The Stakeholder Strategy

Changing corporations, not the Constitution, is the key to a fairer post-Citizens United world.

By Kent Greenfield

Tagged Citizens UnitedCorporations

John Bonifaz is a wiry, bespectacled man with graying temples and a hearty laugh that camouflages his seriousness. He’s fought many progressive fights over the years on issues ranging from voting rights (which won him a MacArthur “genius grant”) to Unocal’s liability for human rights abuses in Myanmar (on which we worked together to draft a lawsuit). We’ve been friends for nearly 30 years, ever since we were student activists at Brown University.

These days, however, we find ourselves differing vociferously on what to do about Citizens United v. Federal Election Commission, the 2010 Supreme Court decision expanding the rights of corporations to engage in political speech and campaign spending. John is a leader in the push to amend the Constitution to restrict constitutional rights to natural persons. His idea has gained quite a bit of traction, mostly because so many Americans are rightly concerned about the power of corporations in our political discourse.

Nevertheless, I believe that the move to amend is a bad, even horrible, idea. I agree that the Constitution is meant to protect people. But people organize themselves into groups, including corporate groups, and sometimes those groups deserve protection. The New York Times, for example, should receive constitutional protection for what it publishes notwithstanding its corporate form. Moreover, the Court’s decision in Citizens United did not depend on the “personhood” of corporations; instead, the Court said that corporations are “associations of citizens” and that protecting corporate speech was a way to protect the rights of those citizens.

John and I recently debated Citizens United on television, and during our exchange he said something particularly revealing. In discussing some of the legal arguments in the case, he described shareholders as “owners.” In this respect, he agrees with the Court and conventional wisdom. Shareholders own companies and management speaks for them.

The reality is different. Shareholders are not really owners, and they exercise little control over corporate political involvement. Employees, communities, consumers, and other stakeholders exercise even less. The reason why corporate political speech is so corrosive to democracy is that the benefits and prerogatives of the corporate form are marshaled to bolster the speech of a tiny sliver of the financial and managerial elite. The fact that corporations speak is not itself a problem; whom they speak for is.

This essay urges progressives to cease their efforts to amend the constitution to weaken corporate “personhood.” Instead, we need to focus on changing corporations themselves so that overturning Citizens United would be unnecessary. We should use this historical moment to nudge corporations closer to what the Supreme Court assumed they are in its Citizens United decision—“associations of citizens.” While the constitutional effort is defensive and palliative, a campaign to redesign the corporation itself would be affirmative and transformative. To cure Citizens United, we don’t have to amend the Constitution—we need to rethink corporations.

The Foundational Nature of Corporate Law

It is not surprising that most opponents of Citizens United have focused on constitutional responses. Policy ideas often start in academia, and it is typical, especially in law schools, for the so-called “public law” topics of constitutional law, regulatory law, election law, and the like to be dominated by professors who are left of the ideological center. The “private law” arenas of tax law, contract law, and corporate law are left to professors who generally fill faculties’ ideological right flank (though there have been exceptions: William O. Douglas, for example, taught corporate law at Yale and served as the chairman of the Securities and Exchange Commission before becoming a Supreme Court justice).

These tendencies end up clustering progressive responses to civil, economic, and social ills around public-law ideas like constitutional amendments or top-down, command-and-control regulations overseen by bureaucracies. Often missed are the progressive possibilities in “private” law, particularly the law of corporate governance. Consider the untapped potential of this area, which provides the governing rules for gigantic economic entities, many of which are international in scope, and some of which rival the economic power of nations. (I often begin my corporate law course by noting that only 57 of the 100 largest economic entities in the world are nations; the other 43 are corporations.) For these businesses, corporate law plays the role of constitutional law—establishing their structure, determining who has the power to make decisions, and limiting the purposes for which that power can be exercised.

The answers to these fundamental questions—How are corporations structured? Who gets to decide what they do? What are they for?—affect all of us. If you care about whether corporations exploit their employees, skirt environmental laws, pay their executives exorbitant salaries, manage only for the short term, or manipulate the political process, you should care about corporate governance.

To imagine the promise of this area of law, one has to understand where we start. Here in the United States, the law of corporate governance is among the most conservative and least democratic in the developed world. For example, U.S. employees have no role in corporate decision-making, and U.S. managers are not required even to gather information on the potential impact of their strategic decisions on communities, employees, the environment, or the public interest, except to the extent those impacts might affect shareholder value. There is no federal law making it a crime to lie to employees—a CEO who lies at a shareholder meeting will go to jail; a CEO who lies to a room full of employees has not done anything unlawful.

Compare this to the European model of corporate governance, which requires much more robust social obligation on the part of corporations, embodied not only in cultural norms but also in law. The duty to disclose information and consult with employees is much more robust, and many large European companies include labor representatives on their boards. Germany, for instance, requires that half the senior board of large companies be elected by employees rather than shareholders. And at least another 15 European countries have some kind of provision requiring “co-determination,” worker representation on boards of companies headquartered in their national territory.

These efforts to include employees in company governance are intended to embody norms of workplace democracy and economic fairness. German CEOs, for example, make less than their American counterparts; countries with co-determination have lower income inequality than countries with weak employee involvement. But they are also seen as an important component of economic success, and indeed Germany is now the economic powerhouse of Europe. The CEO of the German company Siemens argues that co-determination is a “comparative advantage” for Germany; the senior managing director of the U.S. investment firm Blackstone Group has said he believed board-level employee representation was one of the factors that allowed Germany to avoid the worst of the financial crisis.

Turning back to the United States, the most profoundly anti-democratic oddity of American corporate law is the federal abdication of it to the states. Making matters worse, we allow businesses to choose any state as their place of incorporation, whether they are based there or not. So how do companies choose which state in which to incorporate? Whichever gives them the best “deal” in terms of regulations, taxes, and judicial deference.

States compete against one another in this “race to the bottom,” and for the last century or so, Delaware has won. Here is a state with less than one-third of 1 percent of the nation’s population providing the governing law for nearly 50 percent of all American corporations and 60 percent of the Fortune 500. The New York Times recently identified one office building in Wilmington that serves as the legal address of more than a quarter of a million businesses, including Apple, General Electric, JPMorgan Chase, and Wal-Mart. In fact, Delaware is home to more corporations than people.

Yes, this is bizarre. Businesses cannot choose which state’s environmental law, employment law, or labor law covers them, but they can select Delaware’s corporate law simply by establishing an address there and applying for a charter from the Delaware secretary of state. But bizarre is not the half of it. It is also disturbingly anti-democratic. Let us suppose for a moment that citizens of, say, California, Connecticut, New York, or Arkansas came to believe that the corporate decisions of Apple, General Electric, JPMorgan Chase, or Wal-Mart were affecting them. If those citizens sought recourse through the democratic process, either in their own states or at the federal level, they would be completely shut out. The federal government does not regulate corporate governance for the most part, and the only jurisdiction that matters for most companies is Delaware.

And the citizens of Delaware are not going to rock the boat for the benefit of people living elsewhere. The benefit their state derives from being the nation’s corporate haven is significant—the state gathers about a quarter of its budget from taxes and fees on its corporate “residents.” So if every other state in the union required corporate directors to act with regard for employees, communities, the environment, or the company’s long-term reputation, businesses incorporated in Delaware could thumb their noses at those requirements even if they were headquartered in states adopting them. If democracy means being subject to the will of the people, it is difficult to come up with an example of a less democratic rule than contemporary corporate law. If there is low-hanging fruit in the public policy arena, it is likely to be plucked here.

Stakeholders, Not Shareholders

For more than a century, progressives have attempted to use various regulatory mechanisms to stifle the worst impulses of the corporation: antitrust law, environmental law, minimum-wage requirements. These limits have, in many cases, provided massive benefits worth the regulatory costs. But these efforts have mostly been of the command-and-control type, working like a fleet of tugboats to pull corporations away from what would otherwise be their natural course. Few doubt that corporations need public oversight so that they are more likely to behave consistently in the public interest. If we think of corporations as large economic actors that produce both positive and harmful effects, the question—from a regulatory perspective—is how we most efficiently regulate them to maximize their benefits and minimize their costs.

My argument is simply that progressives should consider a new kind of regulatory effort—building a public-interest element into corporate governance itself, creating the possibility that businesses become a more positive social force on their own. I am not urging that corporations become altruistic or charitable institutions: The best way for corporations to serve the public interest is to create wealth, primarily by selling worthwhile goods and services for a profit. What I am suggesting is that we should define wealth broadly, and require corporations to focus on creating it with both a greater awareness of the costs inherent in its creation and the benefits that flow from broadly distributing it. If we can create the initiative within large corporations to head in the correct direction on their own, we will need fewer tugboats to correct their course later.

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.

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.

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.

Including broader stakeholder concerns at the senior level of corporate decision-making will help roll back the pervasive short-termism of corporations. Stakeholders in general, and employees and communities in particular, know their interests are not well served by fetishizing the short term. They hope to have their jobs and their neighborhoods for more than a year; they are unwilling to assume away risk when they are the ones who would bear the costs if those risks play out badly. A more technical way of describing this is to say that there is less moral hazard with boards that include a diversity of interests—people don’t play with fire when it’s their own house that will burn.

Taking the Supreme Court at Its Word

But the final and most important reason to make companies more pluralistic is to make corporations more reflective of democratic norms and principles. Corporations have immense power over our lives, and not only because of the goods and services they sell, the jobs they provide, and the financial gains they contribute to our retirement funds. They also dominate our political world—and here John Bonifaz and his colleagues are correct—because they have access to lawmakers that few individuals can match.

We could address the errors of Citizens United from the constitutional side, but that would certainly be a long shot. The Constitution of the United States is one of the most difficult to amend in the world. A more viable option is to address the errors of Citizens United from the corporate side. Essentially, we could take the Court at its word, and seek to make corporations themselves more like “associations of citizens.” This too may seem a long shot. In a sense it is—if only because it would require a profound change in how we conceptualize corporations, from pieces of property owned by a sliver of the financial elite to collective enterprises benefitting from the contributions of a variety of stakeholders. But once the conceptual change takes hold, the legal adjustments are straightforward and much less demanding than a constitutional amendment. A national corporate governance law would require a vote in Congress followed by a presidential signature. In fact, a national law need not be the first step. As described above, many of these changes could take place one state at a time. States would just have to resist Delaware’s dominance and assert the authority to govern the corporations based in their own jurisdictions.

As the governance of corporations begins to take account of the interests of their stakeholders, the public voice of corporations would reflect the voices of those myriad stakeholders. Corporate involvement in the political process would be less of a concern, because it would be more reflective of the range of stakeholders contributing to company success. It would be less “them” and more “us.” There is nothing inherently undemocratic in corporate speech, unless corporations themselves are undemocratic.

Citizens United recognized the corporate right to speak in the American public square. Currently, that poses a major problem for our democracy because corporations amplify the voices of a tiny number of the financial and managerial elite—the notorious 1 percent. If companies gave voice to a more diverse and pluralistic set of interests, the fact that corporations speak would not undermine democracy. On the contrary, corporate speech would reflect it.

Read more about Citizens UnitedCorporations

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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