The Situationist

Our Stake in Corporate Behavior

Posted by The Situationist Staff on January 23, 2010

Situationist Contributor David Yosifon published a thoughtful and timely op-ed,  in yesterday’s San Francisco Chronicle. Here are some excerpts.

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Corporations are crucial institutions in our society. Consumers rely on them for everything from the basic provisions of food and clothing to the more dispensable delights of computers and cell phones. Workers rely on them for jobs. Communities need them for a tax base. Shareholders rely on them for profits that fund retirement, or entrepreneurial activity.

We all have a stake in effective corporate operations. Yet corporate directors are not required, indeed are not allowed, to put the interests of any party above shareholders in their decision making.

Now the Supreme Court has declared that the First Amendment forbids us from restricting corporate spending on political campaigns. If we cannot restrain corporations from influencing our democracy, then we must have more democracy in the management of our corporations. Directors of publicly traded corporations should be required to become informed about and to deliberate on the interests of all corporate stakeholders, not just shareholders.

The idea that we all have a stake in corporate behavior might seem at odds with the current “shareholder primacy” rule in corporate governance. But it could make sense. Most shareholders are highly diversified, with small investments in a large number of funds or corporations spread across the country and the world. The profit-maximization rule provides shareholders sufficient repose to invest their money at such a distance and with so little say in corporate decisions. Workers, on the other hand, can negotiate and monitor their wages and working conditions directly, or through unions. Consumers can manage their corporate interests at the cash register – they can buy at the offered price or walk away.

But corporations are often more powerful than workers or consumers. Firms can skimp on safety, for example, in ways that are difficult to observe – think asbestos in the factory or trans fats in the fries. Sure, sometimes the socially responsible corporate policy is also the most profitable – as when safer products attract more consumers. But it is naive to think that shareholder interests are always aligned with the rest of society. For a long time policymakers have argued that even where society is vulnerable to corporate overreaching, corporate boards should still focus on shareholder interests. We should rely, the story goes, on external government regulation – such as workplace safety, consumer protection or antipollution statutes – to safeguard social interests.

This approach assumes that government will be capable of developing regulations sufficient to constrain corporate misconduct. But corporations have the incentive and power to stunt such efforts. Firms accomplish this in part through lobbying, donations and direct spending in support of candidates. Because of their wealth, corporations can routinely best other constituencies in the competition for regulatory favor. This problem will only intensify with the new Supreme Court ruling.

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You can read the op-ed in its entirety here.

For a sample of related Situationist posts, see “Taking the Situation of Consumers Seriously,” “Against Freedom of Commercial Expression – Abstract,” “Merchants of Discontent – Abstract,” “The Changing Face of Marketing?,” Reclaiming Corporate Law in a New Gilded Age – Abstract,” “The Situation of Illusion,” “Hey Dove! Talk to YOUR parent!,” “The Situation of Our Food – Part II,” The Situation of Our Food – Part III,” “The Changing Face of Marketing?,” “The Illusion of Wall Street Reform,” “Reclaiming Corporate Law in a New Gilded Age – Abstract,” “Deep Capture – Part VI,” and “Deep Capture – Part VII.”

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One Response to “Our Stake in Corporate Behavior”

  1. Tamara Piety said

    David – As you know,I couldn’t agree more that this is a very troubling decision and is likely to have pernicious effects. But I think these interests will block efforts to reform corporate law to make corporations consider stakeholders as well as shareholders just as they will block many other regulatory efforts. And I’m concerned that trying to reform for-profit corporations to make them more democratic (which I think is unlikely to succeed and even if it succeeds is likely to present unmanageable complexity to corporate decision-making. It is already the case that managers have very complex and difficult decisions to make just trying to make decisions as between long and short term profit. If we add into this the notion that they should do internal goal setting or decision-making within the rubric of goals other than profit-making I am not sure that is going to be a manageable task, institutionally. Moreover, since I do not have a say in electing their boards or managers, I’m not sure I really want them charged with social policy responsibility. And I most definitely don’t want them to be able to assume the mantle of social responsibility without actually delivering any more of it. My biggest concern about Citizens United is my concern that the language of corporate personhood will be quickly adopted in the commercial speech context and so we will see that just as Bellotti was used to bolster arguments by Nike to fend off Kasky’s suit, so too Citizens United’s rhetoric will be used to assert freedom from regulation of tobacco advertising, prescription drugs, securities regulation (and boy does it ever seem to be a bad time to undermine the ability of the government to regulate the financial sector and the capital markets!), etc. We’ll just have to wait and see but I predict a flurry of motions for rehearing, motions to dismiss, and motions for summary judgment in these commercial speech cases arising out of the rhetoric in Citizens United. I actually think maybe old style, externally imposed regulation by government is also most economically efficient for businesses, much as managers like to gripe, because there it is (at least in theory) the polity that is making the decisions about social policy and relieving management of the decision-making. It is simple. You just can’t do it. Of course, because corporations can’t be jailed and because the decision to break the law and pay the fine is often economically attractive, even externally imposed limits may not function as real limits on corporate misconduct. This decision may end up being the Lochner, or even the Dred Scott, of this century, that is, a decision which will ultimately be repudiated as inconsistent with our values and seen as a blot on the institution of the Court but which in the meantime may do terrible damage.

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