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.
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