Who Decides? Rethinking the Corporate Franchise from a Stakeholder Perspective

There’s an old political aphorism that if you’re young and conservative, you have no heart, and you’re old and liberal, you have no head. Idealism, in other words, crumbles over time into realism.  Youth imagines humanity’s potential and ideals, while older folks have seen people acting at their worst.

For at least a century, corporate governance has wrestled between the theories of shareholder primacy and stakeholderism. Shareholder wealth maximization presents a mendacious view of human nature focused on self-interest and greed, but it theoretically channels these traits to power the engines of commerce and maximize societal efficiency. Stakeholderism, on the other hand, endeavors to meet the needs of all, envisioning corporate board members as Platonic guardians or mediating hierarchs who can wisely balance competing interests and sidestep crippling internal conflict. With its narrow focus on individual self-interest, shareholder primacy has no heart—it seeks to make shareholders as rich as possible, with hopefully positive secondary effects. Stakeholderism has no head—it fuzzily bestows its corporate leaders with heroic attributes and hopes everything will work out.

In A Democratic Participation Model for Corporate Governance, we introduce a bit more realpolitik to stakeholderism. Instead of hoping for the best or acceding to the worst, we argue that corporate law should change the structure of corporate governance to better balance power between participants.  Taking stakeholders seriously means giving them voting rights. The longstanding puzzle remains, however: how?  The shareholder franchise appears easy to administer and weigh, with each share assigned voting power at the moment of its creation. In comparison, what stakeholders should get the right to vote, and how much voting power should they have relative to each other?

Our article develops a model for determining whether particular groups of stakeholders should receive voting rights. This model, based on the idea of democratic participation, looks at three factors in determining whether a particular set of stakeholders should have the right to vote: (1) the strength and scope of their interests in the corporation, (2) the accuracy of markers for those interests, and (3) the manageability of those markers. This approach follows the ways in which state democracies have used these indicia in determining who gets to vote for representatives in a particular jurisdiction.  The model also takes into account the minimization of transaction costs, as it contrasts the relative strength of the utility interests of a particular group with the difficulty of calibrating and effectuating their interests through a voting process.

How would the model work in practice?  The article takes each set of stakeholders and assesses their claim for voting rights along the three metrics.  Although we encourage others to pursue these assessments on their own, we arrive at some preliminary conclusions:

• Shareholders have strong financial interests in the corporation, and it is relatively easy to assess those interests along a specific metric. However, we note that shareholders do have divergent financial investments in the firm, based on when they bought in and how long they’ve invested, and there can be underappreciated manageability issues, particularly in the era of flash trading and complicated derivative instruments.
• Employees have a direct and important set of interests in the company; their interests can be accurately assessed; and their voting rights can be administered relatively easily.  Employee interests could be measured along different metrics: each employee could have the same set of voting rights, or they could receive different sets of shares based on position, tenure, and/or choice.
• Regardless of their employment status, platform workers share similar interests with workers, and their voting rights could be readily managed through the platform itself.
• Customers vary considerably as to their interests: some have only a one-time interaction with the business entity, while others have ongoing and enduring relationships that can rival shareholding in economic importance.  Technological developments make it much easier for businesses to have ongoing communications with their consumers, making voting rights more manageable than in the past.
• Social media users meet the metrics for voting rights under the model: they have ongoing and personally significant relationships with the platform; their interests could be set equally to one another or adjusted based on time spent on the platform; and it would be easy to find users and facilitate their voting.  By participating in governance, users could have a meaningful voice in addressing the big structural questions confronting these platforms, such as content management and privacy protections.
• Creditors and suppliers have more limited interests in firm governance, as they have specific axes of interaction and can protect their interests through contract with more precision.  However, in many instances, creditors or suppliers will be sufficiently enmeshed with the ongoing business to warrant some participation in governance, including designated board seats.
• The community and the environmental world certainly pull at our hearts as deserving of representation in corporate governance.  But their interests are more diffuse, the accuracy of those interests thereby more difficult to ascertain, and the manageability more complicated and uncertain.  Although we understand the benefits in having a community or environmental representative on the board, our model does not support that allocation as a general matter.

Democratic governance is an established system for organizations to resolve questions of purpose and put that purpose into action. If we are to take stakeholderism seriously as an alternative to shareholder primacy, these new systems of governance must include stakeholders. The democratic participation model offers a system for evaluating claims from various groups for governance participation.  We look forward to hearing feedback on our proposed model from Forum readers as well as thoughts about alternative approaches.