Corporate Hierarchy and Racial Justice
26 Pages Posted: 7 Nov 2005
Although traditional corporate governance theory viewed corporate directors and executives as agents accountable to shareholders, commentators today tend to agree, as a descriptive matter, that those "agents" enjoy wide discretion to govern the corporation free from shareholder input. There is normative disagreement, however, over whether the law should increase shareholder participation in corporate decisionmaking. This was illustrated recently by the debate over the SEC's failed proposal to expand shareholders' power to nominate director candidates.
The normative debate is typically framed in terms of shareholder value. This essay, prepared for a symposium on race, gender, and corporate law, applies a different normative standard: whether increased shareholder power would make corporations more responsive to issues of racial justice and social responsibility generally. I suspect it would not.
Increasing shareholder power will strengthen the voice of justice-minded shareholder activists, but it will also empower those shareholders who are concerned primarily with profits. This is even more likely to be true in the context of shareholder voting for two reasons. First, social justice concerns, particularly those involving racial minorities, typically do not enjoy majority support in the political arena. Second, most shareholders are rationally apathetic toward corporate elections. Third, shareholders, as dispersed and anonymous participants in governance, are not held accountable for corporate policy. Thus shareholders will be strongly tempted to vote in their narrow self-interest.
Directors and executives currently enjoy the discretion to consider social justice in making corporate policy. That power imposes moral obligations and makes the public view them as accountable for social effects of corporate actions. Increased shareholder power, however, may generate explicit, legally enforceable shareholder demands for higher profits rather than social justice. That would remove directors' discretion and trump their moral obligations. The point here is not that the existing, management-centered corporate governance system is an ideal method of making corporations responsive to racial justice issues. Indeed, dependence on management discretion is probably the worst possible method - except for all the others.
Keywords: corporate governance, race, shareholder, voting, corporate social responsibility, directors
JEL Classification: D21, D63, D79, K22, L20
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