Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy - A Reply to Professor Rock
Business Lawyer, Vol. 76 (forthcoming Spring 2021).
Harvard Law School Program on Corporate Governance Working Paper No. 2020-10
71 Pages Posted: 16 Dec 2020 Last revised: 5 Jan 2021
Date Written: December 15, 2020
In his excellent article, For Whom is the Corporation Managed in 2020?: The Debate Over Corporate Purpose, Professor Edward Rock articulates his understanding of the debate over corporate purpose. This reply supports Professor Rock’s depiction of the current state of corporate law in the United States. It also accepts Professor Rock’s contention that finance and law and economics professors tend to equate the value of corporations to society solely with the value of their equity. But, I employ a less academic lens on the current debate about corporate purpose, and am more optimistic about proposals to change our corporate governance system so that it better supports a fair and sustainable economy.
By contrast to Professor Rock, I do not trace the debate to recent statements by business elites belatedly recognizing that our corporate governance system has failed to work for the many and contributed to growing inequality. Rather, I source the debate to the work of advocates and scholars who have long been trying to restore fairness to our economy by updating an outdated mid-twentieth century corporate governance system to address evolving market and political developments, like concentrated institutional investor power and a corresponding decline in the leverage of workers. These developments have created a profoundly different twenty-first century economy that has outgrown our current corporation governance model’s ability to promote our nation’s best interests. For forty years, a strain of economic thinking, typically embraced by those who believe that society is best served when corporations focus solely on shareholder profit, has increased the power of economic elites and gone to war against the regulatory state and the protections put in place by the New Deal and Great Society to protect workers, consumers, and the environment. Because corporate power has been employed to decrease the ability of the political process to protect corporate stakeholders, the power and purpose dynamics within corporate governance itself must be updated to align with the outcomes we desire for society.
Taking a more positive view than Professor Rock, I argue that the most promising corporate governance reform proposals do not involve a revolution, but a restoration. They build on traditional corporate law techniques, and restore the balance among stakeholders that characterized governance in the period when the U.S. economy worked best. Requiring all large companies and institutional investors to act in a socially responsible way that respects all stakeholders would bring our system into greater harmony with other high-functioning market economies like Germany and those in Scandinavia that compete effectively in the global market while producing wide spread prosperity. The real danger now for the U.S. is inaction and failing to recognize that our current model of corporate law does not function fairly and is tearing away our social fabric.
The article by Edward Rock to which this article responds is available on SSRN at: http://ssrn.com/abstract=3589951
Keywords: labor, gainsharing, sustainability, corporate governance, corporate governance reform, inequality, institutional investors, corporations, long-term investment, reform, corporate social responsibility, stakeholder capitalism, stakeholder governance, fair economy, sustainable economy, corporate law, t
JEL Classification: G10, G30, G38, H10, H20, J38, J88, K20, K22, K34
Suggested Citation: Suggested Citation