“I think the decline of democracy is a mortal threat to the legitimacy and health of capitalism.”
—Rebecca Henderson, Harvard Business School1
The rule of law and democracy are crucial to capital markets. A free market balanced by a democratically elected, transparent and capable government, and a strong civil society (“an inclusive regime”) yield stable growth rates and greater social welfare.2 Conversely, threats to democracy are threats to the private sector, which is why business leaders and institutional investors cannot afford to remain on the sidelines when such threats emerge.
This paper explores the state of American democracy and whether it constitutes a systemic risk that impacts fiduciary duties. The paper proceeds in three parts. In the first, we assess the question of whether American democracy is backsliding towards failure, and argue that it is. In the second, we will examine whether democratic failure represents a systemic risk, and conclude that it does. In the third part, we offer some preliminary thoughts about what steps major private sector actors may undertake as part of their fiduciary responsibilities given the threats to U.S. democracy and markets.
Section 1: Is Democracy Failing?
We examine this question along two key dimensions: public opinion and institutional performance.
The American Public
Based on six high-quality surveys conducted in the last year and a half, support for democracy as the best form of government remains overwhelming and mostly stable across party lines.3 However, about 1 in 5 Americans have views that make them at least open to, if not outright supportive of, authoritarianism.4
But there’s an important qualification: Americans distinguish sharply between democracy in principle and in practice. There is near-universal agreement that our system is not working well—in particular, that it is not delivering the results people want. This is troubling because most people value democracy for its fruits, not just its roots.5
Given that situation, it is not surprising that public support is very high for fundamental change in our political system to make the system work better. There is no party of the status quo in contemporary America: both sides want changes, but they disagree about the direction of change. Unfortunately, about 6 in 10 Americans do not think that the system can change.6 And because it has not changed despite growing dysfunction, polarization has led to legislative gridlock, which has generated rising support for unfettered executive action to carry out the people’s will.
William A. Galston
Ezra K. Zilkha Chair and Senior Fellow - Governance StudiesBillGalston
Founding Director - Center for Effective Public Management
Senior Fellow - Governance StudiesEKamarck
Democracy means the rule of the people, but Americans do not fully agree about who belongs to the people. Although there are areas of agreement across partisan and ideological lines, some in our nation hold that to be “truly” American, you must believe in God, identify as Christian, and be born in the United States.7 In a period of increasing immigration and religious pluralism, these divisions can become dangerous.
Disagreements about who is truly American are part of a broader cleavage in American culture. 70% of Republicans believe that America’s culture and way of life have changed for the worse since the 1950s, while 63% of Democrats believe that they have changed for the better.8 Strong majorities of Republicans agree that “Things have changed so much that I often feel like a stranger in my own county,” that “Today, America is in danger of losing its culture and identity,” and that “the American way of life needs to be protected for foreign influences.” Majorities of Democrats reject these propositions.
Support for political violence is significant. In February 2021, 39% of Republicans, 31% of Independents, and 17% of Democrats agreed that “if elected leaders will not protect America, the people must do it themselves, even if it requires violent actions.” In November, 30% of Republicans, 17% of Independents, and 11% of Democrats agreed that they might have to resort to violence in order to save our country.”9
While public support for many of the reforms in federal compromise legislation is strong, there is a divide in the electorate on what they view as the largest problem in our current system.10 In September, only 36% believed that “rules that make it too difficult for eligible citizens to vote” constituted the largest problem for our elections, compared to 45% who identified “rules that are not strict enough to prevent illegal votes from being cast” as the largest problem.
The conclusion we draw from this quick review of public opinion is that if democracy fails in America, it will not be because a majority of Americans is demanding a non-democratic form of government. It will be because an organized, purposeful minority seizes strategic positions within the system and subverts the substance of democracy while retaining its shell—while the majority isn’t well organized, or doesn’t care enough, to resist. As we show in a later section, the possibility that this will occur is far from remote.
A second way of considering whether democracy is failing is to look at the institutions of government. Successful democratic systems are not designed for governments composed of ethical men and women who are only interested in the public good. If leaders were always virtuous there would be no need for checks and balances.
The Founding Fathers understood this. They designed a system to protect minority points of view, to protect us from leaders inclined to lie, cheat and steal, and (paradoxically) to protect the majority against minorities who are determined to subvert the constitutional order.
During the Trump presidency, the formal institutional “guardrails” of democracy—Congress, the federalist system, the Courts, the bureaucracy, and the press—held firm against enormous pressure. At the same time, there is evidence that the informal norms of conduct that shape the operation of these institutions have weakened significantly, making them more vulnerable to future efforts to subvert them.11 There is no guarantee that our constitutional democracy will survive another sustained—and likely better-organized—assault in the years to come.
We begin with the good news about our institutions.
Former President Trump did not succeed in materially weakening the powers of the Congress.12 He did not try to disband Congress, and while he often fought that institution, it fought back. Speaker of the House Nancy Pelosi (D-CA) had no trouble confronting him, and Democrats brought impeachment charges against him not once but twice. Although speculation was rampant, in the end then-Majority Leader Mitch McConnell (R-KY) did not block either trial. While former Leader McConnell and allies have been called former President Trump’s lapdogs, on virtually all domestic policy issues they have acted like almost any Republican majority would act, and on foreign policy former Leader McConnell neither stopped nor punished Republican senators who tried to constrain Trump when they thought he was wrong.13
The American system is a federalist system. The Constitution distributes power between the federal government and the state government, codified in the 10th Amendment to the Constitution. States have repeatedly and successfully exercised their power against former President Trump, especially in two areas, COVID-19 and voting.14
Despite Mr. Trump’s attempts to pressure the nation’s governors and other state officials into doing what he wanted, he did not inflict lasting damage on the federalist system, and the states are no weaker—perhaps even stronger—than they were before his presidency. Citizens now understand that in a crisis, states are the ones who control things that are important to them like shutdown orders and vaccine distribution.
Democracy Playbook 2021: 10 Commitments for Advancing DemocracySusan Corke, Norman Eisen, Jonathan Katz, Andrew Kenealy, James Lamond, Alina Polyakova, and Torrey Taussig
More builders and fewer traders: A growth strategy for the American economyWilliam A. Galston and Elaine Kamarck
In the spring of 2020 then-President Trump, anxious to get past COVID in time for his re-election campaign, was pushing hard for states to open up early. Only a few complied, while many—including some Republican governors—ignored him. Seeing that the governors were not scared of him, Mr. Trump then threatened to withhold medical equipment based on states’ decisions about opening up. He came up against the Supreme Court’s interpretation of the 10th Amendment, which prevents the president from conditioning federal aid on the basis of governors’ acquiescing to a president’s demands.15
The guardrails between the federal government and the states also held when it came to Mr. Trump’s campaign to reverse the 2020 election results. In Georgia, the Republican Secretary of State Brad Raffensperger, a stalwart Republican and Trump supporter, certified election results in spite of personal calls and threats from the president. In Michigan, Republican Senate Majority Leader Mike Shirkey and Republican House Speaker Lee Chatfield did not give in to Trump’s attempts to get them to diverge from the process of choosing electors.
One of the hallmarks of failing democracies is a weak judicial system under heavy political control. But under assault from then-President Trump, the judiciary remained independent despite his repeated attempts to win in the courts what he could not win at the ballot box. President Trump-appointed judges often made decisions that thwarted Mr. Trump’s attempts to overturn the results. In fact, after the election Mr. Trump’s team and allies brought 62 lawsuits and won exactly one.16 (The others he either dropped or lost.) Many of those decisions were handed down by Republican judges.17 Perhaps former President Trump’s biggest disappointment was the Supreme Court’s decision not to hear election challenges concerning states he claimed he had won.18
A free press is an essential element of a healthy democracy. Former President Trump spent four years using the bully pulpit of the presidency to mock the press, calling them names and “the enemy of the people” and referring to outlets he does not like as “failing.” He revoked the press credentials of reporters he did not like. (The courts restored them.) Nevertheless, reporters were not afraid to call out his lies. With Mr. Trump out of office for months now, no major news outlets have gone broke. Few are afraid to criticize former President Trump or his supporters.
The free press is still fundamentally free (although President Trump undoubtably contributed to some decline in public trust of the media, which in turn weakens its oversight and accountability functions). Its financial and structural problems, most of which are attributable to the challenges of internet age, predated Mr. Trump. Some argue that former President Trump increased distrust in the media but, as polling indicates, the lack of trust in media declined to less than fifty percent in the first decade of the 21st century and has stayed in the low forties in recent years.19
One final point: democracies often fail when their military sides with anti-democratic insurgents. But in the United States, the tradition of civil control over the armed forces remains strong—especially within the military. After the chaos in Lafayette Park last June, when Mark Milley, the Chairman of the Joint Chiefs of Staff, appeared with then-President Trump in military fatigues, Mr. Milley and other top military leaders went out of their way to reaffirm this tradition, which is drilled into all officers throughout their careers. A military coup is the least likely way for democracy in America to end.20
So why are we worried?
Although scholars and pundits have long chronicled with regret the rise of partisan polarization and the decline of congressional effectiveness, concern about the outright failure of American democracy was rare before the rise of Donald Trump. Never before in American history have we had a candidate, not to mention a president, who disparaged the integrity of the electoral system and who hinted repeatedly during his election that he would not accept the results of the election if he lost. This behavior began during the Republican primaries and continued in advance of the 2016 election, which he won, and the 2020 election, which he lost.21 It built to a crescendo that exploded on January 6, 2021, when supporters, called to Washington for a “Stop the Steal” rally, marched to the Capitol, attacked law enforcement officers, vandalized offices, and breached the Senate gallery where the electoral college vote was supposed to be taking place.
The non-stop attacks on American elections were part of a broader attack on the truth. Any story Mr. Trump and his supporters disliked became “fake news,” creating, slowly but surely, an alternate universe that encompassed everything from the integrity of the election to public health guidelines for the COVID pandemic. The very existence of a sizeable number of citizens who cannot agree on facts is an enormous threat to democracy. As the Yale historian Timothy Snyder points out in his 2018 book, The Road to Unfreedom, authoritarians like Vladimir Putin have no use for truth or for the facts, because they use and disseminate only what will help them achieve and maintain power.22 As our colleague Jonathan Rauch argues in The Constitution of Knowledge, disinformation and the war on reality have reached “epistemic” proportions.23
Even though constitutional processes prevailed and Mr. Trump is no longer president, he and his followers continue to weaken American democracy by convincing many Americans to distrust the results of the election. About three-quarters of rank-and-file Republicans believe that there was massive fraud in 2020 and Joe Biden was not legitimately elected president. “A ‘Politico’/Morning Consult survey found that more than one-third of American voters feel the 2020 election should be overturned, including three out of five Republicans.”24
The aftermath of the 2020 election revealed structural weaknesses in the institutions designed to safeguard the integrity of the electoral process. A focus of concern is the Electoral Count Act of 1887, which was adopted in response to the contested election of 1876. This legislation is so ambiguously drafted that one of former President Trump’s lawyers used it as the basis of a memorandum arguing that former Vice President Pence, whom the Constitution designates as the chair of the meeting at which the Electoral College ballots are counted, had the right to ignore certified slates of electors the states had sent to Washington. If Mr. Pence had yielded to then-President Trump’s pressure to act in this manner, the election would have been thrown into chaos and the Constitution placed in jeopardy.25
Recently, former President Trump’s assault on the integrity of the 2020 election has taken a new and dangerous turn. Rather than focusing on federal government, his supporters have focused on the obscure world of election machinery. Republican majorities in state legislatures are passing laws making it harder to vote and weakening the ability of election officials to do their jobs. In many states, especially closely contested ones such as Arizona and Georgia, Mr. Trump’s supporters are trying to defeat incumbents who upheld the integrity of the election and replace them with the former President’s supporters.26
At the local level, death threats are being made against Democratic and Republican election administrators, with up to 30% of election officials surveyed saying they are concerned for their safety.27 As seasoned election administrators retire or just quit, Mr. Trump supporters are vying for these obscure but pivotal positions. In Michigan, for instance, the Washington Post reports that there is intense focus on the boards charged with certifying the vote at the county level. Republicans who voted against former President Trump’s efforts to alter the vote count are being replaced. And most dangerous of all, some states are considering laws that would bypass the long-established institutions for certifying the vote-count and give partisan legislatures the authority to determine which slate of electors will represent them in the Electoral College.
American democracy is thus under assault from the ground up. The most recent systematic attack on state and local election machinery is much more dangerous than the chaotic statements of a disorganized former president. A movement that relied on Mr. Trump’s organizational skills would pose no threat to constitutional institutions.A movement inspired by him with a clear objective and a detailed plan to achieve it would be another matter altogether.
The chances that this threat will materialize over the next few years are high and rising. The evidence suggests that Mr. Trump is preparing once again to seek the Republican presidential nomination—and that he will win the nomination if he tries for it. Even if he decides not to do so, the party’s base will insist on a nominee who shares the former president’s outlook and is willing to participate in a plan to win the presidency by subverting the results of state elections if necessary. The consequences could include an extended period of political and social instability, and an outbreak of mass violence.
Section 2: Does a failing democracy threaten the private sector?
For several reasons, America’s private sector has a huge stake in the outcome of the struggle for American democracy.
In a recent Harvard Business Review article headlined “Business Can’t Take Democracy for granted,” Rebecca Henderson argues,
Henderson further argues that, just as democracy sets the rules of the game for the private sector, the private sector can help to keep in place democracy’s “soft guardrails,” such as the “unwritten norms of mutual toleration and forbearance” upon which democracy relies.29 “CEOs are widely trusted by the American public, “and so the attitudes of the private sector towards government and democracy are consequential.30 Because the free market and democracy are interdependent, a systemic risk to one is, by definition, a systemic risk to the other.
Transnational evidence from the World Bank and Freedom House bolsters Henderson’s claim,31 as does the pioneering work by Daron Acemoglu and James Robinson on the relationship between economic prosperity and political accountability.32 Sarah Repucci, Vice President of Research & Analysis at Freedom House, writes, “The political crackdowns and security crises associated with authoritarian rule often drive out business and place employees, supply chains, and investments at risk, in addition to raising reputational and legal concerns for foreign companies that stay involved.”33 This underscores that it is in the investment community’s own interest to actively push back on efforts to weaken or dismantle these democratic systems. The very nature of checks and balances provides for the stability of a free market, ensuring that a free and engaged citizenry will provide the most stabilizing market forces. “A more democratic world would be a more stable, inviting place for established democracies to trade and invest.”34
The simple fact is that it is hard to plan and invest for the future in volatile, unstable circumstances. The United States is not exempt from the calculus of political risk analysis, even if we are not accustomed to applying it to our own country. Investors have a fiduciary duty that is dependent on their understanding and attempting to deal with systemic risk. According to a recent report, “Decisions made by fiduciaries cascade down the investment chain affecting decision-making processes, ownership practices and ultimately, the way in which companies are managed.”35
Moreover, as overseas firms and countries begin to worry about the stability of our laws and institutions, they will think twice about investing in the United States, and mutually beneficial international partnerships will be harder to negotiate. Economists agree that “the free market needs free politics and a healthy society.”36
The situation is worsened by the fact that large corporations in America are in a weakened position to withstand political attack. According to the Gallup organization, which has explored public confidence in major institutions for nearly half a century, the share of Americans expressing very little or no confidence in big business has never been higher, not even in the depth of the Great Recession. Among the 17 institutions Gallup assessed, confidence in big business ranked 15th, ahead of only television news and the U.S. Congress. Complicating its political challenge in a polarized country, corporate America is increasingly challenged by employees, activists, and indeed some shareholders to take stands on divisive social and political issues in ways that both reflect and reinforce blue/red polarization.
For much of the past century, Republicans were the champions, and Democrats the critics, of corporate America. But now the lack of support for big business is pervasive across the political spectrum. In mid-2019, 54% of Republicans had a positive assessment of big business’s impact on the course of our national life. Two years later, this figure had fallen to 30%, about the same as for Democrats. Republican support for banks and financial institutions as well as technology companies underwent a similar decline.37 If an elected demagogue citing national security or a hot-button social issue sought to restrict the independence of the private sector, public opposition to this effort would likely be muted at best.
At the elite level, the traditional bonds between the Republican Party and big business are also breaking down. For example, a recent op-ed by Republican Senator Marco Rubio (R-Fla.) calls out corporate America for taking sides in the culture war: “Today, corporate America routinely flexes its power to humiliate politicians if they dare support traditional values at all.”38
In short, while more work remains to be done, we believe that the fate of democracy constitutes a systemic risk to markets. The fate of democracy and that of the private sector are inextricably linked, and private sector leaders have reasons of self-interest as well as principle to do what they can to strengthen democracy.
Section 3: What can the private sector do to strengthen democracy?
The private sector has a long and venerable track record in the public sphere. Perhaps the best- known campaign began on college campuses in the 1980s to encourage universities to end their investments in companies doing business in apartheid South Africa. This movement spread to pension funds and to cities and states. By 1990, over 200 U.S. companies had cut investment ties with South Africa. By 1994, Nelson Mandela, the leader of the anti-apartheid movement who was freed after nearly three decades in prison, had been elected president of post-apartheid South Africa.39
Other examples of corporate action include the Sudan divestment movement of the early-mid 2000s prompted by the Darfur genocide, which resulted in about half the U.S. states passing divestment statutes that remain in force for many state pension funds. The U.N. Tobacco-Free Finance Pledge, signed by almost 130 companies from the banking and finance sector, took place alongside the U.S. government’s tough regulatory push. More recently, in response to the Black Lives Matter movement, companies pledged nearly $50 billion to address racial inequality.40 Many companies have made pledges or commitments to fight climate change—for example, through Climate Action 100+ “an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.”41 Marriage equality is another example of such impact.42 While progress remains uneven, investor action is making a difference.
In more recent years much of corporate America and Wall Street, including many large multinationals, have signed onto the UN Guiding Principles on Business and Human Rights/UNGP (June 2011) and the UN Sustainable Development Goals/SDGs (September 2015).
Finally, the movement for ESG (environmental, social, and governance) investing is strong and growing. Driven by investor demand and regulatory pressure, more and more institutional investors are implementing ESG investing. Asset owners such as pension funds are increasingly demanding sustainable investing strategies.
Until recently, democracy has not been a focus of corporate campaigns in the public sphere. However, in response to the 2020 presidential election and former President Trump’s attempts to overturn the results, some corporations entered the fray. In late October of 2020, a group of key business leaders, led by the Business Roundtable, the National Association of Manufacturers and the U.S Chamber of Commerce, issued a statement defending the integrity of the electoral process. When it became clear that Biden had won the election, members of this group made statements in support of honoring the outcomes, and they declared that the transition process for the peaceful transfer of power should begin immediately.43 Numerous companies halted their PAC donations to candidates who had voted against certifying the election results—and some, such as Charles Schwab, announced that it would stop its political giving altogether “in light of a divided political climate and an increase in attacks on those participating in the political process.”44
The role of the private sector did not end with Joe Biden’s inauguration in January of 2021. As state after state moved to enact laws restricting the right to vote, corporations again took action. In May of 2021, hundreds of corporations and executives including Amazon, BlackRock, Google, and Warren Buffett issued a statement opposing “any discriminatory legislation” that would make it harder for people to vote.45 Kenneth Chenault, a former chief executive of American Express, organized the unified statement, highlighting that “throughout our history, corporations have spoken up on different issues. It’s absolutely the responsibility of companies to speak up, particularly on something as fundamental as the right to vote.”46 State and local officials, both past and current officeholders, applauded this statement and urged its signatories to do even more to protect democracy.47
The continuing involvement of the private sector in the defense of democracy is essential for democracy, and for business itself. As a Chatham House report stated recently, “Business should recognize its own stake in the shared space of the rule of law, accountable governance, and civic freedoms…. Business has a responsibility – in its own interest and that of society – to support the pillars of profitable and sustainable operating environments.”48
Discharging this responsibility requires a clear-eyed assessment of the dangers we face. As we have argued, the greatest threat to democracy in America is not that a majority of Americans will turn against democracy. It is that strategically placed state and local majorities will collude with an organized and purposeful national minority to seize control of key electoral institutions and subvert the will of the people.
In this context, the responsibility of large investment institutions is clear: to remain vigilant in the face of ongoing threats to democracy, to do everything in their power to urge corporate leaders to remain involved in the fight for democracy, and to reward them when they do. This responsibility can be discharged most effectively when investment institutions establish the framework for ongoing consideration of this issue—and when they act collectively in defense of the democratic institutions without which prosperity as well as liberty is at risk.
Section 4: For Further Discussion
The above discussion sets the stage for an action agenda. To start the discussion, investors need to ask themselves the following questions:
- Should threats to U.S. constitutional order as discussed in this paper be classified as a systemic risk to markets? And if so, is there a fiduciary duty on the part of investors to identify and pursue mitigating steps?
- Should corporate boards and chief executives of portfolio companies support efforts to protect the right of all Americans to vote in U.S. elections and condemn measures that unfairly restrict those rights?
- Should investors build into stewardship platforms a policy of mitigating risk to U.S. Constitutional integrity?
- Should portfolio companies follow responsible business practices by urging organizations to which they belong to terminate any financial or other support for measures that result in voter suppression in the U.S., and to withdraw from such organizations if such efforts fail?
- Should portfolio companies end any political contributions associated with elected officials or candidates for elected office who decline to accept the legitimate outcome of US elections or who support seditious acts?
- Should investors regularly monitor financial agents they may employ to ensure that they are aligned both in word and deed with our efforts to address the systemic risks to U.S. constitutional integrity?
About the authors
William A. Galston holds the Ezra K. Zilkha Chair in the Brookings Institution’s Governance Studies Program, where he serves as a Senior Fellow. Prior to January 2006 he was the Saul Stern Professor and Acting Dean at the School of Public Policy, University of Maryland, director of the Institute for Philosophy and Public Policy, founding director of the Center for Information and Research on Civic Learning and Engagement (CIRCLE), and executive director of the National Commission on Civic Renewal. A participant in six presidential campaigns, he served from 1993 to 1995 as Deputy Assistant to President Clinton for Domestic Policy. Galston is the author of ten books and more than 100 articles in the fields of political theory, public policy, and American politics. His most recent books are Anti-Pluralism: The Populist Threat to Liberal Democracy (Yale, 2018), Public Matters (Rowman & Littlefield, 2005), and The Practice of Liberal Pluralism (Cambridge, 2004). A winner of the American Political Science Association’s Hubert H. Humphrey award, he was elected to the American Academy of Arts and Sciences in 2004. He writes a weekly column for the Wall Street Journal.
Elaine C. Kamarck is a Senior Fellow in the Governance Studies program as well as the Director of the Center for Effective Public Management at the Brookings Institution. She is an expert on American electoral politics and government innovation and reform in the United States, OECD nations, and developing countries. Kamarck is the author of “Primary Politics: Everything You Need to Know about How America Nominates Its Presidential Candidates” and “Why Presidents Fail And How They Can Succeed Again.” Kamarck is also a Lecturer in Public Policy at the Harvard Kennedy School of Government. She served in the White House from 1993 to 1997, where she created and managed the Clinton Administration’s National Performance Review, also known as the “reinventing government initiative.” Kamarck conducts research on the American presidency, American politics, the presidential nominating process and government reform and innovation.
The Brookings Institution is a nonprofit organization devoted to independent research and policy solutions. Its mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public. The conclusions and recommendations of any Brookings publication are solely those of its author(s), and do not reflect the views of the Institution, its management, or its other scholars.
Amazon, BlackRock, and Google provide general, unrestricted funding to the Institution. The findings, interpretations, and conclusions in this report are not influenced by any donation. Brookings recognizes that the value it provides is in its absolute commitment to quality, independence, and impact. Activities supported by its donors reflect this commitment.