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