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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.
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.
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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.
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