Corporation Nation, page 27
The long-term social and economic costs of radical privatization in areas like medicine are unsustainable for all the players. In other areas privatization can make sense, but only if new democratic market arrangements can be created that give greater voice to workers and communities. Populists support social markets that can spread economic power evenly among multiple stakeholders who can speak to the social results of corporate decisions. These innovative arrangements are the most intriguing part of the new populism, since in the main they don’t depend on government regulation, and they can have real economic payoffs for business.9
The best social markets—based on employee ownership and corporations chartered in the public interest—will not eliminate all the conflicts between profit and people. But they can be attractive to business as well as its critics, since they increase profits as well as democracy, and reduce the need for government intervention. Nonetheless, even social markets require a modicum of government regulation in the interests of society as a whole.
The fundamentalist impulse to purge government entirely is an impractical fantasy: Not only is it impossible to achieve, since all markets are organized by governments and constituted by property, finance, and contract laws, but government intervention is necessary to protect human needs. While the new populism seeks the common ground between business, social needs, and democracy, it recognizes that there will always remain deep contradictions among them. Left to itself, business might choose child or prison labor as a rational profit-maximizing strategy. Even an employee-owned business might decide to spew pollution in faraway communities as a way to cut costs. We need government to make clear that many profitable strategies are unacceptable on moral or social grounds.
Furthermore, government intervention is often essential to increase the efficiency and profitability of business enterprises. This is obviously the case in monopolistic markets, like the U.S. mail or utility monopolies, where it would be irrational to introduce competition and irrational not to regulate. In highly imperfect markets like medicine, even the most socially responsible private insurer makes less economic sense than a governmental system of public insurance. And in more naturally competitive markets, regulation can still often increase efficiency and profitability in thousands of ways, as Robert Kuttner and others have demonstrated in painstaking detail. More broadly, business depends on the kind of careful monetary and fiscal policy that all governments must seek to provide. A government that withdrew from the obligation of crafting a macroeconomic policy would instantly sink the private-enterprise system.
Beyond all these economic considerations, a reaffirmation of government—which is quite different than espousing a government solution to every problem—is desperately needed to restore faith in democracy and make it possible. Quite simply, there can be no popular sovereignty without a real belief in the value of government. If government does not assume and carry out public responsibilities, less accountable institutions such as the corporation will do the job in their own self-interest.
Stakeholder Capitalism and the Public Corporation
In the American model of shareholder capitalism, even Jesus Christ might have a hard time practicing economic democracy and social responsibility if He were running a large corporation. The laws of the land require that he give top consideration to his shareholders. As long as corporate directors owe their fiduciary responsibility to shareholders alone, there is little chance that any corporation can serve the public interest, no matter how saintly the chief executive. Profit will rule above the needs of workers, communities, or the environment, if only because our laws require that it be so.
In Japan, Germany, and some other capitalist societies, corporations operate on a stakeholder rather than shareholder principle. Corporations are legally directed to recognize the interests of workers and other social stakeholders—and sometimes to put them in the corporate boardroom. A stakeholder is anyone whose contribution is essential to the success of the corporation and has a stake in it. This includes not only the owners—those who put in money—but workers who put in labor, governments that provide support, and consumers who buy products. A stakeholder system moves closer to the model of a public corporation, since it recognizes the claims of many different social groups, and makes the corporation legally accountable to all of them.
Many economists now recognize that workers and other stakeholders invest their own kind of capital in the firm—and, like shareholders, have something important at risk. The skills of the labor force are just as important to the bottom line as the money invested, and they are often firm-specific—that is, not easily transferred from one company to another. Today’s shareholders have diversified portfolios and often do not know where their money is invested, a very attenuated kind of ownership compared to the owner who founded and ran his own business. Meanwhile, the worker who has invested much of his life in a firm may have far more at risk in that firm, since he or she may not be able to transfer firm-specific skills to another company. This argument has led even conservative economists to recognize the ownership claims of stakeholders other than shareholders.
A new stakeholder system has serious potential flaws, but could serve both the public and the corporation itself, making it a key part of the positive populist conversation. Workers, consumers, and other stakeholders in the corporate boardroom would ensure that the needs and values of the larger community would get greater attention. Society would literally get a new voice, if not necessarily a vote, in corporate America. But such a system should also pay positive dividends for the corporation, since its financial bottom line depends so heavily on the skills, loyalty, and motivation of workers, consumers, and other stakeholders. A growing body of managerial theory argues that building social capital—that is, cooperation, trust, and a sense of community among all the stakeholders—is the most effective strategy to increase profit, an argument for embracing the stakeholder vision on economic grounds as well as moral ones.
The stakeholder vision has gained increasing political attention in the United States. Many states, as noted earlier, have amended their incorporation laws by adding so-called “stakeholder statutes,” designed to change the corporation from a shareholder to a stakeholder model and give directors legal permission to take into account the interests of workers, customers, communities, and other stakeholders. In the new charter, corporations are no longer violating their fiduciary responsibility to shareholders if they act to protect other stakeholders, even at the expense of profit maximization.10
As noted in the last chapter, some such statutes amount to no more than tools to help executives ward off shareholder activism. Yet in some states, such as Connecticut, the new statutes are not simply permissive, but mandate that directors must take into account the interests of stakeholders. A proposed shift in the Massachusetts statute uses strong language: “A director shall consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, region, and nation, community and societal considerations, including the ability of the corporation to provide, as a going concern, goods, services, employment opportunities and employment benefits and otherwise contribute to the communities in which it does business.… Consideration of any or all of the community or societal considerations is not a violation of the business judgment rule of any duty of the director to the shareholders … even if the director reasonably determines that a community or societal consideration or considerations outweigh the financial or other benefits.”11
The new stakeholder statutes are weak; while they mandate attention to stakeholder needs, they give workers and other stakeholders no new legal decision-making authority. This is one of several deep problems in the current stakeholder movement. It could be partially overcome by creating real stakeholder power rather than rhetorical deference to their needs. America differs from virtually all European countries in its legal disenfranchisement of workers and other stakeholders: In Germany, for example, a codetermination charter requires that 50 percent of the board of directors of all large corporations be representatives chosen by the workers. Other German laws require “works councils,” which are legally mandated representative bodies corporations must negotiate with before they introduce new technology, lay off workers, or change schedules. Such representation complements strong national German unions that have far greater political power and legal bargaining authority than American unions. Some variant of these German stakeholder arrangements exists in every European country, but in the United States workers have no legal stakeholder authority at all.12
To remedy this situation, we need new laws requiring accountability to stakeholders. This could begin with simple disclosure rules requiring that corporations issue reports and information of interest to different stakeholder communities. It might also take the form of stakeholder advisory groups—representing shareholders, workers, communities, customers, or environmental groups—who would confer regularly with executives or board members about how better to serve their constituency needs. This would help build trust, and serve not only the stakeholders but the corporate bottom line.13
Further steps would bring the system closer to real stakeholder empowerment. One approach would be the European model mandating representation of workers or other stakeholders on the board of directors. Stakeholder representatives would speak and vote for both the interests of their own stakeholder group—whether shareholder, worker, consumer, supplier, or community—and the interest of the company as a whole.14
Despite its great attractions, the dangers of this more enlightened approach include the potential alienation of stakeholder representatives from their grassroots constituents, the balkanization of competing stakeholder groups, and a tendency to favor the demands of individual groups over the needs of the corporation or the larger society as a whole. Bundling together groups of stakeholders each looking out for their own interests may be a formula for undermining both the corporation and the larger public interest. The stakeholder model fails to indicate how stakeholders can be induced to guard the interests of the wider society. It also fails to address the broader issues of corporate power, including the political influence of corporations over government and the problems of growing poverty and inequality.
The current stakeholder vision may ironically end up undermining the very power of stakeholders themselves. Giving stakeholders voice in a firm does not ensure a new way of doing business, since under current market and political arrangements many corporate decisions are likely to be decided on low-road criteria no matter who sits on the board. In Germany, worker representatives have often found themselves voting much like shareholder or management directors, shackled by the established constraints of financial markets, laws governing fiduciary responsibility to shareholders, and other similar forces. Stakeholder power will have to be exercised politically at the level of the state—not just in the corporate boardroom—to change these constraints.
The most serious flaw in the prevailing stakeholder vision is its inevitable focus on microsolutions within the firm. While stakeholder voice within the corporation is assuredly important, it is not a substitute for necessary macro-level political and legal change. By working to assure “insider” representation, it can undermine the necessary countervailing forces seeking to change the corporate order from outside. Social stakeholders such as workers and communities must ultimately assert themselves as populist political movements on the outside, as well as reformist voices from within. While these two approaches can coexist, the insider stakeholder movements may create a sense of identification with the firm (among workers or other stakeholders) that can undermine the “outsider” movements necessary to change the larger market order. This has happened to a substantial degree in the stakeholder corporate system of Japan, which has weak unions and a high level of unchallenged corporate paternalism, but to a lesser degree in Germany and Sweden, where strong unions and a national labor party give workers and communities a voice in the state as well as the boardroom. To address these problems, new approaches that go beyond the current stakeholder vision are called for, both at the micro- and macro-levels.
Chartering the Public Corporation
We can now speak of King Boeing. Newly merged with McDonnell Douglas, it is the only commercial airplane producer in America, and one of only two in the world. It is also one of America’s two dominant aerospace and defense corporations. Boeing is a world power, bigger and more dominant in global civilian and military matters than most countries.
Boeing is chartered as a private corporation, but it is codependent with the state, and exercises transparent public powers. Boeing and the American government are intertwined in so many ways that it is sometimes hard to distinguish them. The Pentagon has produced much of Boeing’s technology and funds the lion’s share of the research and development that makes the company’s products possible. The federal government is the exclusive purchaser of many important Boeing products and makes possible many of its sales to governments around the world. Boeing’s monopolistic power over products that help make and break the economy and military might of whole nations gives it a quasi-governmental standing all its own.
Boeing is only one of several hundred giant corporations whose transparent public powers and dependency on government demand that we rethink their charters. The fiction of the private corporation is, as we have seen, the dominant myth of our era. But it now collides so profoundly with reality that it is time to attack it head-on by rewriting the corporation’s constitution: the incorporation laws that define what a corporation is for and who governs.
In Chapter 6, we saw that Americans once relied on charters as instruments of popular sovereignty. Early charters made clear that corporations had to serve the public interest and were accountable to the people. When corporations violated these terms, legislatures would revoke their charters and the corporation was dissolved.
Populists need now to call for a new system of corporate chartering to protect and serve the public interest. Specifically, populists should propose the creation of a new “public corporation” with its own distinctive charter. The new charter must express a clear vision of the corporation’s public purposes, reserve for citizens all powers not expressly delegated to corporations, and establish not just corporate responsibility but real accountability. It would apply to all corporations over a certain size—those worth at least $1 billion—and should, as discussed shortly, involve dual chartering at both state and federal levels.15
While this will require long-term public education and must proceed politically in stages, the issue of corporate responsibility is already in the limelight, and the potential for a new system of corporate charters is already politically in play. Senators Kennedy, Bingaman, and Daschle, as well as House Minority Leader Richard Gephardt, have all proposed the creation of “R corporations,” a new species of “responsible” corporation that would be required to invest in training, avoid layoffs when profits are being made, provide fair medical and pension plans, and generally abide by responsible codes of conduct. In exchange, they would be given tax relief and other incentives.
These legislative initiatives are useful tools for starting a public debate about what we expect from corporations. They are modest in scope and nonpunitive toward corporations. They are a carrot to restore a few of the New Deal social protections that corporations used to provide to employees. While constructive, they still do not constitute a full effort to recharter the corporation as a public entity, and do not pretend to be a step toward greater democracy either within or outside the corporation.16
Chartering the public corporation means going beyond ideas like R corporations and stakeholder representation to create corporate governance in the public interest. What is needed is a chartering system that redefines the purpose of corporations to serve clear public needs, such as respecting the environment, creating dignified and secure employment, and nurturing the local community. Such aspirations are already built into the mission statements of many companies, but need the strength of constitutional sanction to be effective. Only then will they begin to be taken as seriously as the bottom line.
A public charter will not transform the profit-seeking dimension of the corporation, nor eliminate conflict between corporations and workers or communities. The corporation will always be a creature of the market, and it is neither realistic nor desirable to expect it to become the main guardian of the public interest. That is—and should be—the role of government, unions, grassroots social movements, and other civic institutions. A corporate chartering system would instead codify and help the people to enforce the notion that corporations should ultimately answer to citizens.
A central aspect of the chartering system would be the creation of a new system of federal charters. The huge companies that would be subject to public chartering are all national or global in scope. A dual system of federal and state charters—the details of which have been proposed in several books by Ralph Nader and others—would help to keep the playing field level, enforce uniform national social requirements, and prevent corporations from playing one state against another—which ultimately destroyed the nation’s original chartering system.17
Creating real accountability would be the goal of a new chartering system. In early America, this was achieved by imposition of strict conditions on the scope and duration of corporate activities, reservation by the state of all powers not expressly delegated to the corporation, and regular legislative consideration of whether to renew the corporate charter. Many such charter restrictions on corporate internal policy could undermine corporate performance and would not be realistic today. But constitutionally reserving to the people all powers not expressly delegated to the corporation remains vital and should be paired with a reexamination of all the rights previously vested in corporations as legal persons under the Bill of Rights.18
