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.
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