The American Corporation is in Crisis—Let’s Rethink It. A Boston Review Forum Septembre 2019
For decades, shareholder primacy has obscured the fact that employees should do well when businesses do well. Now, as that foundation crumbles, thirteen thinkers debate new reforms that could transform the inequalities at the heart of our economy. Read Leonore Palladino’s lead essay:
Here is my response:
Reforming corporate governance is quickly ceasing to be a polite debate among specialists and turning into a hot topic among leading presidential candidates. And for good reason. As Thomas Piketty’s forthcoming book, Capital and Ideology (2020), argues, radical corporate reform is a top priority for addressing the world’s profound and growing inequality. Lenore Palladino’s essay presents some of those potential reforms, including giving stakeholders, not just shareholders, a chance at ownership and governance.
But while I share her reasonably optimistic view on the potential for change, I want to urge for more clarity on why, exactly, workers are so central to rebalancing power. Because they are not, as Palladino and others have said, just one element of a corporation’s stakeholders—instead, they constitute firms. Lumping workers in with other stakeholders—such as consumers, minor suppliers, and communities—is a euphemism that obscures the reality.
Take, for example, the latest declaration of American CEOs, organized through the U.S. Business Roundtable, which was momentous in its repudiation of shareholder primacy. For more than forty years, the Business Roundtable endorsed shareholder primacy as the defining purpose of a corporation. Now it says that purpose is to promote “an economy that serves all Americans,” while its CEO members claim to “share a fundamental commitment to all of our stakeholders.” By “stakeholders,” they mean customers, suppliers, the communities in which they work, shareholders, and employees. Will this new “modern standard” for corporate responsibility actually help our societies to change course? Certainly not: conveniently, these CEOs remain in charge of striking the balance among these supposedly “co-equal stakeholders,” and the legal structure of the corporation ensures shareholders’ grip on CEOs remains firm.
Palladino’s solution is to insert some employee representation into that legal structure for a modicum of countervailing power. But this miscasts their true role within a firm and actually blunts their power. Workers, after all, are firms’ labor investors, and firms need them just as much as they need capital investors. In plain language, without labor investors, capital could not be made productive at all. Classic economic theory recognized this as a fundamental truth before the neoliberal political and cultural shift of the past forty years valorized capital growth above all else. And it is no less true today, especially in our service- and knowledge-based economy, where the value of labor investors is arguably even higher than in an industrial production regime.
Workers have become the brains and hearts driving the economy—the very source of a firm’s ability to innovate and provide consumer satisfaction. If we are to address the momentous challenges of our times, we must move toward a theory of the firm that understands capitalist firms as political entities with two classes of investor, or two constituencies: labor and capital.
Once we do, we’ll quickly realize that corporate law provides the organizing vehicle for capital investors—and that no such vehicle exists for labor investors. Particularly in the United States, capital investors have never given labor investors much opportunity to organize. Yet, there is a history, as long as the history of capitalism in this country, that speaks powerfully to labor investors’ need for and expectation of such an opportunity: the fight of a labor movement in this country. U.S. labor investors—who are, most often, also U.S. citizens—are still fighting for meaningful political rights in the workplace in order to voice their own views on what their work should serve and how the profits they generate should be shared.
Palladino casts her reforms as changing “corporate governance to be more democratic,” but democracy is not about gaining a few more seats at the table. Its foundation is equality, as “equals in dignity and rights,” that justifies the right to bear on government. For a society that insists on its commitment to a “government of the people, by the people and for the people,” inviting a few labor investors into the boardroom is not enough; that kind of participation makes them, according to the union leader Thomas Donahue, the “junior partner” to capital.
As history shows, the way to move from the despotism of a property-owning minority (the shareholders, in this case) to democratization is a collective veto right –this is the 25 century-long history of bicameralism. Alongside the board of directors, which represents capital investors, a second chamber needs to be organized, to which the firm’s second constituency (the labor investors, including workers involved in the “fissured” supply chain) can elect its own representatives. Together, the two chambers would form the legislative branch of the firm, and U.S. CEOs would finally have a different north on their compass. Before executing strategy, they would have to find workable compromises between both chambers, with a majority in each chamber required before any strategic decision could be approved.
The language of stakeholders does have its place. Consumer, supplier, and community interests, of course, need to be considered, involved, and accounted for in firm strategy. (Certainly, stakeholder advisory committees working with both chambers, would be very beneficial.) But we must not reduce the efforts and contributions of working people by pretending they are merely “the most affected” by corporations. As Palladino says, “If corporate executives and shareholders cannot see themselves sharing ownership and governance with employees, perhaps they should try creating value without employees and see how far they get.” If we really understand this, labor investors cannot be left adrift in the sea of stakeholders.
I must conclude by saying that for any kind of viable future on this planet, we must fish another non-stakeholder out of this sea: the planet itself. For a future that is both viable and democratic, firms must be subject to two capital constraints: one, democratization within, through granting their constituencies of labor investors access to their own government, and two, IPCC guidelines as actual standards. These cannot be left to competitive choices, taken more or less seriously by different firms’ strategies. Yes, the language of stakeholders has its place in the debate about corporate governance. But we must not allow stakeholder theory to become a meaningless sea in which working people and the planet are washed away. If we let that happen, we will all drown.