It leads to unconstrained, unaccountable behaviour because nobody has any clear procedure for punishing divergence from the group's interest. There is, if you like, no "immune system". In such an environment parasites thrive -- and indeed a major driver of both evolution and civilisation is adaptation to parasitic behaviour.

The idea of a democratic process presupposes an institution, which includes explicit divisions of power, which is independent of the individuals taking part.

It is still a hierarchy as someone will hold the power. It is an explicit hierarchy because those powers are enumerated. That the process of replacement is democratic is slightly besides the point (though not entirely, as it prevents all-or-nothing power acquisition).

Whereas a loose, "flat" organisation with no differentiation between the rights, responsibilities and power of members is utterly vulnerable to the first sociopath who happens upon it. Such a person will wind up with an informal dictatorship and everyone else will be stuffed.

I was more referring to a democratic process like - http://en.wikipedia.org/wiki/Direct_democracy

I agree that a loose "flat" organization is prone to serious problems :)

The problem with direct democracy is the same as for voluntary voting: voters on the fringe, who are more highly motivated, will come to dominate the polity.