A Brief Comment on Greenfield’s Stakeholder Strategy
Earlier this month, Kent Greenfield published an essay entitled, “The Stakeholder Strategy: Changing corporations, not the Constitution, is the key to a fairer post-Citizens United world.” In the essay, Greenfield “urges progressives to cease their efforts to amend the constitution to weaken corporate ‘personhood.’” Instead, he advocates two corporate governance changes:
First, the law of corporate governance should expand the fiduciary duties of management to include an obligation to consider the interests of all stakeholders in the firm…. [S]econd … alter the actual structure of company boards to allow for the nomination and election of board members who embody or can credibly speak for the interests of stakeholders.
Greenfield notes that these two changes would most likely require an additional third change—the [further] federalization of at least some meaningful portion of state corporate law:
In order to make these changes meaningful, they would have to be accomplished in a way that minimizes Delaware’s dominance. Otherwise, companies could avoid these changes by fleeing—on paper—to Dover or Wilmington. The most obvious answer to this problem is an assertion of a national corporate-law standard. If the federal government required, for example, companies of a certain size be chartered as national corporations, it would be simple to add the robust fiduciary duties and the requirement that boards include employee representatives. A national corporate-law standard would be a straightforward application of Congress’s Commerce Clause power even in this era of its parsimonious application.
Greenfield’s essay has much more to offer than these main points, and I highly recommend you go read the whole thing. However, I did want to note one particular reaction I had in reading his proposals.
To begin with, the general notion of encouraging corporate boards to consider stakeholders is not new. In fact, the most recent edition of Klein, Ramseyer, and Bainbridge's Business Associations casebook notes that:
A Pennsylvania provision, enacted in 1990, provides, as part of its rules on duties of directors, that directors ‘‘may, in considering the best interests of the corporation,’’ consider the effects of their actions on ‘‘any or all groups affected by such actions, including shareholders, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located.’’ Penn.Consol. Statutes, Title 15, § 102(d).
However, while I believe at least one state had a mandatory stakeholder statute at one time, the permissive nature of the typical stakeholder statute obviously distinguishes Greenfield’s proposal. Furthermore, granting stakeholders a right of action to enforce the obligation helps negate a typical criticism of more traditional stakeholder statutes, which is that they primarily serve as a further defense for directors against shareholder suit but impose no offsetting accountability.
Having said all that, what currently intrigues me is thinking about the role of disclosure in all of this. I believe requiring boards to disclose the substance of their deliberations as to each covered stakeholder could produce an independent benefit. For example, if every relevant proxy statement included a section entitled “Impact on Employees and Local Communities,” the ensuing debate would likely be enriched and, as Greenfield notes in discussing the board-composition proposal: “Another benefit of requiring corporations to take into account the interests of a broader range of stakeholders in corporate decision-making is that the quality of the decisions themselves will improve.” Even more provocatively, imagine if this type of disclosure requirement was imposed on political speech decisions. Corporations could be required to explain how their political spending improves the welfare of each covered stakeholder. Wouldn’t you like to be a fly on the wall while the advisors tried to craft that disclosure?
Obviously, there will be times (perhaps many) when the the interests of stakeholders conflict, and this is a common criticism of stakeholer statutes that remains relevant to Greenfield's proposal. However, one possible solution to this problem is to direct boards to resolve all such conflicts in favor of the long-term sustainability of the enterprise. (Relatedly, David Westbrook just sent around an email to the bizlaw listserv noting an upcoming conference on Rethinking Financial Markets that focuses in part on "Custodial Regulation," which advances the notion that "the practice of financial regulation should shift focus from fostering the formation and allocation of capital to maintaining the stability of the institutions, now all perforce monetary institutions, on which contemporary social life depends.”)
PS--Bainbridge also posted a response to Greenfield's piece here.