I believe that any government selection system's purpose is to instill legitimacy to the government. Whether it is the "divine right of kings," direct democracy, proportional representation or our unique system - the government can govern so long as the governed believe a particular government has the right to govern. Democracy gains its legitimacy through consultation of its citizens - with the correct belief that executing the will of the people as closely as possible will maximize legitimacy, and indeed accomplish the moral cause of allowing a people to more or less govern themselves.
The biggest issue is what to do about minority rights? The issue with a straight direct democracy the "minority opinion" is always ignored. The effect of this is that it reduces the overall legitimacy of the government by having up to 50%-1 people's will not executed (and if you notice in most 2 sided elections the vote counts usually are pretty close, and a 5%-10% spread is usually considered a "decisive" victory in a democracy - which means typically 45% of the people do not get their will executed in this "decisive" victory!) [And of course, this is scaled by turnout - which erodes legitimacy further depending upon the reasons for the people not voting]
So what to do?
In SL we have a unique situation - the government as it were does not have a monopoly of power over its citizens as does a RL government. Escape from CDS is a mouse click away - and a continuous stream of people leaving would create a tight financial problem with the viability of the SIM (since the land is rented from Linden Labs!). This means that we really have to pay close attention to minority rights or our government will be more of a filter rather than inclusive (and make it easy for new factions to form and have a toe hold in decision making, too!). The selection process must uphold & respect minority rights MORE THAN a RL government might for these reasons.
I feel the current system does this, and the constant tinkering with the rules in order for one faction to jockey for more power over another is wrong headed - especially since all tinkering thus far that I have seen seems to take away from minority rights and deposit power in established and already dominant powers.