contends this will put downward pressure on CEO compensation which has ballooned in the past decade. Against this contention the recent award of circa $50 billion in compensation to Elon Musk at Tesla is worth pondering. Thousands of retail shareholders were the most supportive of Musk’s package and it was the institutions who were most opposed. Thus, individual shareholders may act in ways that are surprising, and/or arguably counter to their own interests, but at least such decisions will have far greater democratic legitimacy. In the same vein, there is no guarantee that engaging citizens in the political process will achieve better decisions—but they would also have greater democratic legitimacy.

What makes me most uncomfortable about the process of CEO selection in public companies is what I would describe as the “conspiracy of the interested”. Boards appoint new board members—often in their own likeness.  The board-appointed CEO obviously has an interest in placing on the board those most likely to be supportive–and CEOs normally have considerable influence on selection. Boards remuneration committees decide how much the CEO should earn.  It is easy to see how this creates a system where compensation levels remain high, especially as board directors are often CEOs of other companies. Few board members have a genuine interest in depressing executive wages, contributing to the stratospheric rise in CEO relative pay. This all acts to the detriment of shareholder interests.

Kirk makes an excellent point with regard to the investment banking industry where “the internal candidate whose business or region is currently making the most money” gets the nod to become CEO”. As someone who used to follow the investment banking industry, I was amazed at how difficult it seemed to be for investment bank boards to distinguish between luck and competence in choosing a CEO, and how rarely they search outside the company.

The most amazing case of this I saw at close quarters at Lehman Brothers, a firm I knew well (Disclosure: as an analyst and subsequently as Lehman’s Head of Equities in Europe in the 1990s). Richard Fuld emerged from the fixed income side of the business, which had enjoyed record years during the bull market–unsurprisingly he was selected to run Lehman Brothers, systematically displacing any rivals. In my opinion, despite the success in fixed income, he was not a good choice as an investment bank CEO. Fuld, led the firm into a spectacular bankruptcy in 2008, nearly bringing down the global financial system with it. He is reported to have been paid $500 million during his career at Lehman Brothers, according to James Sterngold of CBS News (April 29, 2010, “How much did Lehman CEO make?”), while the taxpayer bill to rescue Wall Street was $700 billion. There is no guarantee Lehman investors would have behaved differently, but the extraordinary preference for internal candidates, which Kirk criticises, is an issue with the current system.

Furthermore, one can argue that Musk created an enormously valuable company and deserves rich rewards. But Lehman Brothers was founded in 1850–is it really fair that at firms with reputations (and franchise value) have been established over decades or centuries, that today’s CEOs gobble up so much of the value created. Perhaps incompetents get fired when their luck runs out but often with generous “golden parachutes”. Heads I win, tails I win–this a huge problem.

It is hard to imagine how one might set about fixing this problem, or even to feel confident that more democratic decision-making would improve outcomes. But as in the political sphere, it seems hard to argue that the current situation is working so well that it could not benefit from experimentation. One answer could be for the fund managers to enable shareholders to vote their shares, so that the institution’s vote reflects the views of beneficial owners. From a technical standpoint this seems eminently doable, but probably few shareholders would bother to vote. But it would be a start and on important issues one suspects the turnout could be much higher. In any event, more democracy seems worth a try—in the boardroom and in politics.

Democratic Innovation and Impact Investment are Similar–Why This Matters

My master’s degree (UCL, 2023) was in Democracy and Comparative Politics, and my dissertation focused on democratic innovation.  In writing it, I noticed an explosion in academic literature regarding innovations in democracy, in particular since 2010[1]. For a relative newcomer to the field, the passion and volume of academic work offered hope that the continuous global decline in support for democracy[2] might be halted or even reversed.  At its core, simplifying considerably, were the concepts of citizen engagement and deliberation. The first would reinvigorate democracy and bring greater legitimacy to political decision-making. The second involved initially providing participants with information and objective expertise, who could then openly discuss and debate issues in the facilitated pursuit of a consensus, which would formulate policies that possessed greater legitimacy AND were objectively better than those which result from current legislative processes.

Immersing myself in this hopeful world was exhilarating.  Not only was there a growing abundance of academic literature, but thousands of real-life cases were taking place all over the world[3] and important political leaders seemed committed to the ideals of innovation in our democracies[4].  My excitement waned however as I returned to the real world (from the “groves of academe”).  Hardly anyone I knew was aware of any of these democratic innovations and in our day-to-day lives whatever innovations had been implemented seemed to have had very little impact.

This reminded me of my experience in the impact investment world which began roughly 25 years ago. Pioneers (less so academics in that case) were publishing reports about this emerging world of social enterprise and investment (it was called that before Americans insisted on the shift in nomenclature to “impact investing” in 2007) and the arguments in support.  Also, a host of new mission-oriented companies (think Body Shop or Ben and Jerry’s) emerged which added “doing good” to doing well.  I can remember vividly this sense of frustration that an obviously good idea which was destined to improve the way in which our financial markets and commercial enterprises operated was pretty much ignored. Again, the average “man in the street” had absolutely no awareness of the shift and in terms of genuine impact, it was microscopic.  Despite the noble efforts of these committed pioneers, and the seemingly obvious benefits that such a shift would engender, the commercial and investment world were not changing.

What I do recall vividly is the frustration of these pioneers as they presented compelling, passionate and extremely well-intentioned arguments in favour of incorporating impact into the world of investing, to no avail.  They were met with comments like, “lovely idea, we will get back to you”.  Investing institutions feared that bringing impact into the equation would diminish returns.  Large corporations worried that taking non-financial factors into account would threaten profitability. 

I was reminded of this when reading the equivalently passionate academic pieces extolling the virtues of citizen engagement and deliberative democracy, and the mounting frustration at how little was actually changing in the political realm.  What I saw then and now was that wagging your finger at the people who benefit from the status quo and telling them what they “should” do and demanding change because “it’s obviously the right thing to do” very rarely result in any notable progress.  At best, you will get “lovely idea, we will get back to you”.

Since that time the impact investment world has grown by leaps and bounds.  From non-existence in the early 2000s, the sector has mushroomed to $1.164 trillion in 2022[5] according to the Global Impact Investment Network’s latest published report.  This sum is growing at 10-20% per annum, much faster than the overall investment sector.  In the UK, Better Society (was “Big Society” until recently) Capital estimates that the value of UK social investments in 2022 was worth £9.4 billion, roughly 11 times (!) the level in 2011.  Large companies who sneered at the idea of impact in the early part of this century has restructured to take impact into account, which has been well-received by customers and employees alike—some (8,653 at last count) have even become “B Corporations”[6].

I contend that critical to this was a shift in the language of the pioneers, as they attempted to persuade large institutions and corporations.  Instead of finger-wagging or preaching, the emphasis was placed on how it was in the selfish interest of these large organisations to undertake the shift. For example, large investment firms became convinced that impact assets under management would grow rapidly (this has clearly proven to be the case), and that in addition the fees for managing these assets would be higher, the money would be “stickier” (less likely to leave the institution once it arrived then mainstream investments) and that investment returns would not suffer.  Corporations saw the benefit in customer and staff engagement. 

I believe a similar shift is needed in the area of democratic innovation.  My dissertation therefore focused on trying to identify the factors that might convince politicians and civil servants to undertake exercises in democratic innovation because it was in their interest to do so.  As part of my work, I surveyed dozens of democracy technology companies across Western Europe and asked what they perceived to be the factors that do entice politicians to undertake democratic innovation. To be fair, these companies noted that some politicians were willing to do things simply because it was “the right thing to do”.  But this was a small minority.  The bulk of the politicians and civil servants were more effectively persuaded when the arguments focused upon factors of tangible interest. I grouped these factors into “7 Cs”—for example, cost savings or compliance (to national or international requirements).   

The dissertation was obviously written for academic purposes, so is tediously dull, but if readers of this blog wish to have a copy please just e-mail me at rod@schwartzuk.com and I would be happy to send it.  I do so not to bore more readers with my academic prose, but in order to try to persuade those who care about the adoption of democratic innovations, focused on citizen engagement and deliberation, to concentrate on factors which are in the selfish interests of politicians and the civil servants who serve them. This may feel like a compromise to purists, but I would argue that getting politicians to do things which improve the functioning of our democracies is more important than the elegance of academic logic deployed in the course of this persuasion.

 Rodney Schwartz, London, 11 May 2024

I started my career in mainstream finance and shifted into impact investing before returning to my lifelong passion of politics in early 2021.  This blog reflects that return and is my way of sharing the impressions of someone journeying from “proper jobs” in the investment world back into education to study politics after four decades.  For those interested in why I started this blog click here, and to read my declaration of known biases, click here.  I welcome any comments.


[1] Elstub, S. & Escobar, O. (2019) “Handbook of Democratic Innovation and Governance”, Elstub S. & Escobar, O. (eds.). Northampton: Edward Elgar Publishing.

[2] V-Dem (2023) “Democracy Report 2023: Defiance in the face of autocratization”, Gothenburg: University of Gothenburg, V-Dem Institute.

[3] Participedia identified 2,228 cases as of 4 May 2024 (https://participedia.net/)

[4] https://www.theguardian.com/cities/2014/oct/08/parisians-have-say-city-first-20m-participatory-budget  downloaded 4/5/24 at 16:14

[5] https://thegiin.org/assets/2022-Market%20Sizing%20Report-Final.pdf   downloaded 4/5/24 at 16:47

[6] https://www.bcorporation.net/en-us/  downloaded 11/05/24 at 16:02