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.
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