The Bipartisan Policy Center (BPC) just wrapped an event on corporate governance titled “The Role of a Corporation: The Shareholder versus Stakeholder Debate,” and it covered some interesting territory. BPC president Jason Grumet led a discussion with former Securities and Exchange Commission members Dan Gallagher and Roel Campos. In the spirit of bipartisanship, BPC’s Michele Nellenbach introduced the discussion with the idea that “there’s got to be a middle ground where we can all come together…between Sen. [Elizabeth] Warren’s position and Milton Friedman’s.”
I’m not as enamored of bipartisanship per se as the BPC team, but I certainly like it when we see broad support for a good policy. The idea, however, that there’s a “reasonable middle ground” on corporate governance strikes me as questionable, especially if we’re talking about federal policy. From a voluntary, pragmatic point of view, there are many governance policies that fall into the “social responsibility” category that any particular company might choose to adopt on their own, for their own reasons. Groups that try to persuade firms to create environmental stewardship initiatives, for example, have been quite successful over the years. Many companies have found green programs to be a great fit.
The real question, however, is “who decides?” If concepts like corporate social responsibility and environmental, social, and corporate governance are going to continue to exist in the voluntary economy, then we don’t really have a public policy debate at all—we have a marketplace of ideas, just as we have a market for goods and services. The good governance ideas will get adopted and refined and the bad ones will eventually disappear. Directors, managers, shareholders, and other stakeholders will all have some degree of influence over those decisions.
But many anti-corporate activists have no real interest in using their influence in the voluntary economy merely to persuade and cajole, but are instead eager to use Congress, and regulatory agencies like the Securities and Exchange Commission and the Consumer Financial Protection Bureau, to force corporate boards to adopt a laundry list of supposedly enlightened rules, all of which are either hostile or indifferent to a firm’s primary goal of operating profitably.
Putting aside the rather large question of shareholder primacy when it comes to apportioning any eventual profits, there is a big problem with allowing outside interest groups to use the force of the federal government to meddle in internal corporate management. It will be impossible to calculate from a distance what the critical carrying load of not-profit-driven obligations for a particular company is—a new Department of Corporate Social Responsibility could easily push an otherwise successful firm into bankruptcy with non-business mandates.
Tellingly, even companies that have voluntarily saddled themselves with such responsibilities have a very uneven record. As I wrote in my review of James O’Toole’s The Enlightened Capitalists about implementing pro-worker policies, “employee welfare outcomes are often counterintuitive [and] well-intentioned policies can create dynamic effects within the company that reduce or eliminate expected gains, either for the company or for individual employees.” While he is generally in favor of such policies, longtime business school professor O’Toole has detailed a discouraging litany of for-profit firms that fizzled when they assumed increasing “social” obligations unrelated to their core business. Good intentions, whether from regulators or managers themselves, are not enough to make activist theories work in practice.
Thus, in terms of public (i.e., government) policy on corporate governance, there should be as little of it as possible consistent with protecting investors. In terms of each particular industry or firm, we should allow a thousand flowers to bloom. To the extent that statutory or regulatory change is needed to enable that flexibility, like the recognition of new “benefit” type corporations or other models, the relevant policymakers should enable that flexibility. But giving anti-corporate activists the authority to destroy only half of American companies is not the kind of bipartisan compromise we need.
Watch the full video of the event below.