The Stakeholder Strategy
Changing corporations, not the Constitution, is the key to a fairer post-Citizens United world.
Besides, this broader fiduciary duty would benefit the company over time. Fiduciary obligations build trust in those who contribute, since they know management has a duty to look after their interests. If management owes obligations of care and loyalty to all the firm’s important stakeholders, they are more likely to invest in the first place and more likely to leave their investment in place over time. This has long been thought to be true of shareholders; but it is true for other kinds of “investors” as well. For example, employees who do not fear that their interests will be shoved aside anytime they are in conflict with short-term profitability will be more loyal and more willing to develop firm-specific skills that benefit the company over time, and they will take less of an us-versus-them attitude toward management. Also, since most shareholders tend to be short-term investors, requiring management to consider other stakeholders’ interests will inevitably lead to longer-term management in each firm, creating a less volatile, more stable economy overall. Given what we’ve experienced over the last few years, that should sound pretty attractive.
Concern for stakeholders is becoming a mainstream idea. A recent article in the Harvard Business Review argued, “There’s a growing body of evidence…that the companies that are most successful at maximizing shareholder value over time are those that aim toward goals other than maximizing shareholder value. Employees and customers often know more about and have more of a long-term commitment to a company than shareholders do.” Evidence from Europe bears this out—countries that have strong worker involvement in corporate governance enjoy higher rates of worker productivity and fewer days lost to strikes than countries without such involvement.
The second specific regulatory change I propose would be to alter the actual structure of company boards to allow for the nomination and election of board members who embody or can credibly speak for the interests of stakeholders. Currently, the board embodies the interests of two groups: senior management and large shareholders. Once we recognize that a variety of stakeholders makes essential contributions to the firm, it becomes clear that the current structure does not serve most of those stakeholders well. The way to change this is to require boards to reflect a broader cross section of those who contribute to their companies’ success.
How to do this? Figuring out which stakeholders deserve representation and how much they deserve would undoubtedly be difficult. But it is not impossible. Employee representatives would be fairly straightforward to elect—either we could use the German model, in which employee representatives are selected by the company workforce, or we could simply issue each employee one share of a special class of stock and have a number of board seats elected by that class. If we wanted other stakeholders represented, there are various ways it could be done. Community leaders in the localities where the company has a major presence could nominate a director; long-term business partners and creditors could be represented as well. We could even require companies to include a “public interest director,” whose special obligation would be to vet company decisions from the standpoint of the public. (We can draw from the Dutch experience, where spots on the senior boards of corporations are reserved for representatives of various social interests.)
But before we move forward, note something crucial. In order to make these changes meaningful, they would have to be accomplished in a way that minimizes Delaware’s dominance. Otherwise, companies could avoid these changes by fleeing—on paper—to Dover or Wilmington. The most obvious answer to this problem is an assertion of a national corporate-law standard. If the federal government required, for example, companies of a certain size be chartered as national corporations, it would be simple to add the robust fiduciary duties and the requirement that boards include employee representatives. A national corporate-law standard would be a straightforward application of Congress’s Commerce Clause power even in this era of its parsimonious application. This is not broccoli; it is as commercial as commerce is ever going to be.
Another option for reducing Delaware’s dominance is for other states to assert their prerogative to regulate the internal governance of corporations based in their jurisdictions. Believe it or not, the rule that says businesses may incorporate anywhere, regardless of where they are actually based, has hardly been challenged because it has simply always been that way. It is based on an assertion of power by Delaware and is a function of other states’ acquiescence. (Massachusetts, for example, even has a statute saying Delaware law should apply if a Massachusetts-based company is chartered in Delaware.) That acquiescence could end, and states other than Delaware could assert the authority to govern corporations that are headquartered in their states, just as they govern humans in their states. The worries about companies all picking up and moving to Delaware is overblown; in order to get the benefit of Delaware law, companies would actually have to move there, not a cheap proposition. All I am saying is that corporate law should be like other areas of state law—if you live in a state, that state’s law should apply to you. Other than the Business Roundtable and the Delaware corporate bar, who could oppose such a clearly democratic reform?
The Advantages of Corporate Governance
Why should progressives go the corporate governance route in restraining corporate power? Why fight for these specific changes rather than, or in addition to, the many others on our wish list? There are several reasons.
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