A model of corporate governance that brings in employees and other stakeholders alongside shareholders could ensure corporations make decisions based on more than stock prices.
At this point, saying that inequality in the United States is a problem is almost cliché. There is plenty of data illustrating the extent of inequality. Proposed solutions range from education reform and minimum wage increases to tax and spending reform and public employment programs. Yet there is one area that has been largely neglected in policy discussions around inequality: corporate governance.
Corporate governance may at first seem like a marginal (and boring) issue, but it is in fact the opposite. Our corporate governance laws create the power structures of some of the most formidable economic forces on the planet. These laws are key to how economic and political power is distributed across society, and as such we should pay much more attention to them.
Currently, the U.S. has a shareholder corporate governance model. There are two major implications of such a model: practically, the shareholders are the ones who “own” the company and elect the board. Philosophically, the purpose of the corporation is to maximize value for shareholders. There are problems with this model. Because the corporation represents shareholders, there are incentives in place to externalize costs onto other groups. For example, in an effort to increase stock prices, corporations may dump waste into rivers, lay off workers, or engage in illegal accounting schemes.
However, there is an alternate model that could change how corporations function and what their purpose is: the stakeholder corporate governance model. In the stakeholder model, stakeholders are the “owners” of the corporation and elect the board of directors. The corporation’s purpose becomes maximizing value for stakeholders. Who exactly are these stakeholders? There are many, and definitions vary. But for our purposes, let’s focus on one particular stakeholder: employees.
In a stakeholder corporate governance model, employees would elect board members along with the shareholders, so the employees’ interests would be represented in business decisions. Employees would have much more bargaining power over their own wages and management’s wages, in a way that echoes unionized workplaces. However, this system would not be based on the antagonistic arrangement between unions and management, but rather on a cooperative, insider relationship between employees and shareholders. With symmetrical information between employees and shareholders, decisions could be made without misunderstandings and outrage.
When companies are doing well, employee representation in decision-making processes would ensure employees also benefit from the company’s success through increased wages. In companies that aren’t doing so well, employee representation can ensure cost-cutting measures don’t disproportionately affect employees while executives continue to get bonuses. Additionally, if a corporation is doing poorly and needs to lay off workers, there will be fewer tensions if workers understand they are properly represented in decision-making processes. For a real-life example of a successfully implemented stakeholder model, check out Germany. There’s also evidence that corporations that follow the stakeholder model outperform ones that follow the shareholder model.
This is just the tip of the iceberg for what stakeholder governance could achieve. There could be even greater impact if other stakeholders, such as communities and customers, could be represented. With this expanded definition, the interests of these various stakeholders would be strongly represented in the corporate decision-making process. Thus, corporations would not impose potentially damaging costs (such as dumping waste into rivers or producing poor quality goods) on to communities and customers. External costs would be effectively “internalized” into corporate decision-making. Under the stakeholder model, maybe, just maybe, corporations could save the world.
Azi Hussain is the Roosevelt Institute | Campus Network Senior Fellow for Economic Development. He is a junior in the School of Foreign Service at Georgetown University majoring in International Political Economy.
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