Author Archives: akammer

2012 Year in Review

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I haven’t been updating this blog much recently. But in the tradition of year-end roundups that I’m seeing on Twitter, I’ve decided to collect a few personal favorites from the things I’ve written over the last year.

This last piece was a personal favorite, and I hope to build on these ideas in the coming year. I hope to get a few long form things written this next year too and to finish another law review piece, this time on federalism.

Happy holidays. Thanks to everyone who has read and responded.

Freedom, Revisited [Part 1]

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[ I started this intending to write a short essay on the need for liberals and the left to develop new theories of liberty. My basic view is that both for legal advocacy and to “reclaim the politics of freedom” more generally, progressives need a fuller theoretical response to the limitations of the right’s vision of freedom as a system of negative rights and economic liberty. This is the first of several posts, in which I hope to discuss theories of negative liberty, positive liberty, and civic republicanism as potential ways to revitalize common understandings of freedom that embrace the United States' tradition of democratic governance and the need for broadly inclusive economic structures. ]

I agree with Corey Robin’s conclusion in Reclaiming the Politics of Freedom. Freedom needs to be contested and understood at the level of first principles if an alternative is to emerge to counter the anti-statist, pro-private power vision that has come to dominate American discourse and aided in the dismantling of public services and the regulatory structures that limit corporate power. The need to reconceptualize liberty is particularly urgent given that the conservative members of the US Supreme Court have imported a theory of negative liberty into their interpretation of the Constitution and the First Amendment specifically. This impoverished notion of liberty has become a barrier to a variety of democratically enacted regulations and, in the 2010 Citizens United case, served as the basis for eliminating reasonable campaign finance laws. The constitutionality of the Affordable Care Act, similarly, will turn on the Court’s willingness to read this theory of negative liberty into the text of the Commerce Clause.

The theory of freedom that informs the American right’s “small government,” “get the government out of x” rhetoric is, as Charles Taylor and others have noted, a mostly negative theory of liberty. The idea being that freedom means the absence of coercion or interference, or as Ayn Rand said, “to be free, a man must be free of his brothers.” It’s important to point out that historically negative liberty has inspired leftists and liberals as intensely as it currently moves the American right. The theory of negative liberty was first described (albeit unpraisingly) by the liberal theorist and socialist Thomas Hill Green, and in the Twentieth Century, the idea moved liberals like Isaiah Berlin. In his essay Two Concepts of Liberty, Berlin described negative liberty as “the area within which a man can act unobstructed by others.”

The recent revival of interest in Ayn Rand’s writings and libertarianism more generally speaks to the level to which this notion has informed the way millions of Americans continue to understand themselves politically. I think it would be a mistake not to take such commitments seriously. Rather than entirely abandon a theory that has proven enormously inspiring and deeply rooted (at least among Americans), I think it’s worth asking what other liberals have found inspiring here and looking at where conservatives have sold their own theory short.

There is one extremely important difference between the negative liberty described by Berlin and the liberty celebrated by libertarians and the contemporary American right. Berlin’s definition of negative freedom means the absence of coercion from all others, whereas the right’s definition means only the absence of coercion from the state. As Corey Robin noted, the way conservatives managed to recast negative freedom in this way was “to locate this notion of freedom in the market.” By focusing primarily on the tension between private industry and government regulation, conservatives have advanced a view of freedom that largely ignores both the mass incarceration state and the various ways private industry can impinge on individuals’ rights.

As Bernard Harcourt’s scholarship has helped highlight, there is something enormously paradoxical about a view of negative liberty that locates freedom entirely in the market but turns a blind eye to police enforcement and national security. The United States has been gradually sacrificing civil liberties to the exigencies of law enforcement and counter-terrorism over the past decade. We have become the most incarcerating nation in world history, with more than six million people imprisoned and many of them for nonviolent offenses. As Harourt recently wrote, “The rise of neoliberal thought since the 1970s has left us with a frightening union, one in which there is both free-market ideology (which militates against universal healthcare) and mass incarceration (with the attendant excesses like generalized strip-searches).” The unwillingness of American courts to see liberty outside the economic sphere is, to quote Harcourt again, “pushing the country, inch-by-inch, in the direction of a police state.”

Beyond the paradoxes of the mass incarceration state, the problem of private power exposes another important oversight in the right’s operative theory. If negative liberty is genuinely about protecting spaces of individual autonomy, it has to mean being free to act without coercion from from private parties as well as from government and law enforcement. That means that businesses that can turn phone records over to the police, websites that sell an individual’s search history, prospective employers who ask for facebook passwords, and employers who meddle in their employees private lives are just as capable of interfering with people’s negative liberties as state agents. Private individuals unconstrained by the state provided the foundations of both slavery and debt servitude, indisputably two of the most unfree systems in human history. The failure of the right to address the excesses of corporate power and the various risks created in the private sector is precisely what is least liberating about that view — it is a vision of freedom that is willing to accept coercion and domination as long as they are committed by private actors.

In contrast to that view, a more thorough acceptance of negative liberty would be far more radical (and complicated) than simply shrinking the state at every opportunity. It would also mean liberating the spheres where individuals may act and opening up spaces for people to act democratically or collectively to shape the conditions of their own lives. To protect their own liberty, people would have to be able to resist not just coercion from the state but also to resist coercion from extractive economic structures and private actors who do not share their interests. Indeed, one might even expect the champions of negative liberty in a democracy would be far more concerned with coercion from private powers than the government, because government, arguably, is already accountable to the people through elections.

Negative theories of liberty could once again carry some emancipatory potential if expanded to embrace individuals’ authority to free of both unwanted private encroachments as well as intrusions by law enforcement and other state actors. That is not to say that a more expansive concept of negative liberty would not be without shortcomings of its own. Some of these shortcomings should become clearer when contrasted to the positive and civil republican theories of liberty [I'll save that for another post]. Nonetheless, negative liberty has been an inspiring and enduring vision of freedom that has moved millions of people across history and continues to speak to Americans’ self-understanding. For the current moment, a vision of negative liberty that takes private power into consideration still offers a powerful critique to those who think keeping the government out of the market is a sufficient guarantee of individual freedom.

Dog Shows & the Illusion of Order

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I spent two nights last week watching the Westminster Dog Show with several other contributors to this blog. There were a few conversations about how immoral and sometimes cruel dog-breeding can be and that here are so many other ways in which this spectacle can be found offensive: You have to be a certain kind of rich to even partake. And it’s a kind of objectification that most of its viewers would find objectionable in any other context. The most analogous “sport” or contest I can think of has to be the child beauty pageant. But I won’t go into that or into the ethics of the breeding.

What I really want to write about is how this contest purports to sort and rank among the thousands of dogs that are escorted around that stage every year.

How does the contest presume to compare across dog breeds? How do you put a purebred, one hundred and twenty pound Great Dane next to a Pekingese or a chow chow and then determine that one is more deserving of the coveted “Best in Show” title than all the rest? The answer, obviously, is that you create some kind of frame and superimpose it onto the animals. You devise a sorting system to ignore the messy and incomparable details of reality, and if you designed it right, the system provides outcomes that humans care about (such as telling you which dog is “best”). Humans do this kind of nonsense all the time, and fortunately we have things like dog shows to remind us just how ridiculous it is.

According to the Judging and Standards section of the Westminster Dog Show’s webpage, the specimens of different breeds are evaluated against one another according to the following system:

Each breed’s parent club creates a STANDARD, a written description of the ideal specimen of that breed. Generally relating form to function, i.e., the original function that the dog was bred to perform, most standards describe general appearance, movement, temperament, and specific physical traits such as height and weight, coat, colors, eye color and shape, ear shape and placement, feet, tail, and more. Some standards can be very specific, some can be rather general and leave much room for individual interpretation by judges. This results in the sport’s subjective basis: one judge, applying his or her interpretation of the standard, giving his or her opinion of the best dog on that particular day. Standards are written, maintained and owned by the parent clubs of each breed.

To get around the fact that these dogs are in a sense incommensurate, a system has to be designed that can, nonetheless, compare them. And the result, in short, is something of a contest of Platonic ideals. The closer a French Bulldog, say, comes to what people have collectively identified as its essence, the better it will fare against other Frenchies, and the better it will “perform” against other dogs who don’t so perfectly embody their breed’s ideal characteristics. This is a contest to best embody the quintessence of one’s kind, a step removed from asking which dog is most like its ideal self.

Which is absurd, except that we do it all the time. People compare athletes across sports, musicians across genres, and writers across eons. We compare the utility or “costs and benefits” of vastly different government policies, and we feel comfortable assigning dollar values to just about anything.

Westminster Kennel Club logo

Westminster Kennel Club logo

I’ve been reading a terrific book by Pierre Schlag, The Enchantment of Reason, that I want to tie in here. Schlag basically argues that reason is a system of belief that requires faith, and that while it can consistently answer some questions, often it’s just the language in which people express their interests and preferences. In other words, the institutions that rely on “reason” (e.g. law, economics, etc.) always depend on the same circularity and hypocrisies as the dog show. The outcomes are just the delayed realization of their axioms. And like the dog show rules, these axioms we live by are a decision that can never be fully grounded in reason.

One of the most interesting chapters in Schlag’s book points out that “reason” breaks down most obviously when it’s asked to compare things that are incommensurable. To use his example, how can you reasonably conclude whether eating apple pie or reading Wittgenstein is a better use of your time? Which provides more utility? Or more happiness? Or satisfies a more important desire? Which time horizon is more appropriate — short-term or long-term interest? And whose interests, yours or society’s? The answer to which activity is “better” is simply a function of which system you use to ask the question. All it does is hide the ball and give the appearance of reason to an arbitrary choice that does all the work.

It’s one thing if the system is one for evaluating dogs to gratify the economic desires of dog breeders and the egotistical yearnings of wealthy dog owners,  but what if this same problem really plagues the systems that underlie most of our public institutions? Why do we pretend that law is an orderly, rule-determined game, when the referees and agenda-setters can often pick whatever criteria they want? Or that we can put prices on lives or on art or on our health? The glib answer is that it’s necessary to make society work, but that only goes so far.

As with the dog show, it certainly appears more legitimate to pick a set of rules than for someone to arbitrarily pick winners. But picking rules itself can be thinly veiled exercise of arbitrary power. (Like Bush v. Gore which essentially picked rules after the fact as a pretense to pick the President in the 2000 election). It’s not an uncommon observation to say that if the dog show mattered at all, these rules would be intolerably vague. They do nothing to constrain the whims of the decision-makers. There’s no basis for thinking that a dog that does well one year would do as well under a different set of judges, etc.

To risk comparing the incomparable, these are precisely the same problems that plague the operating rules in the economics profession, courtrooms, insurance companies, and countless other public and private institutions where allegedly disinterested judges or observers apply allegedly objective criteria. These systems are just slightly better at hiding their arbitrariness (at least most of the time). They are more opaque and cryptic about how fundamentally unreasonable their assumptions are, and they enjoy positions of power that provide a patina of authoritativeness. So in the end maybe the dog show isn’t so bad after all. It’s not any less reasonable than these other institutions, and the stakes, at least, are not quite as high.

Reexamining Corporate Governance after Citizens United

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This entry was originally posted at Policy Shop.

Earlier today, Demos, along with a broad coalition of organizations, asset management groups, and elected officials sent a letter to the Senate Banking Committee calling for a public hearing to consider corporate governance solutions to Citizens United. While large numbers of democracy advocates continue working to overturn Citizens United and restore meaningful campaign finance restrictions, there are a number of important battles happening on the corporate law front as well that could significantly increase transparency and restore accountability over corporate political spending.

Corporate governance has been underutilized as an arena to empower the broader public against the unrestricted flow of corporate money in our democracy. Senator Menendez, for instance, recently reintroduced the Shareholder Protection Act, which would require full disclosure of any political spending by publicly-owned corporations and further require shareholder authorization of corporate political spending. Similar shareholder protection laws have been proposed in California, Massachusetts, and New York. And a petition was filed with the SEC in 2011 (File No. 4-637) requesting a rule to require public companies to disclose their political spending to shareholders. As today’s letter to the Senate Banking Committee observed:

“[c]orporate disclosure and the raised voices of shareholders can help provide a framework to rein in some of the damage to our democracy in this troubling new political landscape.”

Beyond the well-documented distortive and corrupting effects that corporate spending has in the electoral and legislative arenas, there are also several compelling economic reasons that corporate political spending should be made more open and responsive to investors.

First, the influence and access of corporate lobbyists means that corporations or affiliated groups often draft the laws and regulations that most affect them. Rent-seeking of this form undermines competitiveness and makes the market less accessible to new entrants. As the American Independent Business Alliance (AMIBA)’s amicus brief in Citizens United noted, “large corporations have converted their economic power into political favors that extract subsidies from taxpayers, stifle enforcement of anti-trust laws…and other rules that disadvantage small business.”

Second, corporate political activity also has the potential to alienate investors and consumers in ways that are bad for business. In 2011, for example, Target donated $150,000 to an anti-gay-rights Minnesota gubernatorial candidate. Their political spending sparked a massive public backlash that included calls for boycotts and ended with a shareholder resolution asking the company to rethink its policies on political donations. While this incident led to Target’s eventual adoption of policies requiring greater transparency, the potential for consumer and shareholder backlash makes political spending enormously risky, particularly in our increasingly polarized political environment.

Finally, a system where management is spending money that belongs to shareholders creates potential conflicts of interest that will affect people’s willingness to invest. Some investors will choose to avoid businesses whose political stances they find objectionable. But even more systemically, the interests of shareholders and managers do not always perfectly align, and shareholders have reasonable concerns when their money is going to support political activity. As the coalition noted in its letter:

In corporate governance, there are no rules or procedures established in the United States to ensure that shareholders – those who actually own the wealth of corporations – are informed of, or have the right to approve, decisions on spending their money on politics.

Beyond the agency problems, the lack of transparency and shareholder feedback has the potential to chill investment.

Corporate governance solutions to Citizens United need a more prominent place in our politics. Holding management accountable is important both for the strength of the larger democracy and to limit the disabling impact that self-dealing and rent-seeking are having on our economy.

Citizens United Was Just the End-Zone Dance

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This entry was originally posted at Demos’ Policy Shop.

Jeffery Clements was at Demos this morning for an event marking the New York launch of his new book, Corporations Are Not People. As a lawyer and cofounder of Free Speech for People, Clements has been one of the leading voices in the campaign for a constitutional amendment to overturn Citizens United. This book, rather than simply providing a limited guide on the harms of corporate political spending in elections, offers a much more profound reexamination of the role corporations play in American public life.

While Citizens United might look like an outlier in the Supreme Court’s First Amendment jurisprudence, Clements makes a very compelling case that the decision can be better understood as the culmination of a decades-long campaign to insulate corporate activity from democratic regulation and control.

This corporate rights agenda was first outlined in the 1971 Powell memo, a confidential memo written by former-tobacco industry lawyer and later Supreme Court Justice Lewis Powell to the Chamber of Commerce. Powell’s memo complained that corporations were under public attack by all kinds of public health and safety regulations, and he provided a decades-long strategy to construct an area of corporate rights that would no longer be subject to public laws that cut into their potential bottom lines. Powell was eventually appointed by President Nixon to the Supreme Court, where he began transforming the First Amendment into what Jedediah Purdy recently called an “anti-regulatory hammer.”

Clements also draws attention to an interesting wrinkle in the right-wing deregulatory project that often goes unrecognized: conservatives have long been conflicted about providing corporations with constitutionally recognized rights. Chief Justice William Rehnquist, another Republican Nixon appointee, was extremely influential in standing up to the invention of new corporate constitutional rights. Rehnquist has a number of eloquent dissents that reiterate the idea that corporations are a legal fiction — a creation of state law that provides a useful instrument for economic growth — and he repeatedly stood up for the position that the states are permitted to define the privileges and burdens created by the corporate form.

Justice Rehnquist dissented to Powell’s activist vision of the First Amendment as early as 1978 inFirst National Bank of Boston v. Bellotti, which recognized corporate speech rights to contribute to political campaigns, and in the 1980 case Central Hudson Gas & Electric Corp. v. Public Service Commission, which struck down a restriction on commercial advertising as a violation of the First Amendment. As recently as McConnell v. Federal Election Commission, which upheld the same campaign finance law that Citizens United eviscerated, Chief Justice Rehnquist was able to maintain a majority of the Court for the position that a democratic majority may legally limit the role of corporate money in elections. As Clements noted, it was not until Justices Alito and Roberts joined the Court that the corporate rights project of removing democratic control over corporate behavior attained its current high-water mark.

Clements was a persuasive speaker, and beyond looking forward to this book, I’m excited to see the impact he will have on the way Americans understand their relationship to corporate power. More than a call to undo Citizens United, this book makes a wide-ranging rallying cry to restore the rule of public law over those forms of concentrated wealth that are manipulating and dismantling the democratic institutions the United States was founded on.

Fighting over Salaries

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Slavoj Zizek has a new piece in the LRB arguing that the recent waves of protests around the world are “not proletarian protests, but protests against the threat of being reduced to proletarians.” The unrest he identifies comes at least partially from the group he calls the salaried bourgeois, educated protesters seeking to maintain their privilege from the managers and bankers who are taking home an increasing share of global surpluses. The salaried bourgeois are professionals, emplyees with benefits and bargaining power, anyone who derives surplus value for their work over the minimum amount that capitalists can get away with paying completely debased wage slaves like sweatshop employees in China.

There’s a lot of interesting stuff to say about his position. It was pointed out in an online reading group I’ve been following that it’s overly simplistic and that the absence of debt considerations is a glaring flaw in his account. Another is that our currently configured economy appears incapable of producing all the jobs that would allow people to attain the status of salaried bourgeois or even that of a wage laborer. In other words, these protests might be a recognition that the current economic system, for whatever combination of reasons, makes a handfull of people obscenely rich but cannot provide jobs to a large segment of the population, educated or otherwise.

In an effort to do a bit more blogging on this site, I’m just going to post what I emailed the listserv earlier today.

I love Zizek, but there’s this unfortunate tendency even on the left to reduce management to high-paid-but-still-just-salaried employees. I know Zizek is more interested in getting at the idea that CEOs don’t really earn their surpluses (which is true) but he fails to recognize the role they have in cutting their own pie. Yglesias did the same thing here incidentally. But this distinction is one that salaried bourgeois should care a lot about. Peter Frase had a good response to the Yglesias piece, where he said “the point isn’t just ‘what you take home’, nor is it even how your income is classified for accounting purposes; rather, it’s where you’re positioned in the system of capital accumulation.”

I think there are at least two major things that make executives structurally different from salaried workers (and if workers had these things our capitalism would be a very different capitalism). One is that managers are paid at least partially in equity (i.e. stock or options) so when the company is worth more they are worth more. Stock compensation for employees is not just a “bonus” as Zizek says; it’s a way to maintain a property right in whatever excess wealth your company produces. While it looks like higher pay, this is really a kind of proportional ownership, and it’s a very different relationship to production than the rents that salaried employees bring home. The second big difference between CEOs and employees is that managers make decisions that affect their compensation and those of everyone below them. Formally managers don’t have votes on the board, but they get to influence the composition of the board and hence affect votes that way, and managers make all kinds of spending and other decisions that often come back to benefit them directly. Whereas workers are treated like a labor input and increasingly can’t even pressure management or directors through collective bargaining.

So while I’m in agreement with Zizek that some of the protests are about a salaried bourgeois afraid of having their privileges and salaries gradually taken away, I don’t think this is about protecting the right to a salary. Or at least not only that. Even if you make a decent salaried living, being an employee means being in a mostly powerless position where you are decided upon. And people are starting to see that having no power in this system is a gradual path toward less pay, fewer jobs, and more wealth being extracted upwards. I like to think that the protests were about employees, temps, students, etc recognizing their powerlessness in this structure and not just about transferring surplus profits from CEOs to workers.

America’s Libertarian Pendulum

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I wrote a piece for Guernica on the regular recurrence of libertarianism in America. Here’s the key idea I wanted to get across:

These tensions [between majoritarian politics and unassailable individual freedoms] are largely inherent to our political system, and as long as we have a liberal democracy, they cannot be finally resolved. Libertarian arguments will keep coming back, because majoritarian politics will always be unsatisfying or objectionable to some subset of the population. Transforming a policy dispute into constitutional or higher order debate about individual rights provides a mechanism for resisting majoritarian abuse, but it can also undermine the potential power of a political majority and make a country ungovernable. And as we are now seeing, this ability to reframe politics as a battle between the individual and the state also contains the explosive potential to escalate simple politics into a constitutional crisis. Billionaire funders and government ineptness aside, libertarianism is in the air because the line between private power and public accountability is being redrawn.

A Good Man

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A friend and I were talking about Bertolt Brecht the other night, and he mentioned a poem I’d never read, “The Interrogation of the Good,” which Slavov Zizek quotes in Violence to mock the neoliberalism of American progressives and professionals. Brecht’s poem goes far beyond Hannah Arendt in blaming the average person who thinks he’s apolitical, ‘just doing his job,’ for enabling political and societal breakdowns through complacence. I can’t help from thinking that the poem is something of a joke, but there’s also an unmistakable hint at the absolute hatred that people bear against one another when things fall apart. It has to be one of the most scathing condemnations of political apathy and shallow philanthropic liberalism ever written.

“The Interrogation of the Good”

Step forward: we hear
That you are a good man.

You cannot be bought, but the lightning
Which strikes the house, also
Cannot be bought.
You hold to what you said.
But what did you say?
You are honest, you say your opinion.
Which opinion?
You are brave.
Against whom?
You are wise.
For whom?
You do not consider your personal advantages.
Whose advantages do you consider then?
You are a good friend.
Are you also a good friend of the good people?

Hear us then: we know.
You are our enemy. This is why we shall
Now put you in front of a wall. But in consideration
of your merits and good qualities
We shall put you in front of a good wall and shoot you
With a good bullet from a good gun and bury you
With a good shovel in the good earth.

Reimagining the Corporate Form: Toward a More Democratic System of Corporate Governance

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This entry was also posted at the HLPR Blog: Notice & Comment.

Occupy Wall Street has, in the words of John Paul Rollert, “come to embody a common sense that something is wrong with American capitalism.” The problem Rollert points to is not with capitalism itself, but with a particular American version that has ceased to work for broad cross-sections of its population. Given America’s Depression-level income inequality and near-record levels of private indebtedness, it is extremely tempting to focus on bad outcomes as the problem. But the real issue is that many of the economic and political structures that we take for granted repeatedly produce unequal, undesirable outcomes. If reformers seek to make American capitalism more inclusive, the focus needs to be on fixing these structures and getting the rules right.

It has been a steady mantra of Occupy Wall Street not to make demands of existing political leaders and institutions. But as Matt Langer explained, “the reasoning behind not making demands most certainly does not preclude making demands of our collective imagination.” Whether people prefer to work within existing structures or not, the next essential step is to understand how broken institutions and flawed incentives created this mess and to start imagining what structures can be built in their place. Where better to start than with corporations?

Current Governance Structures and Their Shortcomings

Consider the role that our system of corporate governance has played in producing some of our current imbalances. Excessive risk-taking, stagnating wages, and the spike in executive compensation can all be linked back to a system of corporate governance that privileges management’s interests at the expense of other actors.

It’s by no means an original observation to say that boards are under the sway of management. Indeed, the US is something of a global outlier in allowing a business’ president/CEO to appoint its board of directors, and in some cases the president/CEO actually serves dually as the chair of the board. Not only is the composition of the board not reflective of its owners, employees, or investors, boards are only subjected to a relatively relaxed legal standard. As a result, directors often find that their interests (i.e. staying on the board) are best served by taking a passive role and letting management make most of the choices. In light of this structural failure to limit conflicts-of-interest, it should be unsurprising then that the interests of employees, shareholders, and other stakeholders are, at best, secondary to those of executives. As Harvard Law Professor Mark Roe succinctly phrased it, “the US is managerialist, not capitalist.”

Current governance arrangements have had an enormous impact on the larger economy and on the distributive features of American capitalism. To begin with, the existing corporate governance system (in conjunction with other regulatory failings) has proven inadequate to keep excessive managerial risk-taking under control. Despite the Enron disaster, the fall of Bear Sterns and Lehman Brothers, and the near-collapse of many of America’s overleveraged financial firms in 2008, we appear to have done nothing to address this issue. These risk-induced failures were repeated last week in the near-overnight fall of MF Global. As though nothing was learned, the star-studded MF Global board sat by and, in Steven Davidoff’s words, “gave executives []free rein to take tremendously risky bets that brought the house down.”

In 2008, Martin Lipton and his colleagues at Wachtell prepared an excellent memoranda on boards’ responsibility over risk-management which was posted at the HLS Forum on Corporate Governance. In discussing the legal framework for risk-management, they advised corporate boards to go beyond the minimal requirements created by the leading state law case, In re Caremark. Nonetheless, this is how they summarized the state of the law: “These cases demonstrate that it is difficult to show a breach of fiduciary duty for failure to exercise oversight; these cases do not require the board to undertake extraordinary efforts to uncover non-compliance within the company.” Federal laws like the Sarbanes Oxley Act do require auditing and increased oversight from the board, but the overall implications remain: the decision-making center of gravity remains largely with executives, whose personal incentives to post short-term profits can fuel excessive risk-taking, and current law gives boards few incentives to keep that risk-taking in check.

The problem is not just that boards are passive and deferential, but that those who want risk limited cannot make themselves heard. These high-risk strategies often run counter to the interests of other stakeholders, including bondholders and shareholders, whose interests are not reflected in the board’s composition and thus are not sufficiently represented. The idea that the broader public or the employees whose jobs are on the line would have a say is, under current thinking, not even a remote possibility.

The resultant proximity between Boards and management has a lot to do with runaway executive pay. Board members usually have a stake in their position, and because they are appointed by management, it’s often not in a director’s interest to start ruffling the CEO’s feathers. As Lucian Bebchuk and Jesse Fried argue in their excellent book Pay Without Performance, “structural flaws in corporate governance have produced widespread distortions in executive pay.” Their argument, briefly, is that boards have too many incentives to go along with management and are therefore unable to contract with executives at arm’s length. This broken feedback loop is at the root of the ridiculous pay packages, bonuses, and golden parachutes we’ve seen over the past decade.

The wage stagnation that’s affected the remainder of the workforce shares a common origin: all stakeholders other than executives are systematically excluded from decisions that determine compensation. The fact that corporate profits remain at near record highs suggests that the problem is indeed structural and not attributable simply to changes in the labor market. The absence of a voice for employees either in management or on the board of directors, in conjunction with weakening collective bargaining rights, means that the record profits businesses have been posting get funneled mostly to executives and do not translate into gains for the average American worker. The rules that determine who gets to cut the pie, in other words, have a lot to do with the fact that CEOs went from making 24 times what the average worker did in 1965 to making 185 times as much in 2009.

http://www.stanford.edu/group/scspi/cgi-bin/fact2.php

Ratio of CEO compensation to of average worker’s compensation.
Source: Economic Policy Institute, 2011, via SCSPI.

More Inclusive Alternatives to Minority-Rule Governance

Corporations do not have to be organized in this way in order for the private sector to prosper or for the economy to grow. Recent events should make it clear that keeping down transaction costs is not the only concern here. A number of compelling alternatives exist. I start with the more moderate reform proposals and conclude by proposing that we look to the German corporate model or other structures that afford investors and employees a role in a company’s management.

Calls are frequently made to enhance the role of shareholders in decisions involving executive compensation and risk-management that happen at shareholders’ expense. Bebchuk and Fried have argued that it’s possible to improve transparency and accountability by giving shareholders a greater say on pay, by strengthening shareholders’ ability to unseat and replace directors, or by increasing the number of independent directors (i.e. directors not employed by or doing business with the company). Another proposal they describe would allow shareholders the ability to amend the corporation’s charter. Any long-term solution to these agency problems entails providing investors and owners with a permanent vote or some structural role in decisions that affect them.

An increased role for employees is also necessary to prevent some of imbalances that have arisen between management and the average member of the workforce. Randall Thomas and Kendell Martin, for example, have argued that labor unions and related entities should be allowed to make shareholder proposals. It would be possible to go even further by affording both investors and labor a role on the board and a larger say in major decisions that affect a company’s future. This is precisely what the German corporate governance system does. The German Codetermination (Mitbestimmung) system provides employees a role in the company’s management and has proven remarkably successful across a number of economic sectors. And although German income inequality has grown in recent years, “income inequality in Germany is a long way from reaching US proportions.”

I point these out not to advocate any particular corporate form, but to observe that there are alternatives that can address failings of the existing system. It’s important also to observe that things were not always this way. The internet has fostered an explosion in new forms of social organization, and cooperative membership structures are another potential source of ideas. There’s no reason that running a successful business means accepting a one-size-fits-all corporate model, particularly when that model marginalizes a company’s most committed participants—its investors and its employees.

Capitalism isn’t a single thing or a system of natural laws. It is a system whose rules are shaped by political—and ideally democratic—choices. Nowhere is this more obvious than in the reified legal fiction of the modern corporation. The absence of democracy within corporations is a central reason that the US has seen such a proliferation of high-risk investment strategies, and an unprecedented divergence in incomes. The concerns of both investors and employees have been systematically subordinated to the interests of America’s managerial class. The failure to create an inclusive economy is fundamentally a failure to build inclusive institutions. And the first step to fixing this problem is remembering that the rules that govern institutional decisions can be different.