We Americans tend to embrace the concept of democracy -- right up until the moment we become shareholders in publicly traded companies.

As my Foolish colleague Ilan Moscovitz pointed out in a recent article, public companies theoretically function as mini-democracies, where shareholders ostensibly choose their representatives (board members) and vote on important issues that could affect those companies' futures.

Unfortunately, too many investors seem to have forgotten that shares give them an ownership stake in a company, and that corporate managers work for them. Many even become outraged at the concept that shareholders should have any voice beyond the ability to buy and sell shares. Some even forget that as shareholders, they should be fighting for greater shareholder rights and better corporate governance, not against them.

Outrageous outcomes
More robust corporate governance principles, and more aware and mobilized shareholders, could help fend off some of the corporate excesses that stunt public companies' futures -- and hurt investors in the process. If more shareholders had the gumption to push back and vote with conviction, we might avoid debacles like these in the future:

  • Former Countrywide CEO Angelo Mozilo's recent legal penalty might sound like just deserts. After all, he has to pay back $45 million in profits and a $22.5 million fee to settle his securities fraud case. However, Mozilo pocketed $500 million in compensation during his tenure, and Bank of America (NYSE: BAC), which acquired Countrywide, is actually contractually responsible for paying $20 million of the settlement.
  • Hewlett-Packard's (NYSE: HPQ) board of directors should have simply been able to fire former CEO Mark Hurd for misconduct. Instead, they merely forced him to resign, allowing him to pocket millions in severance. HP didn't have to pay Hurd's way out the door; his employment contract failed to stipulate "cause" for firing, and also declared all of his first-year performance goals already met. Oracle's (Nasdaq: ORCL) immediate hiring of Hurd only added insult to injury.
  • Johnson & Johnson (NYSE: JNJ) CEO William Weldon made $25.6 million in 2009, a pay hike compared to the $23 million he pocketed the year before. An Institute for Policy Studies report points out that his pay hike increased despite the company's planned 9,000-plus worker layoffs, and its recall of more than 100 million bottles of popular medications such as Tylenol, Motrin, Benadryl, and Zyrtec.
  • In one of the most classic cases, Home Depot's (NYSE: HD) Bob Nardelli left the retailer after several years of stunted growth. Not only did he end up landing another job at Chrysler, but he also left Home Depot with a mammoth $210 million in cash and stock options for his lackluster performance.

Democracy, or demo-crazy?
Too many shareholders shrug their shoulders and say, "Sell if you don't like it." Mention shareholder activism, and they raise the spectre of "fringe groups" and "special interests" throwing monkeywrenches in the corporate gears.

Ironically, many companies are pursuing the wrong path as is, and a much-feared change in direction might ultimately be a good thing. And even if a few fringe loonies filed outrageous proposals, the bulk of more sensible shareholders would still have the power to vote them down.

No less an authority than Adam Smith, the revered capitalist philosopher, distrusted the concept of collections of tradesmen -- what we would now call corporations. As he wrote: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Smith added: "The directors of such companies, however, being the managers rather of other people's money rather than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery watch over their own... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company."

Plenty of economic philosophers share Smith's distrust of large corporate entities. Often, the bigger a corporation gets, the more bureaucratic and inefficient it becomes, emboldening management to run roughshod over apathetic shareholders.

So why do so many investors reject the democratic means at their disposal to keep corporations on the straight and narrow?

Democracy isn't a dirty word
Too few companies provide good examples of excellent, responsible stewardship. Berkshire Hathaway (NYSE: BRK-B) and Costco (Nasdaq: COST) might spring to mind, but it's far easier to find companies rife with management errors and arrogance.

In fairness, individual shareholders aren't the only voting bloc in need of a wake-up call. Institutional shareholders also need to push harder for prudent policies and long-term thinking among their holdings. Still, we small investors should keep a sharp eye on our companies' leadership and performance as well. Every share we own is an ownership piece of a company; greedy, incompetent, and ineffectual management hurts our future profits.

Democracy isn't a dirty word. It might just be the best way to clean up corporate America -- and boost our own wealth in the process.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Berkshire Hathaway, Costco, and Home Depot are Motley Fool Inside Value picks. Berkshire Hathaway and Costco are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. The Fool owns shares of Berkshire Hathaway, Costco, Johnson & Johnson, and Oracle. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.