Democratizing the Corporation

Keywords: Milton Friedman; Duff Conacher; Democracy Watch; shareholder activism; corporate social responsibility; democratizing corporations.

It was, unsurprisingly, Milton Friedman who declared most baldly that business has no social responsibilities, for “only people can have responsibilities.” The stockholders, customers, or employees of a corporation can spend their own money on a particular social cause if they wish to do so, but its executive must not spend their money in a different way than they would have chosen. If he does this, “he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds should be spent, on the other.” Decisions about taxation should not be made by a corporate manager, but by government.

But Friedman was writing in 1970, and matters have changed since then. It seems no longer self-evident today that the unique proper objective of commercial corporations is to amass profits for their shareholders. Whether or not the people have come to believe more deeply in democracy, they do seem to recognize now the environmental and social consequences of corporate decisions. Socialists are no longer the only ones who want to hold these organizations more responsible for their actions and accountable to the public. One obvious change is the increased number of people who are committed to “ethical investment” — mostly in mutual funds that avoid the stocks of irresponsible firms.

Also, Bart Mongoven, writing for Strategic Forecasting, reports that the 2006 mainstream corporate meeting season had begun, and that shareholder activism has increased dramatically since 2001. ("Shareholder Activism: A View From the Plateau," Stratfor, June 1, 2006.) Such activists are requiring fund managers to justify the votes that they cast with their proxies. Moreover, far more votes in annual meetings nowadays are favoring shareholder proposals and opposing management’s position.

“During the past five years, the number of shareholder resolutions that have received more than 20 percent support has increased dramatically. Further, the number receiving relatively high levels of support (5 to 15 percent) increased even more.”

As a result, the executives are increasingly often negotiating agreements with activists in private before these meetings, with the result that resolutions are dropped without ever coming to the floor. Rival companies have to follow suit or “be branded as laggards by activists.”

Mongoven attributes these changes largely to the increasing participation of large pension funds in shareholder activist campaigns. These pension fund policies are usually made by politicians who say they are promoting the interests of the public over the corporation. Mongoven predicts that the next battleground by activists will be their effort to politicize mainstream mutual funds.

Still, these changes are far from revolutionary challenges to capitalism. In fact, although I have more faith than most of my friends that the free market is generally a beneficial economic system, I would like to see deeper changes making corporations significantly more democratic. I would favor legislation requiring the board of directors of every sizeable corporation to include members chosen from lists of candidates named by the following four constituencies: their consumers and customers; their employees; environmental organizations; and civil society groups concerned with health and community well-being. The remainder of the board would, as now, represent shareholders, but their decisions and plans should be transparent, so that the various constituencies can hold their representatives accountable.

Once such reforms are introduced, I will not object to the profit-making orientation of corporations. Capitalism has served the world well — at least when compared to all other modern economic systems that are on offer. All around the world, it raises standards of living and life expectancy for humankind. It just needs an infusion of democracy.

I am not the only person who thinks along these lines, but most of the others seek more modest reforms than the ones I’ve suggested here. For example, Duff Conacher’s Canadian organization, Democracy Watch, published a paper in 1994 called “Corporate Citizenship and Social Responsibility.” It noted that

“the overall impact of corporate negligence on Canadians and Canadian communities far outweighs the impact of individual negligence…. Occupational deaths are the third leading cause of death in Canada… Unsafe and usually illegal working conditions … cause more deaths in a month than all the mass murderers combined do in a decade. … As far as consumer fraud is concerned, the RCMP Commercial Crime Section estimates losses by Canadian victims in 1992 at $574 million. Others have put the figure at $4 billion…”

The paper calls for a world “where individual citizens, in their roles as voters, taxpayers, workers, consumers and shareholders, have the right through democratic community and government decision-making processes to determine and to limit the rights and activities of corporate “citizens” and have the right to hold corporate “citizens” accountable for their activities.”

Democracy Watch proposes setting up a corporate crime registry, giving citizens the right to prosecute corporate crime.

“Government subsidies of environmentally harmful activities of corporations could be ended, and government could pledge to purchase products and services only from socially responsible companies… Corporations could also be removed from the protection of the Charter of Rights and Freedoms, thereby reclaiming it as the Charter of HUMAN Rights and Freedoms. Finally, there are international campaign strategies to create an international social responsibility framework for transnational corporations (TNCs). These include strengthening international codes of conduct for TNCs and the enforcement of these codes, and ensuring that TNCs can’t shift blame or profits from country to country to avoid liability and taxes.”

This document is remarkably far-reaching, offering fully four pages, single-spaced, of specific recommendations for the reform of our corporate economy. Many of these are quite visionary. However, when it comes to democratizing the corporation, Conacher’s (see photo) proposals are more conventional than my own. He would

“Require that directors be assigned to various constituencies such as consumer protection, environmental protection, law compliance and political relations and that committees be set up within the board with special responsibilities to oversee company obligations in these areas and areas such as auditing and nominating of directors.”

That’s a good start — but I would go further. Where Conacher would work with a board of directors comprising only shareholders, assigning each of them a specific domain of social responsibility, I would like to see some real accountability in the system. I think people who represent their specific constituencies and can be held accountable to them should occupy these powerful roles. These delegates will probably never outnumber the directors representing shareholder interests — nor would I want them to — but I’d like for them to have genuine power and represent the social concerns of workers, consumers, and environmentalists.