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The Stakeholder Strategy
Changing corporations, not the Constitution, is the key to a fairer post-Citizens United world.
An Effective Tool Against Inequality
One reason is that these changes could provide genuine benefits to a wide range of people, in a way that is relatively efficient as a matter of regulatory policy. For example, think about the problems of wealth and income inequality in the United States, which are at historically high levels. The causes of inequality are various, but they spring in part from the behavior of corporations—low wages for working-class Americans, exorbitant compensation for corporate executives, and a disproportionate amount of shareholder gains going to the richest among us.
The policy tools we have available to address such inequality are incomplete at best. We can advocate for an increase in the minimum wage, but the benefits diminish above the lowest rungs of the economic ladder. We can seek to empower labor unions, but less than 7 percent of the nation’s private work force is organized. We can redistribute financial wealth from the rich by way of the tax system, but that creates resentment even among those who would benefit (remember Joe the Plumber?) and arguably decreases the incentives to produce in the first place.
In comparison, changes in corporate fiduciary duties and the makeup of the board would mean that the allocation of the financial surplus created by successful corporations is likely to be fairer to all concerned. Because the allocation of corporate surplus is one of the most important decisions for boards and senior management, a change in their duties and their composition is bound to make a difference. Moreover, executives presently receive the compensation they do in part because directors and executives are members of what amounts to a private club of financial elites, all of whom look after one another. Adding fiduciary duties to interests outside the group will diminish this tendency, and the inclusion of employee representatives and other stakeholder advocates at the board level will make such insiderism transparent and less pervasive.
This improvement in the initial allocation of wealth is bound to be more efficient in lessening inequality than having government redistribute wealth after the fact. Fairness in the initial distribution will cause less resentment than post-hoc redistribution using the tax system. Further, employees receiving a fair wage are likely to reciprocate good will toward their employers, increasing productivity and decreasing the need for strict monitoring, effects that you don’t see with a regimen of government redistribution. In comparison to increases in the minimum wage, a stakeholder-oriented corporate governance system would benefit stakeholders up and down the economic hierarchy and earlier in the wealth creation process.
Private Expertise for Public Good
Beyond addressing economic ills, adjustments in corporate governance are bound to be more efficient than other regulatory tools because they harness corporate expertise for public purposes. In dealing with issues such as environmental sustainability, for example, corporate personnel often have expertise that government officials do not (think of the Deepwater Horizon disaster, where BP’s expertise in deep-ocean drilling far outstripped that of government inspectors). Of course, it is easier and more efficient to avoid environmental degradation than to arrest it later (think of, let’s see, the Deepwater Horizon disaster), and corporations with a greater stake in worker safety may be able to anticipate problems before they arise.
Better Decision-Making through Pluralism
Another benefit of requiring corporations to take into account the interests of a broader range of stakeholders in corporate decision-making is that the quality of the decisions themselves will improve. Group decision-makers that are homogeneous in perspective, experience, and values fall easily into groupthink—and there are few group decision-makers more homogeneous and whose mistakes are more costly than corporate boards. One of the things we know about group decision-making is that dissent is essential, and that social bonds among people in the group can make disagreement less likely exactly when disagreement is most needed to spur discussion and analysis. A 2002 article from the Harvard Business Review said it best: “The highest performing companies tend to have extremely contentious boards that regard dissent as an obligation…and even have a good fight now and then.” The examples given in the article are now a little dated, but is there any doubt that we would be better off today if more executives and directors had dissented during the run-up to the 2008 crash? The Blackstone executive I mentioned earlier who claimed that German co-determination mitigated the effects of the crash there argued that the mechanism by which this worked was that it “introduces a range of new perspectives” at the board level.
The Long Term over the Short Term
More diverse boards will also have a longer time horizon, which will improve the substance of their decisions. That “short-termism” is a problem is one of the few notes of agreement among business commentators and academics on both the right and the left. The problem is caused by the increasingly short time horizon of shareholders, who now hold their stocks, on average, for only about six months; as much as 70 percent of the daily volume is high-frequency trading where investors hold stocks for seconds. Management adhering to the interests of those shareholders thus ends up prioritizing short-term gains even if the result is long-term difficulties. A survey of more than 400 chief financial officers of American companies—conducted before the 2008 collapse—revealed that a significant majority of them would prioritize meeting Wall Street’s quarterly expectations over doing what was best for the company even a few years down the road. The 2008 collapse revealed the risks of this prioritization of the short term over the long term.
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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