Issue #26, Fall 2012

The Stakeholder Strategy

Changing corporations, not the Constitution, is the key to a fairer post-Citizens United world.

John Bonifaz is a wiry, bespectacled man with graying temples and a hearty laugh that camouflages his seriousness. He’s fought many progressive fights over the years on issues ranging from voting rights (which won him a MacArthur “genius grant”) to Unocal’s liability for human rights abuses in Myanmar (on which we worked together to draft a lawsuit). We’ve been friends for nearly 30 years, ever since we were student activists at Brown University.

These days, however, we find ourselves differing vociferously on what to do about Citizens United v. Federal Election Commission, the 2010 Supreme Court decision expanding the rights of corporations to engage in political speech and campaign spending. John is a leader in the push to amend the Constitution to restrict constitutional rights to natural persons. His idea has gained quite a bit of traction, mostly because so many Americans are rightly concerned about the power of corporations in our political discourse.

Nevertheless, I believe that the move to amend is a bad, even horrible, idea. I agree that the Constitution is meant to protect people. But people organize themselves into groups, including corporate groups, and sometimes those groups deserve protection. The New York Times, for example, should receive constitutional protection for what it publishes notwithstanding its corporate form. Moreover, the Court’s decision in Citizens United did not depend on the “personhood” of corporations; instead, the Court said that corporations are “associations of citizens” and that protecting corporate speech was a way to protect the rights of those citizens.

John and I recently debated Citizens United on television, and during our exchange he said something particularly revealing. In discussing some of the legal arguments in the case, he described shareholders as “owners.” In this respect, he agrees with the Court and conventional wisdom. Shareholders own companies and management speaks for them.

The reality is different. Shareholders are not really owners, and they exercise little control over corporate political involvement. Employees, communities, consumers, and other stakeholders exercise even less. The reason why corporate political speech is so corrosive to democracy is that the benefits and prerogatives of the corporate form are marshaled to bolster the speech of a tiny sliver of the financial and managerial elite. The fact that corporations speak is not itself a problem; whom they speak for is.

This essay urges progressives to cease their efforts to amend the constitution to weaken corporate “personhood.” Instead, we need to focus on changing corporations themselves so that overturning Citizens United would be unnecessary. We should use this historical moment to nudge corporations closer to what the Supreme Court assumed they are in its Citizens United decision—“associations of citizens.” While the constitutional effort is defensive and palliative, a campaign to redesign the corporation itself would be affirmative and transformative. To cure Citizens United, we don’t have to amend the Constitution—we need to rethink corporations.

The Foundational Nature of Corporate Law

It is not surprising that most opponents of Citizens United have focused on constitutional responses. Policy ideas often start in academia, and it is typical, especially in law schools, for the so-called “public law” topics of constitutional law, regulatory law, election law, and the like to be dominated by professors who are left of the ideological center. The “private law” arenas of tax law, contract law, and corporate law are left to professors who generally fill faculties’ ideological right flank (though there have been exceptions: William O. Douglas, for example, taught corporate law at Yale and served as the chairman of the Securities and Exchange Commission before becoming a Supreme Court justice).

These tendencies end up clustering progressive responses to civil, economic, and social ills around public-law ideas like constitutional amendments or top-down, command-and-control regulations overseen by bureaucracies. Often missed are the progressive possibilities in “private” law, particularly the law of corporate governance. Consider the untapped potential of this area, which provides the governing rules for gigantic economic entities, many of which are international in scope, and some of which rival the economic power of nations. (I often begin my corporate law course by noting that only 57 of the 100 largest economic entities in the world are nations; the other 43 are corporations.) For these businesses, corporate law plays the role of constitutional law—establishing their structure, determining who has the power to make decisions, and limiting the purposes for which that power can be exercised.

The answers to these fundamental questions—How are corporations structured? Who gets to decide what they do? What are they for?—affect all of us. If you care about whether corporations exploit their employees, skirt environmental laws, pay their executives exorbitant salaries, manage only for the short term, or manipulate the political process, you should care about corporate governance.

To imagine the promise of this area of law, one has to understand where we start. Here in the United States, the law of corporate governance is among the most conservative and least democratic in the developed world. For example, U.S. employees have no role in corporate decision-making, and U.S. managers are not required even to gather information on the potential impact of their strategic decisions on communities, employees, the environment, or the public interest, except to the extent those impacts might affect shareholder value. There is no federal law making it a crime to lie to employees—a CEO who lies at a shareholder meeting will go to jail; a CEO who lies to a room full of employees has not done anything unlawful.

Compare this to the European model of corporate governance, which requires much more robust social obligation on the part of corporations, embodied not only in cultural norms but also in law. The duty to disclose information and consult with employees is much more robust, and many large European companies include labor representatives on their boards. Germany, for instance, requires that half the senior board of large companies be elected by employees rather than shareholders. And at least another 15 European countries have some kind of provision requiring “co-determination,” worker representation on boards of companies headquartered in their national territory.

These efforts to include employees in company governance are intended to embody norms of workplace democracy and economic fairness. German CEOs, for example, make less than their American counterparts; countries with co-determination have lower income inequality than countries with weak employee involvement. But they are also seen as an important component of economic success, and indeed Germany is now the economic powerhouse of Europe. The CEO of the German company Siemens argues that co-determination is a “comparative advantage” for Germany; the senior managing director of the U.S. investment firm Blackstone Group has said he believed board-level employee representation was one of the factors that allowed Germany to avoid the worst of the financial crisis.

Turning back to the United States, the most profoundly anti-democratic oddity of American corporate law is the federal abdication of it to the states. Making matters worse, we allow businesses to choose any state as their place of incorporation, whether they are based there or not. So how do companies choose which state in which to incorporate? Whichever gives them the best “deal” in terms of regulations, taxes, and judicial deference.

States compete against one another in this “race to the bottom,” and for the last century or so, Delaware has won. Here is a state with less than one-third of 1 percent of the nation’s population providing the governing law for nearly 50 percent of all American corporations and 60 percent of the Fortune 500. The New York Times recently identified one office building in Wilmington that serves as the legal address of more than a quarter of a million businesses, including Apple, General Electric, JPMorgan Chase, and Wal-Mart. In fact, Delaware is home to more corporations than people.

Yes, this is bizarre. Businesses cannot choose which state’s environmental law, employment law, or labor law covers them, but they can select Delaware’s corporate law simply by establishing an address there and applying for a charter from the Delaware secretary of state. But bizarre is not the half of it. It is also disturbingly anti-democratic. Let us suppose for a moment that citizens of, say, California, Connecticut, New York, or Arkansas came to believe that the corporate decisions of Apple, General Electric, JPMorgan Chase, or Wal-Mart were affecting them. If those citizens sought recourse through the democratic process, either in their own states or at the federal level, they would be completely shut out. The federal government does not regulate corporate governance for the most part, and the only jurisdiction that matters for most companies is Delaware.

And the citizens of Delaware are not going to rock the boat for the benefit of people living elsewhere. The benefit their state derives from being the nation’s corporate haven is significant—the state gathers about a quarter of its budget from taxes and fees on its corporate “residents.” So if every other state in the union required corporate directors to act with regard for employees, communities, the environment, or the company’s long-term reputation, businesses incorporated in Delaware could thumb their noses at those requirements even if they were headquartered in states adopting them. If democracy means being subject to the will of the people, it is difficult to come up with an example of a less democratic rule than contemporary corporate law. If there is low-hanging fruit in the public policy arena, it is likely to be plucked here.

Stakeholders, Not Shareholders

For more than a century, progressives have attempted to use various regulatory mechanisms to stifle the worst impulses of the corporation: antitrust law, environmental law, minimum-wage requirements. These limits have, in many cases, provided massive benefits worth the regulatory costs. But these efforts have mostly been of the command-and-control type, working like a fleet of tugboats to pull corporations away from what would otherwise be their natural course. Few doubt that corporations need public oversight so that they are more likely to behave consistently in the public interest. If we think of corporations as large economic actors that produce both positive and harmful effects, the question—from a regulatory perspective—is how we most efficiently regulate them to maximize their benefits and minimize their costs.

My argument is simply that progressives should consider a new kind of regulatory effort—building a public-interest element into corporate governance itself, creating the possibility that businesses become a more positive social force on their own. I am not urging that corporations become altruistic or charitable institutions: The best way for corporations to serve the public interest is to create wealth, primarily by selling worthwhile goods and services for a profit. What I am suggesting is that we should define wealth broadly, and require corporations to focus on creating it with both a greater awareness of the costs inherent in its creation and the benefits that flow from broadly distributing it. If we can create the initiative within large corporations to head in the correct direction on their own, we will need fewer tugboats to correct their course later.

What specific reforms are needed? The most crucial one is conceptual rather than legal or political. Instead of thinking of corporations as pieces of property owned by shareholders, we should conceptualize them as team-like enterprises making use of a multitude of inputs from various kinds of investors. The success of corporations depends on the contributions of many different stakeholders, and the governance of corporations should recognize those contributions. Fixating on the contributions of only one of these groups—shareholders—blinds us to the essential investments of the others, and encourages management to prioritize shareholder interest alone. But a corporation does not live by shareholder equity alone. A company also needs the contributions of employees, consumers, communities, and bondholders. If any one of these investors—and I use that term intentionally—backs out from the enterprise, it is doomed.

The traditional notion of shareholders as the (only) owners of corporations is one that even progressives still hold (as my argument with Bonifaz showed). But this notion does not comport with the reality of the corporate world today. Shareholders are not “owners” in any meaningful way. If you own a share of General Motors, you will still be tossed out of its headquarters as a trespasser if you try to enter without an appointment. If you try to exercise dominion over its property you will be arrested; try it with an Escalade at your local GM dealer and see what happens. Rather than thinking of shareholders as owners, think of them as investors willing to contribute to a collective enterprise in return for a potential gain if things go well.

Seeing shareholders in this light highlights their similarity with other stakeholders. For a business to succeed people and institutions must invest financial capital; other people must invest labor, intelligence, skill, and attention; local communities must invest infrastructure of various kinds. None of these investors makes its contribution out of altruism or obligation. What they are doing is contributing in hopes of potential gain if things go well. They expect management to gather inputs from other contributors, put them together in a way that will enable the company to produce goods or services for a profit, and then distribute the wealth that is created. The benefits can come in various forms—goods and services for consumers, jobs for employees, tax bases for communities, financial returns for investors. Each of the contributors has a stake in the company, and the company depends on the contributions of each stakeholder. Unfortunately, in our current regulatory scheme, the concerns of the other stakeholders are not considered within the internal, structural machinery of corporate governance. These stakeholders are to be taken care of (to the extent they are at all) by way of protections they can gain through contract or external regulation. There’s one way to change that: adjusting the structure of corporate governance.

Changing the Corporation

Let me propose two concrete and achievable changes that would likely produce real benefits at reasonable cost.

Issue #26, Fall 2012
Post a Comment

Greg Jemsek:

The logic of this "paradigm shift" is well laid out in this article. However, like so many opinions expressed by progressives, it avoids dealing with the more contentious obstacle of getting a recalcitrant congress to even consider such a change in perspective. People in general would benefit, but would the 1%? No, and their lobbyists still control the game. The assumption of good will on the part of corporations themselves, and on the part of our government, is what is flawed here, despite the clear and interesting perspective put forth.

Aug 26, 2012, 9:11 PM
notta lackey:

I disagree with the premise of this article. The actual need is for corporate democracy. Let them stay in Delaware. Just have a 500% Federal income tax surcharge and a maximum salary of $50,000 for publicly traded corporations that don't have free elections. Just do like political elections. If your group has some threshhold of shares, you can petition to put somebody on the ballot. Just like in politics, the petition size should be a small percentage of the electorate.

In addition, at the meeting, the top executive pay contracts are also voted on. Right now the CEOs for practical purposes select the boards. The above would reverse that, unless the selfish clod wants to work for 50k.

And we also need the corporate personhood amendment. The "person" part of corporatedom was originally to allow limited liability. We need something that can limit liability to get investors, but it was a legal fiction. Legal fictions have their place, but they should never be expanded because they are fiction.

Sep 1, 2012, 1:34 PM
notta lackey:

I disagree with the premise of this article. The actual need is for corporate democracy. Let them stay in Delaware. Just have a 500% Federal income tax surcharge and a maximum salary of $50,000 for publicly traded corporations that don't have free elections. Just do like political elections. If your group has some threshhold of shares, you can petition to put somebody on the ballot. Just like in politics, the petition size should be a small percentage of the electorate.

In addition, at the meeting, the top executive pay contracts are also voted on. Right now the CEOs for practical purposes select the boards. The above would reverse that, unless the selfish clod wants to work for 50k.

And we also need the corporate personhood amendment. The "person" part of corporatedom was originally to allow limited liability. We need something that can limit liability to get investors, but it was a legal fiction. Legal fictions have their place, but they should never be expanded because they are fiction.

Sep 1, 2012, 1:35 PM

This article supports muzzling free speech. So what if big money is behind and spends it on political self interest? You must think American citizens are idiots and cannot be trusted to hear information that may mislead them. Phooey! Free speech for all, regardless of source, money or not.

Sep 1, 2012, 3:54 PM
Robert Schmid:

This article proposes some very good and effective ideas. However, I still feel the evolving notion of corporate personhood presents a danger. As long as the corporate shield stands alongside the notion of corporate personhood, these entities will be able to act without regard for responsibility to their communities. One or the other has to go or be weakened. If corporate personhood must stand, then it must easier to pierce the corporate veil.

Sep 2, 2012, 10:45 AM

The easiest way to deal with the problem is a simple law that restricts the right to make campaign contributions to any candidate to persons who are eligible to vote in the election in which that person is a candidate. Corporations may well be legal people, but they don't have the right to vote.

Sep 11, 2012, 3:51 PM

Flawed logic and premise.

Shareholders may be owners but it doesn't follow that management can speak for them or needs to speak for them.

All shareholder are free to speak outside their role as shareholders and, at the very least, their right to speak would not be abridged by preventing corporate campaign donations.

Shareholders own companies as investments, not to have a say in what the corporate management - a dozen people maybe - seeks to say politically. And corporate entities don't exist to exercise speech.

Sep 13, 2012, 3:36 AM

i would rather see an amendment stating that only VOTERS FROM THE DISTRICT can contribute to a campaign for an elected office in that district. Therefore if only a human person can submit a ballot to be counted, it eliminates corporate/cpac money. If it restricts that donation from coming from outside any given district there can be no outside influence. The office of President would be the only national office where money could only be donated by VOTERS across the country. Seems pretty straight forward to me. Issue ads are a different matter, FCC regulations could address these and almost assuredly shut them dowm with taxation, must have identification of group responsible, and equal time back in the mix.

Sep 13, 2012, 7:50 AM

Wouldn't it be MUCH easier to LIMIT contributions to $100 per 'INDIVIDUAL"?!

Sep 13, 2012, 7:50 AM
Brian Cooney:

Excellent article. Our system of corporate governance is abysmally anti-democratic. The recommended changes in corporate governance would be a great first step. Ultimately, it seems to me that the only kind of corporate governance consistent with democracy is for the default firm to be a worker cooperative with statutory obligations to stakeholders other than employees (e.g. the local community). We know from the cases of Mondragon and John Lewis Partners that such a model is viable in a free market economy.

Sep 13, 2012, 10:03 AM
Sanford Lewis :

Interesting perspective. But "a CEO who lies at a shareholder meeting will go to jail" WAY overstates the situation. In my experience as a lawyer who represents socially concerned shareholders, CEOs lie at shareholder meetings all the time, and seldom face any accountability.

Sep 16, 2012, 11:26 AM
Gary Brumback:

Ending corporate personhood will absolutely NOT end America's own worse enemy, her corpocracy, or collusion between powerful corporations along with their allies and "our" government. There are numerous other ways in which corporations can influence politicians. Moreover, even if corporate personhood were ended (and a Cconstituional amendment is only but also the most difficult means to do so), corporations and their lawyers would easily find loopholes (most likely ones inserted by crafty lawyers).

Mr. Greenfield and readers, the corpocracy is ruining America. It must be ended. The only way to do so is to know it out with "two-fisted democracy power." It's a metaphor that carries quite a punch. To see what I mean go to

Sep 22, 2012, 9:18 AM
Laura Lee:

One thing that would need to happen for a paradigm shift to occur is for the news media to cover the other stakeholders as intently as they cover the numbers going up and down in the Dow. Right now business journalism is nearly synonymous with writing from the perspective of management and capitalists. Some sort of dow-like measurement of how decisions affect other stakeholders that news people could follow and easily report on would be a good start.

Dec 7, 2012, 11:12 AM
B Lab:

Mr. Greenfield makes an excellent point regarding the need for corporate governance reform. In fact, 13 states have already taken action and passed Benefit Corp Legislation.
Benefit corporations are a new kind of corporation legally required to: 1) have a corporate purpose to create a material positive impact on society and the environment; 2) expand fiduciary duty to require consideration of the interests of workers, community and the environment; and 3) publicly report annually on its overall social and environmental performance using a comprehensive, credible, independent, and transparent third party standard. This offers business more freedom in defining success and provides legal protection for those looking to pursue a corporate purpose other than maximizing profits for shareholders.
While 15 other states are moving forward with similar legislation in 2013, the real question is what will happen in Delaware. As Mr. Greenfield correctly points out, "the only jurisdiction that matters for most companies is Delaware". It is up to this state, and us as consumers, entrepreneurs and investors, to see that the governance of corporations evolves and takes account of the interests of stakeholders. This way all businesses will have the freedom to compete to be not only the best in the world, but the best for the world.

Jan 3, 2013, 11:41 AM

The idea is really quite simple. If corporations do not have the same rights a persons, to vote (though they do have the right to enter into contracts, and to buy and sell property)...

then neither should unions have the right to "engage in political speech and campaign spending."

I would be more than happy to curtail the right of corporations, just so long as an equal curtailment applies to unions.

Then perhaps more of their dues income could go to what the unions claim is their primary effort: making things better for their memebers, rather than being funneled into Democrat coffers.

"... We can redistribute financial wealth ..."

"Redistribution: is nothing more than legalized theft; an imposition of communism (communal wealth)

Jul 20, 2013, 8:24 PM

Post a Comment



Comments (you may use HTML tags for style)


Note: Several minutes will pass while the system is processing and posting your comment. Do not resubmit during this time or your comment will post multiple times.