A Democratic Participation Model for Corporate Goverance

Corporate law is in the grip of a fundamental conundrum: whether corporations should seek only to serve shareholders or instead attend to the interests of all stakeholders. The doctrine of shareholder primacy, which focuses the corporation’s attention on the goal of maximizing shareholder wealth, has been startingly successful, capturing the theory and practice of corporate governance for roughly fifty years. But recently the costs of this monomaniacal focus on the financial interests of one set of corporate participants have become clearer. At a time when the original reasons for restricting the corporate franchise to shareholders have been shown to rest on faulty assumptions and the misapplication of standard economic theory, shareholder primacy’s fingerprints have been discovered all over potentially catastrophic problems such as dramatically rising income and economic inequality, accelerating climate change, and the unleashing of vast sums of money upon politics. Stakeholderism promises a better way—a focus on meeting the needs of all stakeholders in the corporation through a balanced approach to governance. But stakeholder theorists have largely offered only hortatory suggestions for corporate boards, unable to develop concrete reforms to implement their concepts. So we now find ourselves at a stalemate: Shareholder primacy improperly orients the purpose of the corporation around maximizing shareholder wealth and power, while stakeholder theory has failed to develop a workable model of governance that would put its ideas into practice. This Article breaks the corporate governance stalemate by presenting a new model of corporate governance based on the theory of democratic participation. The model supports the extension of the corporate franchise beyond shareholders to other stakeholders, but only when governance rights can accurately capture the preferences of those with sufficiently strong interests in a manageable way. We explain the principles of the model and apply it to a variety of stakeholders with potential governance claims: shareholders, employees, creditors, consumers, and communities, among others. Assessing their interests, the accuracy of markers for those interests, and the manageability of those markers, we show how a variety of firm participants could be integrated into the governing structure of the corporation. This new model would allow appropriate stakeholders to define and effectuate their own interests through governance and would help ensure that the corporate purpose debate results in something more than empty rhetoric.