 |
||||
 |
 |
 |
 |
 |
 |
||||
The Stakeholder Strategy
Changing corporations, not the Constitution, is the key to a fairer post-Citizens United world.
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.
First, the law of corporate governance should expand the fiduciary duties of management to include an obligation to consider the interests of all stakeholders in the firm. (This could occur either at the national or state level; more on that in a moment.) For decades, the fiduciary obligations of management have been categorized as including a duty of care and a duty of loyalty. Under current judicial interpretation in Delaware, both mean something less than one might assume—“care” has essentially become the duty to gather information and avoid gross negligence; “loyalty” has devolved into a mere ban on undisclosed self-dealing, such as managers doing special deals with the company on the side.
While it wouldn’t hurt if both of these duties were more robust with regard to shareholders, what I’m suggesting here is that they run to all the stakeholders of the company, not just shareholders. With regard to the duty of care, this would mean that when senior management or the board makes decisions on the strategic course of the company, they would need to gather and consider information on the effects of the decision on the company’s stakeholders. They would not be able to meet their obligation simply by evaluating the impact of the decision on the company balance sheet but by assessing the long-term impact of the decision on the company as a whole, including its implications for employees, consumers, and other stakeholders. As to the duty of loyalty, little would change except there would be a greater number of people interested in monitoring the possible malfeasance of management. (And if a broader duty also meant that the duties were more seriously enforced, the shareholders, too, would be happier.) How effective would such a change be? Admittedly, the change would be more process- than results-oriented. But process matters, especially when we’re talking about the choices of some of the most powerful group decision-makers in the world. At the very least, corporate directors (and the executives who putatively report to them) would not be able to make decisions in which the only metric that matters is stock price, measured day to day or even quarter by quarter.
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 PMI 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 PMI 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 PMThis 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 PMThis 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 AMThe 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 PMFlawed 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 AMi 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 AMWouldn't it be MUCH easier to LIMIT contributions to $100 per 'INDIVIDUAL"?!
Sep 13, 2012, 7:50 AMExcellent 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 AMInteresting 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 AMEnding 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 www.uschamberofdemocracy.com
Sep 22, 2012, 9:18 AMOne 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 AMMr. 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.
Post a Comment
Kent Greenfield teaches corporate and constitutional law at Boston College. He clerked for Supreme Court Justice David H. Souter and is the author of The Failure of Corporate Law and The Myth of Choice: Personal Responsibility on a World of Limits.
Events
Democracy, Brennan Center Co-Host Money-in-Politics Event
On May 7, the Brennan Center for Justice, a New York City-based public policy institute, hosted a panel discussion co-sponsored by Democracy and Demos on money in politics, the subject of Democracy’s centerpiece symposium in the Winter 2013 issue.
News
Washington Post Interviews Kleiman on Crime Policy
In a March 28 post in The Washington Post’s Wonkblog, Dylan Matthews interviewed UCLA professor Mark Kleiman about his essay, “Smart on Crime,” in the current issue of Democracy.
News
Klein Cites Democracy Essay on Defense Spending
In his Bloomberg View column on February 13, Ezra Klein discussed the politics of military spending and highlighted a number of quotes from former Representative Barney Frank’s feature contribution to Democracy’s Winter 2013 issue.
