The following is an excerpt from Sarah C. Haan’s book, “Reclaiming Corporate Democracy.”
“By means of proxies, American corporation officials are used to holding meetings with no one but themselves attending…”
-Prof. William H. Lough, 1914
On the last day of January, 1888, hundreds of people streamed into the old Fitchburg train depot on cobbled Causeway Street in Boston. The granite depot resembled a castle but strained to accommodate a standing-room-only crowd, gathered for the annual shareholders’ meeting of the Fitchburg Railroad Company. The main business was the election of the representative body that ran the corporation, its board of directors. Two slates of candidates were competing for shareholders’ votes, and flyers had been circulated savaging the company’s current management. Critics accused the Fitchburg’s board chairman and president, Elijah Brigham Phillips, of serious mismanagement. The Fitchburg’s stock price had been falling for a year.
Phillips was an old-guard railroad man, an aging patriarch with a full, white beard and pince-nez glasses. Closing in on seventy years, he’d had a career in railroads that stretched back to his teen years, when he’d been a freight clerk for the Boston & Worcester Railroad. He had worked his way to the top of the company that constructed the Wisconsin Central Railroad, and the town of Phillips, Wisconsin is named after him. Eventually, Phillips returned east to take the helm of the major Eastern Railroad Company and, after that, the Fitchburg Railroad. In the 1880s, the Fitchburg was one of a small number of important railroad companies running trains through Boston and into neighboring states like New York, Vermont, and New Hampshire.
The railroad industry dominated corporate America in 1888. Like the tech industry of the twenty-first century, the railroad industry was associated with cutting-edge technological innovation and economic prosperity—and the behemoth corporation. All major railroads were organized as corporations, some of which were the largest, most powerful companies the nation had ever seen. The New York Stock Exchange listed its first railroad stock in 1830; by 1885, more than eighty percent of its stocks were railroad listings. With lines that stretched hundreds of miles across state borders, railroad corporations were pioneers of organizational management. A railroad like the Fitchburg had a large, low-paid workforce that worked grueling, dangerous jobs. It had a small set of well-paid corporate officers. And it had a huge shareholder class—thousands of individuals who, collectively, had invested millions of dollars to participate, as owners, in the modern, industrializing economy.
To be a shareholder in a nineteenth-century railroad company was to hold formal membership in the new age of industrial capitalism. Shareholders enjoyed rich rewards that included distributions of cash, known as dividends, and governance rights, including an annual vote to elect the company’s leadership. Railroad shareholders received perks like free train rides. A highlight—or perhaps a burden—of this membership was the annual meeting. Shareholders gathered in person once a year to learn about the company, argue about its policies, and cast votes, participating as citizens in this “body corporate and politic.”
The Fitchburg’s 1888 annual meeting was contentious. President Phillips presided, facing down opponents who skewered him with language that invoked hereditary monarchy, which Bostonians held in special contempt. Phillips was lampooned as “King Phillips” and “Rail Royalty,” and criticized for drawing a huge annual salary from the corporate treasury while the railroad’s finances plunged. Critics accused him of building an extravagant, private railroad car for his own personal use—a “private palace coach”—and of installing his son in a management job without benefit to the company. In short, President Phillips was charged with ruining the railroad while reigning over it as if by divine right.
In spite of these serious charges and the company’s poor financial performance, Phillips was victorious. More than 64,000 votes out of 72,450 were cast in his favor; he and ten associates were reelected to the Fitchburg’s board. Once his board position was secure, Phillips’s reign as president was also assured.
Charges of election fraud surfaced immediately, however. Among those casting votes were more than a hundred hired men, including fifty “tramps” who had been recruited from a local charity and probably stood out in the crowd. These indigent men had been paid to attend the meeting and vote in favor of Phillips and his fellow board candidates. They did this as “proxyholders,” that is, as stand-ins for the railroad corporation’s real shareholders, many of whom lived too far away from Boston to attend the meeting. To vote on their behalf, the proxyholders used a legal mechanism that was unique to corporate elections. Proxy voting allowed a corporation’s shareholders to delegate their votes to others—even strangers—who were empowered to vote the shares as they saw fit. In this case, the proxyholders-for-hire had agreed in advance to cast votes for Phillips and his associates, in exchange for payments of cash. The shareholders who had signed their votes over knew nothing of these arrangements.
Phillips himself and his deputies were responsible for this scheme. Using misleading circulars, they had secretly coaxed shareholders to sign proxy cards, in a practice known as “soliciting proxies.” Prominent Boston clergymen had signed the circulars used to solicit the proxies; these clergymen would later admit that they had played no other role in the scheme than lending the use of their names. The Fitchburg’s managers collected signed proxy cards from shareholders and distributed some among their employees, who were assigned to vote them at the meeting. The rest of the proxies were spread among more than a hundred recruits, including the “tramps.” All the expenses of the elaborate proxy operation were paid from the Fitchburg’s treasury, routed through employees’ expense accounts.
The Fitchburg’s managers had solicited proxies in secret because they were doing something illegal. For decades, Massachusetts law had prohibited a corporation’s officers and directors from soliciting shareholders’ delegated votes. Merely requesting a proxy from a shareholder was illegal. Voting a proxy was a separate legal violation for salaried officers like President Phillips, which is why men from Boston’s lowest classes had been recruited to vote them instead. Massachusetts’s legislature had enacted these prohibitions to prevent exactly what happened at the Fitchburg: the use of proxies by a company’s unsuccessful leaders to ensure their own reelection. A truly free election might have produced a different result. The case raised fundamental questions about the insulated control of corporate organization, vested in men who, like Phillips, had begun to form a particular class: public-company managers.
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In important respects, in the United States, the organizational rules that apply to corporate institutions are the same rules that apply to political institutions. The governance structures of both types of organizations mirror each other. Corporations are managed by a representative board of directors, who can act only collectively, like a legislature, and who are elected by the votes of shareholders. Directors serve defined terms and mainly lead by determining high-level corporate policy, which is executed by the company’s officers. Both systems of organizational governance evolved and became solidified over the same period, too: the core features of American corporate and political democracy developed over the nineteenth century. For corporate elections, this included proxy voting and, at the end of the century, cumulative voting. For political elections, it involved the invention of gerrymandering and the wide adoption of the Australian or “secret” ballot.
One way in which corporate democracy does not resemble political democracy, however, is its dependence on proxy voting. When a shareholder gives a proxy to another person, the shareholder is delegating his or her vote away. The delegation takes the form of a written instrument, sometimes called the “form of proxy,” the “proxy card,” or just the “proxy.” The person authorized to exercise the delegated vote is the “proxyholder.” Importantly, the proxy is not an absentee ballot. It is a power of attorney that authorizes the holder to vote the giver’s stock. If the proxy instrument does not include instructions to the proxyholder, it is an “uninstructed proxy”—meaning that the holder has full discretion to vote the stock however he wishes, on any matter that comes up for a vote. Nineteenth-century corporate law did not even obligate the proxyholder to tell the shareholder how his or her vote was cast after the meeting was over, and in some circumstances this is still true today.
Proxy voting undermines self-government because it vests one person’s vote in a different person. In fact, proxy voting allows many people’s votes to be delegated away and vested in a single other person, concentrating voting power in a way that is profoundly undemocratic. Because it is inconsistent with basic democratic ideals of liberty and equality, American political elections do not permit proxy voting. The enthusiastic embrace of proxy voting in corporate governance, and its rejection in political governance, put these two systems of governance on diverging paths in the nineteenth century. Over time, some attributes of corporate democracy came to be distinguishable from those of political democracy, even as key markers of democracy, such as elections and voting rights, could be found in both systems.
Excerpted from “Reclaiming Corporate Democracy.” Copyright © 2024 by Sarah C. Haan. Reprinted by permission.
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Articles represent the opinions of their writers, not necessarily those of ProMarket, the University of Chicago, the Booth School of Business, or its faculty.
