Tuesday, August 1, 2017

More on Corporations, Accountability, and the Proper Locus of Power

My colleague, Joan Heminway, yesterday posted Democratic Norms and the Corporation: The Core Notion of Accountability. She raises some interesting points (as usual), and she argues: "In my view, more work can be done in corporate legal scholarship to push on the importance of accountability as a corporate norm and explore further analogies between political accountability and corporate accountability."

I have not done a lot of reading in this area, but I am inclined to agree that it seems like an area that warrants more discussion and research.  The post opens with some thought-provoking writing by Daniel Greenwood, including this:  

Most fundamentally, corporate law and our major business corporations treat the people most analogous to the governed, those most concerned with corporate decisions, as mere helots. Employees in the American corporate law system have no political rights at all—not only no vote, but not even virtual representation in the boardroom legislature.
Joan correctly observes, "Whether you agree with Daniel or not on the substance, his views are transparent and his belief and energy are palpable." Although I admit I have not spent a lot of time with his writing, but my initial take is that I do not agree with his premise. That is, employees do have political rights, and they have them where they belong: in local, state, and federal elections.  Employees, in most instances, do not have political rights within their employment at all.  Whether you work for the government, a nonprofit, or a small sole proprietorship, you don't generally have political rights as to your employment.  You may have some say in an employee-owned entity, and you may have some votes via union membership, but even there, those votes aren't really as to your employment specifically. 
 
The idea of seeking democratic norms via the corporate entity itself strikes me as flawed.  If people don't like how corporations (or other entities) operate, then it would seem to me the political process can solve that via appropriate legislation or regulation. That is, make laws that allow entities to do more social good if they are so inclined. Or even require entities to do so, if that's the will of the people (this is not a recommendation, merely an observation).  Scholars like Greenwood and others continue to make assertions that entities cannot make socially responsible choices. He states, " The law bars [corporations], in the absence of unanimous consent, from making fundamental value choices, for example, from balancing the pursuit of profit against other potential corporate goals, such as quality products, interests of non-shareholder participants or even the actual financial interests of the real human beings who own the shares."  And judges and scholars, like Chancellor Chandler and Chief Justice Strine, have reinforced this view, which, I maintain, is wrong (or should be).  
 
Professor Bainbridge has explained, "The fact that corporate law does not intend to promote corporate social responsibility, but rather merely allows it to exist behind the shield of the business judgment rule becomes significant in -- and is confirmed by -- cases where the business judgment rule does not apply." Todd Henderson similarly argued, and I agree, 
Those on the right, like Milton Friedman, argue that the shareholder-wealth-maximization requirement prohibits firms from acting in ways that benefit, say, local communities or the environment, at the expense of the bottom line. Those on the left, like Franken, argue that the duty to shareholders makes corporations untrustworthy and dangerous. They are both wrong.
I don't disagree with Joan (or with Greenwood, for that matter), that accountability matters, but I do think we should frame accountability properly, and put accountability where it belongs.  That is political accountability and corporate accountability are different. As I see it, corporations are not directly accountable to citizens (employees or not) in this sense (they are in contract and tort, of course). Corporations are accountable to their shareholders, and to some degree to legislators and regulators who can modify the rules based on how corporations act.  Politicians, on the other hand, are accountable to the citizens.  If citizens are not happy with how entities behave, they can take that to their politicians, who can then choose to act (or not) on their behalf.  
 
I think entities should consider the needs of employees, and I believe entities would be well served to listen to their employees. I happen to think that is good business. But I think the idea that employees have a right to a formal voice at the highest levels within the entity is flawed, until such time as the business itself or legislators or regulators decide to make that the rule. (I do not, to be clear, think that would be a good rule for legislators or regulators to make for private entities.) The proper balance of laws and regulations is a separate question from this discussion, though. Here, the key is that accountability -- or, as Prof. Bainbridge says, "the power to decide" -- remains in the right place.  I am inclined to think the power structure is correct right now, and whether that power is being used correctly is an entirely different, and separate, issue.  

http://lawprofessors.typepad.com/business_law/2017/08/more-on-corporations-accountability-and-the-proper-locus-of-power.html

Business Associations, Corporations, CSR, Delaware, Joan Heminway, Joshua P. Fershee, Legislation, Management, Research/Scholarhip, Shareholders, Social Enterprise | Permalink

Comments

Thanks for the acknowledgement and for these thoughts, Josh.

You conclude: "I am inclined to think the power structure is correct right now, and whether that power is being used correctly is an entirely different, and separate, issue." Right. I also am inclined to continue to rely on the traditional internal corporate constituents--directors, officers, and shareholders--to make decisions for the firm. This does not mean that others do not have a roles. And, as you acknowledge, it also does not mean that we have properly calibrated the balance between that discretion and accountability . . . . Let's keep the conversation going.

Posted by: joanheminway | Aug 1, 2017 2:06:29 PM

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