The corporate form has been compared and contrasted favorably and unfavorably with government. The literature is broad and deep. Having said that, there is, perhaps, no one who writes more passionately on this topic than Daniel Greenwood. Set forth below are two examples of text from his work that illustrate my point.
We live in a democratic age, in which the sole legitimate source of political power is the consent of the governed. Yet our business corporations defy every norm of democracy.
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. Board members owe a fiduciary duty to the corporation, according to most of the statutes, and to the shareholders, according to the popular shareholder primacy narratives, but they owe no consideration at all to employees.
Daniel J.H. Greenwood, Essay: Telling Stories of Shareholder Supremacy, 2009 Mich. St. L. Rev. 1049, 1060 (2009).
The corporation as a state-within-the-state . . . cannot be justified under any democratic theory, because this state-like entity defies all democratic norms internally. No corporation operates by the principle of one person, one vote. All economically significant corporations disenfranchise a substantial portion of the affected populace, while even shareholders vote according to the number of shares they hold. Moreover, standard corporate law sharply limits the control that even the “voters” have over “their” entity. The law bars them, 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. Moreover, it even bars them from electing directors pledged to particular interests: directors, unlike ordinary politicians, are bound by law to pursue the interests of all (and only) shares, and courts will enforce this duty-subject to the often significant limitations of the business judgment rule-at the behest of any shareholder, regardless of election results. Theorists, therefore, usually resort to market-based explanations of why the corporation is unable to exert any power over its shareholders, employees and other participants.
Daniel J.H. Greenwood, Markets and Democracy: The Illegitimacy of Corporate Law, 74 UMKC L. Rev. 41, 54–55 (2005) (footnotes omitted). Whether you agree with Daniel or not on the substance, his views are transparent and his belief and energy are palpable.
With politics in the news every day and corporations on my mind, I have been pondering certain elements of democracy as they play themselves out in corporate governance. In particular, of late, I have focused in on accountability as a core democratic norm.
Recent research led me to this quote, which really made me stop and think:
Focusing on accountability provides the basis for a functional vision of democracy that both attends to questions of social and material equality and structural change and can be applied in a variety of contexts. A vision of democracy as accountability is more robust than a purely procedural definition because it attends to important substantive goals. At the same time, however, it avoids the necessity of a priori agreement on the substantive ends to be achieved by leaving those decisions in the hands of those who are in the best position to make them.
Molly Beutz, Functional Democracy: Responding to Failures of Accountability, 44 Harv. Int’l L.J. 387, 405 (2003) (footnote omitted). This article includes many other interesting, related observations about democracy as accountability. It does not connect directly with corporate governance, but the author does note (as quoted above) that “[f]ocusing on accountability provides the basis for a functional vision of democracy that . . . can be applied in a variety of contexts.” Id.
Concerns about accountability when decision-making authority for a collective rests in the hands of a person or small group are raised in governance–political and corporate governance. Questions about the infiltration of autocratic, oligarchic, authoritarian, and other similar norms exists in both states and corporations. Internal and external rules of governance provide accountability mechanisms to constrain that decision-making discretion. 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. Professor Beutz ends her article on democracy with the following overall observations, among others:
. . . The purpose of democracy is to ensure that those who are affected by decisions possess the power to sanction or reward decision-makers and to provide a framework for resolving disputes over resources and power.
Understanding democracy as accountability provides a framework for responses to failures of democracy that are appropriate to the given cultural and historical context and responsive to the needs of citizens. This conception of democracy directs a responding actor to strengthen domestic mechanisms, promote institutional arrangements that vest citizens with effective sanctioning power, and work toward consolidation of accountability norms. . . . Finally, this principle has at its foundation the rule of law and transparency, which are essential to the proper functioning of democracy. . . . .
Id. at 431. It strikes me that a lot of these same comments about democracy could be made about corporate governance. Of course, Steve Bainbridge raised important points in this regard when he wrote:
A complete theory of the firm . . . requires one to balance the virtues of discretion against the need to require that discretion be used responsibly. Neither discretion nor accountability can be ignored, because both promote values essential to the survival of business organizations. Unfortunately, however, they also are antithetical–at some point, one cannot have more of one without also having less of the other. This is so because the power to hold to account is ultimately the power to decide.
Stephen M. Bainbridge, Director v. Shareholder Primacy in the Convergence Debate, 16 Transnat’l Law. 45, 60 (2002). So, maybe in corporate governance we are talking about responsible discretion subject to restrained accountability . . . ? As always, your thoughts are welcomed.
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