Wednesday, May 14, 2014
Corporate governance and social welfare – stability and change
As several posts in this book club series have suggested, there are a number of factors that my theory suggests might reinforce stability or catalyze change in US, UK, Canadian, and Australian corporate governance moving forward.
In the third and final part of the book I address various possibilities. One is the potential for the shareholder base to evolve in ways that blur the boundaries between “employee” and “shareholder” identities, complicating efforts to distinguish them by reference to distinct sets of interests (a possibility toward which Matt points in his post in questioning the implicit assumption that “pro-shareholder” necessarily equals “anti-employee”). Defined contribution pensions have arguably moved us in this direction to some degree, though I think John Cioffi is right to conclude in his excellent comparative book that “shareholder” does not represent “a salient political identity” in the US. In Australia, on the other hand, compulsory “superannuation” seems clearly to have promoted a much stronger investment-orientation across society. Under this system of mandatory retirement pension fund contributions, employees are directly engaged in the investment process as they select funds and identify suitable investment strategies, and the program has been reinforced by aggressive marketing aimed at promoting an investor identity across the working population. This program blurs not only the boundary between “employee” and “shareholder” identities, but also the boundary between state-based and private social welfare provision. As such, Australia’s compulsory superannuation program actively promotes pro-shareholder sentiment at the same time that traditional social welfare programs (such as universal healthcare) actively defuse anti-shareholder sentiment – a particularly potent combination that helps explain Australia’s adoption of strongly shareholder-centric corporate governance structures in recent years.
Another significant possibility is that a given country’s responses to the financial crisis might enhance the stability of shareholder-centric rules, or tend to undermine them, as the case may be. As I describe at some length in the book, both the US and the UK have, in the wake of the crisis, responded with shareholder-centric corporate governance reforms (a mistake in my view, as described in a prior post). Yet the US has, at the same time, substantially enhanced certain forms of social welfare protection – most notably related to health care – while the UK hasn’t. This contrast presents a natural experiment that may help test further the explanatory power of my theory, which would lead one to predict that the US approach will exhibit greater stability in the face of future crises than the UK approach will. Time will tell (assuming that these policy packages are themselves sustained in the meantime).
Other factors with the potential to reinforce stability or catalyze change have been suggested in posts contributed to this book club. One, identified in Joan Heminway’s post, is that changes might occur within the sphere of corporate law itself that impact how we think about the social dimensions and impacts of corporate governance. Specifically, Joan points to “the introduction of social enterprise entities into state corporate law” in the US, including “benefit corporations, flexible purpose corporations, and the like.” As she rightly observes, such developments “could both substantiate and challenge [my] observations about shareholder power under U.S. corporate law,” depending on how things unfold in this rapidly evolving area.
As a normative matter I’m suspicious of these developments because I suspect that, were such entities to grow in popularity, they could amount to a social net minus. Suggesting that we need a new business form to wed pursuit of profit with pursuit of non-shareholder interests might be read to implicitly concede that shareholder interests literally define the purpose of presently existing corporations – which, as I detail at length in the book, I consider a gross misstatement of current law. My guess (perhaps even my hope) is that social enterprise entities will ultimately amount to one of those thought experiments that, although of little ongoing relevance, leave us with a better understanding of where we were to begin with – perhaps analogous to close corporation statutes, now largely moribund because business people realized that they could already achieve their goals through better-understood preexisting corporate legal structures. Joan is absolutely right, however, that such developments could ultimately impact how we think about the degree of shareholder-centrism exhibited by general corporate law, depending on the use and popularity of such social enterprise entities moving forward.
Another intriguing possibility, raised in John Cioffi’s post, is that employees might simply lose across the board, in all the policy domains that I discuss. As John explains, “[t]here appears to be an implicit logic [in the book] that if employees lose in one policy domain … their interests will be protected to some degree in another.” John observes, however, that “employees and organized labor have been on the losing end of the corporate governance and broader political economic changes of recent decades, which were coincident with and constitutive of the emergent variants of finance capitalism” since the 1980s. In this light, he argues, “it’s awfully hard to make a convincing case that employees’ interests have not been compromised.”
The force of John’s point is considerable, and well-taken. As I indicate in my methodology chapter, I build on approaches common to the political economy, social welfare, and risk management literatures in making the broad assumption that “stable democratic rule” requires, in each of the countries investigated, that “popular demands for social protection are guaranteed some form of institutionalised access to the policy-making process.” (Here I quote Australian political scientist Francis Castles’ fascinating book, Australian Public Policy and Economic Vulnerability: A Comparative and Historical Perspective (1988).) This broad assumption clearly leaves plenty of room, however, for an absolute fall (or, in theory, an absolute rise) in organized labor’s capacity to bring employee interests to bear on the formulation of policy in any domain, as John suggests.
I certainly don’t deny this possibility, and broadly agree with John’s characterization of the trajectory over the last several decades. But I don’t think that this observation is inherently in tension with my core claims. As discussed in a prior post, the predominant US responses to takeovers in the 1980s and the crisis aftermath in the 2000s are (at a mid-level of abstraction) quite similar. And the latter episode, in particular, illustrates the peculiar rhetorical and political force of the “middle class” concept as a means of merging, and mutually drawing upon, the financial and social welfare-oriented interests and concerns of working families in a period of substantial social and economic instability. Notwithstanding the losses endured by employees and organized labor over recent decades, social welfare concerns of the sort that I’ve emphasized demonstrably impacted post-crisis reform efforts in the US – even if corporate governance reforms took a pro-shareholder form due to the prevailing (and mistaken) conceptualization of the corporate governance problem to be solved.
Posted by Christopher Bruner on May 14, 2014 at 03:02 PM | Permalink
Since I have just written an article on fiduciary duty in benefit corporations, which grew out of serving on the committee that drafted Minnesota's new statute, my attention was drawn to the comments from Christopher and Joan on that new form. I feel a need to respond to Christopher's normative criticism, which I think is fairly widely shared. I agree that in fact ordinary corporations already have the freedom to pursue stakeholder interests, at least in states with constituency statutes (in Delaware, I do think the form provides some more room to pursue other interests, though the effect isn't huge). So, if benefit corporations are pushed as a way to give more freedom to pursue shareholder interests, I agree it could have a negative effect on how non-benefit corporations are perceived. And I have heard some proponents endorse benefit corporations for that reason, so that public perception could indeed take hold.
But the real justification for benefit corporations is not that they allow their managers to pursue stakeholder interests, but that they require it. They thus provide a way to commit to pursuing a broader sense of public good. That is certainly not true in other for-profit corporations. It is unclear how well fiduciary duties in benefit corporations will achieve that commitment--that's the topic of my paper--but at least that is what they try to do. So that does represent a real change, if it takes hold at all. Note that this relates directly to the discussion in your book of the Blair/Stout team production theory. One of your critiques of the descriptive accuracy of that theory is it "requires a stakeholder mandate, not mere discretion." (p. 58) Well, here's a legal form that provides that stakeholder mandate.
Posted by: Brett McDonnnell | May 15, 2014 2:26:57 PM
So glad you are writing on this, Brett. I know that Lyman Johnson, Mark Loewenstein, and others have begun to weigh in on these issues. I also agree that the traditional corporate form allows for the pursuit of other stakeholder interests.
Having said that, my view differs from yours, Brett, in that I see the two big, interconnected issues as (1) the ability to define corporate purpose to incorporate other stakeholders and (2) the ability to apply fiduciary duties of directors and officers in that more-well-defined corporate-purpose context. That's another way to achieve a stakeholder mandate. One does not need benefit corporations or other social enterprise forms to create the mandate.
The signalling of a broader stakeholder mandate to relevant markets is much more clear, however, in the benefit corporation form. There is emerging scholarship to that effect, but I cannot now put my finger on it. I will try to find the paper I am thinking of.
Posted by: Joan Heminway | May 15, 2014 6:17:31 PM
Those are good points. I agree that signaling is critical, although the long-run value of signaling does ultimately depend upon how well a particular form or strategy actually works at committing a company to pursuing stakeholder interests. I also agree that an ordinary for-profit can define a stakeholder interest, most obviously by putting a provision in its charter (I haven't actually seen any case law on that, but I suspect that even Delaware courts value contractual freedom enough that they would honor such a provision). But I'm not sure I'm with you on the fiduciary duty point. In a corporation with a stakeholder provision in its certificate, is it at all likely that the Delaware courts would ever actually find a duty violation for ignoring that provision? I'm quite skeptical. Of course, there's a real problem whether courts will do that for benefit corporations either. Many seem skeptical, as am I--it's the issue I grapple with in my paper. But at least if we reach a critical mass of benefit corporations, we may start seeing some case law develop which gives some guidance on duty in a company devoted to stakeholders. Such case law is an externality that would be much harder for individual corporations to establish by simply adopting charter provisions within the standard for-profit corporate law setting.
Posted by: Brett McDonnnell | May 16, 2014 3:47:51 AM
Thanks for this further comment, Brett. We can duke it out on the fiduciary duty question some time. I admittedly have gone back and forth on it myself. So, skepticism is warranted.
If you put my fiduciary duty issue together with a comment I made in response to an earlier post in this book club series--the point that I believe the fiduciary duties under Delaware law are owed to the corporation, for the primary benefit of the stockholders (except perhaps in the takeover area, where they may be owed to the corporation and the shareholders), then I think you can see why I think it might work. The corporation is defined by its charter as filed with/accepted by the state. The corporate purpose therefore defines what the corporation is. If the charter narrows the purpose, I would think a court looking at the board's duties to that entity would have to take the narrowed purpose into account. It's part of the bargain, as a shareholder, of buying into a corporation that the shareholder gets the benefits and detriments of the terms and provisions in the charter.
I also should note that, while I must look to Delaware for much of what I do, I always try to incorporate the law of other jurisdictions as well when dealing with larger policy-oriented issues. Other states may exercise their law-making authority differently in these spaces, as Chris notes in his book (and as many of us, probably you included, acknowledge in our scholarship). Tennessee sometimes does some bizarre things, and Massachusetts (my former home state) did, too, in response to assuredly strong state policies. But even with that, the matter is not free from doubt, for sure. And, again, I appreciate your thoughts, as always.
Posted by: Joan Heminway | May 16, 2014 4:51:40 PM