Sunday, February 19, 2006

Taming the Corporate Beast

I went to ’s book signing tonight at Cody’s. I was easily won over to the argument of The Left Hand of God, and I was captivated by the dynamic rabbi. He’s an extraordinarily articulate and spiritually challenging speaker, though I won’t try to summarize his whole political agenda here. One proposal, however, caught my attention and I asked about it later in the Q and A. He wants to transform the big , which now is governed by a board of directors whose members are legally obligated to place the of the in the highest priority. They are not legally allowed to vote in favor of resolutions that would, say, institute environmental protection or workers’ rights if those innovations can be shown to have a negative impact on the “bottom line.”

Lerner wants to change that. His proposal is to issue charters to companies for no more than five years. At that time, every corporation with an annual revenue of $50 million or more would have to come before a of ordinary citizens who would review its performance and decide whether it is in the public interest to extend the charter another five years. If they decide otherwise, some other group would be given a chance to take over the management of the corporation.

That’s an even more radical proposal than I have been suggesting myself, and mine has always been viewed as nearly crazy. So in the question period I outlined my own alternative: (a) complete of all holdings and plans by the company, so that their doings can be tracked by anyone wishing to do so, and (b) all large corporations – say of about the size that Lerner had established as his own cutting point – should be required to appoint directors representing a variety of constituencies besides the shareholders: environmentalists, consumers, employees, and human rights NGOs, at a minimum.

Lerner responded with two arguments. First, he believes that the representatives of these other interests will become absorbed into the culture of the existing boards, so that they would shortly become compromised, adopting the “profit-seeking” motive that they see in all the meetings. Oddly, he referred to as an instance of this process. It seems that Lerner had been active in the Free Speech Movement, which Searle initially supported. He was then appointed to some official position to represent the students’ point of view. Three years later he wrote a book about how to contain and manage student movements. Maybe it did happen; I don’t recall, though I certainly do recall Searle vividly in the classroom. Anyhow, that could not happen if the representatives of these interest groups were actually elected democratically and held accountable to their constituencies for their votes. I think that is the kind of structure that has proposed. Its advantage is that it allows for reformist movements to become democratic and powerful. However, there was no opportunity to pursue the question at length in a conversation with Lerner. His second argument was that the corporate executives will fight every single liberalizing measure fiercely, and one might therefore go for something truly radical, such as his “jury-judged” model of charter certification.

But I am still convinced that my way is better, and I’m even more convinced after having read a Stratfor Intelligence report by that came yesterday. I had assumed that the reforms could only happen as a result of legislation, requiring the boards to appoint members with diverse social concerns. Not so. It is already happening, and apparently on a remarkable scale. Mongoven calls it a “perfect storm” brewing on the corporate horizon, challenging CEOs and senior managers. He predicts that the usual relationship between shareholders and corporations may change fundamentally in the next few years.

One of the factors behind this is the increasing demand for election of the directors by a majority vote of shareholders. At present, the votes of shareholders in elections of board members are considered only advisory’ they can be ignored. Of course, this means that the managers and directors are not properly accountable. Large that control substantial funds as shareholders are leading the demands for change. Not surprisingly, the executives generally try to block such innovations, arguing that it will “politicize” the election of board members.

But from the other side there is another movement led by shareholder activists whose agendas cover such issues as climate change, executive compensation, and diversity among board members. These activist reformers lately have been introducing resolutions that win more than 10 percent of votes. One weapon that these social critics are beginning to use effectively is a SEC ruling of 2003 that requires mutual and pension funds to publish their . Since other companies and often hold those proxies, it is now possible to identify particularly powerful interests and lobby them. Often such shareholders proposed are introduced by religious groups or NGOs such as Friends of the Earth. They must be phrased in such a way as to question the financial implications of, for example, not following the Universal Declaration of Human Rights, but this is mere rhetoric; everyone understands that financial improvements are not the real purpose of the resolution.

Mongoven shows that as the number of votes for social reforms increase, there is also a strong impetus to compromise with the groups behind the resolutions. And the votes are increasing; especially as pension funds have become politically active. The California Public Employees Retirement System is the single largest stockholder in the United States. If you add in the support of churches and state and city government, socially responsible investors can get up to 20 percent of the total shareholder vote – definitely enough to win concessions.

I am greatly encouraged by these changes. We’re going to get some radical improvements in the corporate world faster than Michael Lerner could possibly imagine – and without even enacting legislation to force it to happen. It’s will happen through the moral of ordinary citizens. Hooray for them.


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