The Divine Right of Capital: Chapter 10

Chapter 10: New Citizens in Corporate Governance

The Principle of Democracy:
The corporation is a human community, and like the larger community of which it is a part, it is best governed democratically.

In rethinking the corporation to be accountable to a broader set of stakeholders, it is important to note that employees are internal to the corporation while the community is external to it. Externally, corporate governance is regulated by state statues and court decisions. This must shift to be increasingly supportive of the broader democratic order. Internally, corporate governance is controlled by a board and management that legally answers to shareholders. This must shift by extending governance rights to employees as well as shareholders. This latter shift is the focus of this chapter.

Voluntary efforts to change the corporation lack staying power and are easily trumped by pressure from shareholders. Shareholder primacy is enforced through the threat of lawsuits and takeovers, both enforced through legal mechanisms. Ultimately, any lasting solution will need to be legal in nature in order to counteract these mechanisms.

Democracy is fundamentally about structures – structures of voice, decision making, conflict resolution and accountability. Our political system has structures to secure our liberties. Separation of powers is one example. We lack a similar set of structures to protect people’s liberties within the corporation.

Stakeholder theory expands the notion of who is served by the corporation from its exclusive focus today on shareholders, by opening it to include customers, stockholders, employees, suppliers, creditors, the community and the environment. Most of the focus thus far in stakeholder theory has been on ethics rather than grounding it in solid legal theory, which has weakened the theory’s applicability and left widely dismissed as irrelevant by researchers in finance and corporate law. Some of this weakness in stakeholder theory may rest on a deeper set of issues stemming from a lack of clarity over who actually should have a voice in the company’s governance.

Stakeholder theorists often ask who is affected by the corporation, but corporate governance theorist David Ellerman suggests a more relevant question is who is governed by the corporation? He makes the analogy that many foreigners are affected by US actions and that their rights should be protected, but that that doesn’t mean they should have a right to vote in the US. When shareholders elect a CEO for the corporation, it is not the shareholders who are governed by that CEO. It is the employees who are. Current governance theory sees employees as outsiders who merely sell their labor to the firm. Employment contracts are illegitimate in the sense that they preclude employees’ ability to self-govern. Democracy scholar Robert Dahl notes that the right to self govern is amongst the most fundamental of all human rights and that laws cannot rightfully be imposed on others by persons who are not subject to those laws themselves. Just as with the right to vote, the right to self governance is not a right that can be sold, even voluntarily.

Some management theory, such as Theory Y, gives employees more autonomy and control, but this thinking has not yet crossed into mainstream governance theory. One exception is Margaret Blair who argues that if stockholders’ assumption of “residual risk” (being last in line for compensation after creditors) grants them governance, employees bear just as much residual risk and hence should also be granted governance rights. Another exception is Lynn Stout, who builds on the notion of “team production” to argue that the contributions of labor and capital are non-separable and that governing boards can help oversee the proper allocation of profits between labor and capital to ensure behavior from both sides that contributes to the long-term, ongoing health of the firm.

With stakeholder theory, many progressives lump employee concerns in with other social concerns, which in many ways undermines the legitimacy of employees claims to governance of the firm. There are instances when other stakeholders may become “captive” by the firm and in those cases governance roles may be appropriate. But employees are the one group that always deserves such a role.

One approach to opening up employee governance is the creation of a separate employee legislative house. The Works Councils of Germany follow this approach. This kind of an approach would relies on the wisdom of the separation of powers found in the US government.

However it is structured, employee representation needs to be mandatory. This is not the same as unions. Kelly’s point here seemed a bit off the mark to me, perhaps because she does not want to undermine the role of unions. She notes that unions may be thought of as a kind of political party, representing the interests of workers, but representation should be the default assumption in all companies regardless of whether or not they have been organized. She feels that the two could exist side-by-side, but I’m not sure the need for unions would be quite as strong with the kind of representation she’s painting here.