
A Proposed Alternative to Corporate Governance and Theory of Shareholder Primacy - Dowwie
https://corpgov.law.harvard.edu/2018/09/12/a-proposed-alternative-to-corporate-governance-and-the-theory-of-shareholder-primacy/
======
grellas
Under modern corporate law, shareholders are the owners of the entity and its
assets (operating businesses) and the ultimate governing role falls to a board
of directors whose fiduciary duty is to act for the best interests of the
company and its owners.

A modern B corp permits a board to balance this traditional fiduciary duty to
act for the benefit of the shareholders with other specified goals defined in
its charter and _agreed to_ by those shareholders.

At no point in any of this does any type of governmental authority have any
say whatever concerning how the company should be managed and for whose
benefit (government has a role in a technical sense only in providing a state
charter giving the corporation a legal existence and in non-management aspects
such as having the power to tax the entity and to enforce broadly applicable
criminal and regulatory laws against it, e.g., laws against securities fraud
or illegal securities offerings).

In other words, the whole modern corporate structure assumes that private
actors using a state-chartered mechanism (the corporate entity) can arrange
their affairs freely to optimize the management of the entity to further the
economic interests of the owners of that entity. As to that part, government
has no say whatever.

The Warren proposal would substitute a range of public dictates for the
private choice that characterizes the current system. It would initially apply
to large cap companies but there is no limiting principle preventing the idea
of such public dictates being applied to any manner of corporation or, for
that matter, to any other limited liability entity, whether large or small.
Taken to an extreme, this sort of regime could easily be implemented in a way
that transforms most forms of private enterprise into entities restricted or
burdened by whatever dictates the politically-organized forces who happen to
hold sway at any moment might want to decree.

Of course, none of that might happen. It is certainly possible to adopt the
Warren proposal and keep it limited to a narrow sphere of enterprise (large-
cap companies) where its impact might be limited. But I wouldn't bet on it.
With no restraining principle behind it, the proposal could easily be the
foundation for completely transforming the notion of enterprise in the United
States and I for one don't want to see a day where bureaucrats, lawyers, and
second-guessing judges are gnawing termite-like at the foundations of what
today are vibrant and healthy businesses in the name of other goals having
nothing whatever to do with the economic interests of shareholders.

~~~
TomMckenny
The Warren law would simply reintroduce several systems that were in place by
convention until the '80s.

That earlier period, by the way, was not a living hell of industry killing
regulation but in fact had less consolidation. It also had higher GPD growth,
lower cost of living, and more economic stability, so apparently it won't kill
the economy either.

~~~
roenxi
But did those conventions cause all those things, or did the incentives that
caused the conventions also cause all those things? Because addressing the
conventions is just cargo-cult economics, we want the incentives.

The US system is massively debt based at the moment, private debt (note:
private not public) went from 40% -> 80% GDP from 1970 to today. My naive
perspective is that I would expect higher debt loads to cause:

* Lower GDP growth

* Higher costs of living

* Reduced economic stability

* Consolidation (because large players have more capital so can secure larger loans)

* Low real wage growth (because ability to earn by working is not as attractive because there is an option to 'earn' by borrowing)

The US ended the Brenton Woods system in the early 70s, and the consolidations
really started in in around the early 80s [1]. So we know that there were some
pretty major changes at the roots, of the financial system. It seems very
plausible that some critical incentive changed in the late 70s (roughly lines
up with Paul Volcker becoming Fed chair) and we have been seeing the
ramifications ever since. That happens to coincide with the highest interest
rates set under the current monetary system and the start of the current trend
which is extending into the negatives [2].

[1]
[https://en.wikipedia.org/wiki/List_of_bank_mergers_in_the_Un...](https://en.wikipedia.org/wiki/List_of_bank_mergers_in_the_United_States)

[2] [https://tradingeconomics.com/united-states/interest-
rate](https://tradingeconomics.com/united-states/interest-rate)

~~~
TomMckenny
Oh yes, I would never claim those differences in the board room would be the
_reason_ for non-consolidation etc. That would indeed be cargo-cult. I merely
meant that evidently such boardroom arrangements don't destroy an economy.

Additionally, I would intuit that it improves the employee's condition and
because employees are strongly motivated to keep the company they depend on
strong, their motivations align with investors to that degree while they may
have additional insights. So I'm theorizing their presence will at worst do no
harm.

As you imply, the American rapid rise to economic supremacy and current slow
down is undoubtedly complex. I would add that initially part of it was the
annihilation of productive capacity outside the US after WWII and part of it
was the Keynesian stimulation that WWII forced the US to do during the war.

I just meant to say to the grandparent post that observationally Elizabeth
Warren's proposal was not a threat national commerce.

------
grasshopperpurp
>If the average number of employees in a company in the course of the
preceding three years has been at least 35, the employees in such a company
are entitled to elect a number of employee representatives to the board of
directors (“Company Representation”). The number of employee representatives
shall be equivalent to at least half of the rest of the board of directors,
however no fewer than two (i.e. if a board of directors consists of eight
regular members, the employees have the right to elect four employee
representatives).

Denmark has similar structures in place - for employee representation, anyway.

[http://www.bechbruun.com/en/Services/Setting+Up+in+Denmark/C...](http://www.bechbruun.com/en/Services/Setting+Up+in+Denmark/Company+formation/Governance+structures+in+a+Danish+limited+company)

I've been reading up on Denmark, because they seem to have a very balanced
system, where regulations make sense and corruption is low. The workers are
paid well, and the social safety net is pretty robust. Still learning a lot,
and I'd love to hear from people who know more.

>Denmark’s economy performs notably well in regulatory efficiency. Open-market
policies sustain flexibility, competitiveness, and large trade and investment
flows, and the transparent and efficient regulatory and legal environment
encourages robust entrepreneurial activity. Banking regulations are sensible,
and lending practices are prudent. Monetary stability is well maintained, and
the judicial system provides strong protection for property rights. Political
pressure for expanded government spending has been increasing, but such
institutional assets as high degrees of business efficiency and regulatory
flexibility have counterbalanced some of the shortcomings of heavy social
spending.

[https://www.heritage.org/index/country/denmark](https://www.heritage.org/index/country/denmark)

~~~
tomjen3
Dane here, what do you want to know?

~~~
grasshopperpurp
Thanks for asking, tomjen3!

I'm generally curious about the role of culture vs specific mechanisms (laws,
regulations, etc.) and how they intermingle. I'm sure I'm forgetting a bunch,
but these are the questions that immediately come to mind:

How is Denmark able to limit corruption (relative to most countries)?

How is Denmark able to pay its working class such a high wage (relative to
countries like the US)?

How are you able to institute regulations that are both effective but not
overly burdensome?

How is Denmark able to balance a strong social-safety while promoting a
productive working class/discouraging freeloaders?

What areas would you most like to see Denmark improve?

Thank you again!

~~~
tomjen3
>How is Denmark able to limit corruption (relative to most countries)?

I really don't have a good answer to this one. I think it is a combination of
relatively equal wages (so you would be limited in how much you can afford to
pay in bribes and I don't have to take bribes to live) and very strong taboo.

I mean it isn't perfect, there was a case that started about a year ago with a
computer supply company called Atea that had arranged for 10% of payments to
be diverted to a special account that the employees in charge of purchasing
could then use for expensive trips.

It also highlighted a lot of small favors that the company had done -- and it
meant that people got (suspended) prison sentences and fines for such small
things as getting an iPad on permanent "loan".

>How is Denmark able to pay its working class such a high wage (relative to
countries like the US)?

That is mostly because they are in a position to demand it: we had relatively
aggressive unions, but we also pay a very high "kontanthjælp" (directly
translated: cash help) of about 1768 usd/month for a single person (on top of
that comes rent assistance, though there is now a cap on the combined amount),
much more if you a single parent (including completely paid for child care) --
that is less than it would be in the US, because we have a higher cost of
living.

Cash assistance is literally the lowest amount you can get, so effectively
unless you pay more you are not going to be able to hire anybody (technically
cash assistance requires that you are trying to get a job, in practice, you
can learn to cheat the system).

Note that this also means that many of the things that are done in the US are
not done in Denmark: nobody packs bags for you at the supermarket, greeters
are unheard of, substantially everybody does their own laundry, we mostly cook
at home, etc.

We also have unemployment insurance, a quasi public private scheem, where you
will recieve up to 80% of your previous salary for up to 2 years, though the
actual cap on the salary payout is low enough that most wouldn't get that much
out of it.

>How are you able to institute regulations that are both effective but not
overly burdensome?

We aren't, though because we don't have nearly the freedom of speech
protections the US have, it is easier to curtail lobbyism (there is also the
factor of scale, and most really large international companies move their
profits to Ireland so their interest in lobbying here is limited in the first
place), which means we don't generally have regulations that benefit a single
big company (we also only have a handful of really big companies, such as
Maesk and Lego and basically no really heavy industry which would normally
require more regulations)

We have lots of burdensome regulations: Uber is banned, the rules and
regulations on unemployment and unemployment insurances are enormous,
immigration law is constantly being changed to make it more difficult to get
here (this is caused by political demand by one of the parties the government
needs support from to stay in power).

In general though, Denmark is (or was) a very productive society, even more so
that Norway and Sweden, and we had a very high amount of trust (aka social
cohesion) - to some extend this is still true. That means that it is generally
easier to create regulations that people think are fair, so they are less
likely to be broken.

>How is Denmark able to balance a strong social-safety while promoting a
productive working class/discouraging freeloaders?

We have a problem with freeloaders in the working (or not working) class (in
many cases unemployment/cash assistance will get you close to what you can
make on an entry level job, which typically isn't that fun, so you might feel
going to work is a joke), but the systems still have a huge support in general
among everybody, partly because most people do believe that they will be there
for them, the day they might need them. This is especially the case with
health services, although, like the UK, the waiting lists are long. I carry
private insurance (relatively inexpensive, because the amount covered is not
that high) should I need, e.g shoulder surgery and this is getting to be a
common perk.

In general though I think people are more willing to tolerate some
freeloading, so long as the system is kept, because the system is very
popular. This is in direct contrast to the US, where people don't see the
system as working for them, and so they are even less willing to accept
freelancers.

>What areas would you most like to see Denmark improve?

I would love for us to focus on keeping an acceptable standard for the bottom
and focus less on inequality, and I would for us to look more broadly about
how to achieve it (e.g we have government health care, but that doesn't mean
the government should necessarily run the hospitals, anymore than the
government unemployment insurance should only be useable in government shops),
with more trust/responsibility in individuals rather than regulations.

~~~
grasshopperpurp
Thanks so much for the excellent response!

------
billbrown
This proposal would effectively make the federal government the Executive
Chairman of a board. It's too radical and won't go anywhere, even with
Democrats. It reads like establishing progressive bona fides.

~~~
dragonwriter
> This proposal would effectively make the federal government the Executive
> Chairman of a board.

No, it would make the federal government the public chartering authority of
large corps, which was a role states have had and used to take more seriously
than they do now.

> It's too radical and won't go anywhere, even with Democrats

It's true that the neoliberal wing of the party that has been dominant since
the early 1990s won't like to much, but the neoliberal wing recently has seen
a number of incumbent office holders go down to primary challengers from the
progressive wing. The neoliberal wing’s support in the Democratic electorate
isn't nearly as strong as their current strength in office would suggest, and
some of them are no doubt starting to realize that.

> It reads like establishing progressive bona fides.

Whatever else it is, it's definitely part of both setting g the ground for
platform debates and establishing personal position leading in to 2020.

~~~
golemotron
> No, it would make the federal government the public chartering authority of
> large corps, which was a role states have had and used to take more
> seriously than they do now.

What would make that Constitutional? It's not an enumerated power.

~~~
ballenarosada
The commerce clause?

------
clairity
warren correctly identifies a current problem with our collective
understanding of corporate governance, but i’m not sure adding a federal
oversight organization is the right solution.

states are the canonical governmental unit in the US, so it makes sense that
they manage corporate charters. the federal government should be primarily
concerned with interstate and international affairs.

one could argue that corps are interstate and international organizations, but
that’s only because we’ve allowed them to be. there are benefits to megacorps,
like cheaper products, but there are also costs, like wage depression.

but i still think the primary problem is size, not corporate charters. solve
the size problem and all the ills that warren addresses would go away along
with it.

so, (1) get rid of corporate welfare (like debt tax shields), (2) cancel
corporate personhood (remove corporate money from politics), and (3) instill a
more progressive tax system (with more effort to account for externalities).

~~~
dragonwriter
> states are the canonical governmental unit in the US,

No, they aren't.

They are no more canonical than the federal government.

> the federal government should be primarily concerned with interstate and
> international affairs.

While it may not be a perfect test, the applicability standard in Warren's
proposal does a good job, IMO, of limiting applicability to corporations that
are significant players in interstate and international commerce, not
businesses that are primarily of concern for their state of origin.

> cancel corporate personhood

Juridical personhood is the central defining feature of the corporate form;
“cancel corporate personhood” means “abolish corporations”.

~~~
clairity
> "Juridical personhood is the central defining feature of the corporate form;
> 'cancel corporate personhood' means 'abolish corporations'."

if we remove corporate personhood, will businesspeople then all of the sudden
become less motivated to create companies and incorporate them so they have
the opportunity to make money? i'm quite skeptical of such a claim.

the corporate veil is unnecessary, just like the capital gains tax advantage,
for promoting business. it's only encouraged bad behavior and protected
incumbents, rather than supporting new innovation.

~~~
dragonwriter
> if we remove corporate personhood, will businesspeople then all of the
> sudden become less motivated to create companies and incorporate them so
> they have the opportunity to make money?

Incorporation doesn't create the opportunity to make money—or even the
opportunity to combine with others to do that—partnerships can do both.

Incorporation is special because it creates a separate legal person—corporate
personhood—who is the target of legal action against the business enterprise,
and for whose liabilities the investors have limited legal accountability.

~~~
InitialLastName
> Incorporation is special because it creates a separate legal
> person—corporate personhood—who is the target of legal action against the
> business enterprise, and for whose liabilities the investors have limited
> legal accountability.

Part of the issue is that these separate "persons" aren't actually able to be
held accountable. When corporations do something illegal by, say, killing
people out of neglect, they aren't imprisoned (shut down temporarily) or
executed (dissolved).

~~~
billbrown
There it is: the corporate death penalty.

They are held accountable through lawsuits. Do you seriously contend that when
a company kills someone out of neglect, they face no accountability? They are
sued individually and through classes to the tune of millions (and billions in
some cases).

~~~
s73v3r_
I think most people would believe that, in most cases, the amount of liability
they receive is disproportionate to the amount of harm they cause. And as more
and more companies seek to ban class actions and require binding arbitration,
saying that they actually face liability for their actions seems laughable.

------
pjc50
This is gloriously radical and will go exactly nowhere with a Republican
Senate/House/Presidency.

~~~
maxxxxx
You are right but the Democrats would never do it either.

~~~
tryptophan
It's easy to grandstand when you know nothing you say will ever some to pass.

------
Shivetya
All we have to do is look back in history to know why this idea is bad on so
many levels.

1) Corporate charter at the Federal level. General incorporation laws gave
rise the incredible growth that powered the economy since their inception
specifically because the isolated the ability of politicians to have undue
influence over them.

Do you want to see companies have to react to every whim powerful senate and
house members have? perhaps appointees in the commerce department decide that
something isn't up to snuff one year? the political influence will be so great
that corporations will be hiring new and more politically connected players
which will include those who are directly tied to individual politicians just
to curry favor.

2) giving 40% of the board to the employees? which employees? does that mean
contracted and out sourced as well? do you really want to experience the
impact this will have on the market when stock holders find their loss of
influence leads to less overall wealth for all? watch the 401k investments
take that hit.

3) these limits while sounding nice would not favor start ups that hit it big
and may result in further restructuring of benefits and increase executive pay
to compensate. there are already many rules afoot that limit the exercise of
options.

4) the political contribution rule simply means that politicians will simply
have a greater lock on their office and power than they currently do now.
combined with the idea that employees at many larger companies would sit on
the board would allow union dominated employers to keep money limited to the
politicians who have the most influence. effectively cementing the two party
system even further.

5) welcome to the whim and politically driven decision factory. that nonsense
rule basically opens up every decision to legal challenge.

these rules are designed to give politicians in Washington power they don't
have over corporations. you think cronyism is bad now, just watch what happens
when politicians in powerful committees get this level of influence. it won't
be to protect the little guy, it will be to protect the wealth of politicians
and those connected to them both politically and by blood.

tl;dr this all about empowering politicians even further and locking down the
two party system into place. where corporations become even more in bed with
the very politicians supposedly there to regulate them. you think its bad that
many in politics go on K-street, well they will have guaranteed spots on Wall
Street too and your investments will pay for it

~~~
billbrown
Plus, it'll start at $1 billion in tax receipts but that's not where it's
going to end up. There will be disfavored industries that'll have to recharter
and there'll be ones that recharter for "national security."

------
travisoneill1
The goal of this proposal is wealth redistribution. Why not just do it
directly? By any sane analysis we are far to the left of the peak of the
Laffer curve so there is plenty of room to act. There is no reason that the
benefits of cut throat capitalism and a strong welfare state can't coexist in
the same economy. This command economy government offloading the welfare state
onto corporations nonsense is not the way to accomplish it.

------
beat
The vociferous pro-capitalism faction here should cool their jets about the
liberal nanny state for a moment and start thinking seriously about what's
happening here, lest things far worse (in their eyes) than this bill start
happening.

The American public is _angry_. They feel, and justifiably so, that _someone_
has been screwing them for decades - that the lot of ordinary working people
has gotten worse, while economists and the media rave about the booming
economy and the rich are clearly getting richer. This anger expressed on both
sides of the political aisle in the form of quasi-third party insurgency
candidates - Donald Trump and Bernie Sanders. They might have radically
different solutions, but they touched the same nerve. "Make America Great
Again" is exactly how they feel - that something terribly wrong has happened
to America, and radical steps are needed to fix it.

The "neoliberals" of the center-left Democrats are discredited and in eclipse.
The way candidates get ahead right now is through loud denounciations of
corporate greed. And while Trump's xenophobic demogogue act works for the
moment at distracting the anger away from Wall Street (for his supporters
anyway), it wouldn't be that hard for the next demogogue to target that anger
at Wall Street instead.

And if that happens, Senator Warren's bill might be cold toast compared to the
revolution that comes.

------
sn41
How about labor representation in the Board of Governors?

~~~
ncallaway
> Corporate Employees to Elect At least 40% of the Board of Directors—A
> corporation would be required to elect at least 40% of its Board of
> Directors through company employee vote.

