Reflection of Stakeholder’s Accountability in Legislation

06/05/2021 1 By indiafreenotes

Accountability is a concept in corporate governance that is the acknowledgement of responsibility by an organization for actions, decisions, products, and policies that it undertakes.

A customer of a business expects that a product manufactured and sold by a business has been designed, tested, and produced so that it is safe to use. An investor in a business expects that the managers of the company are working to maximize shareholder return and to not be wasteful of corporate resources. The federal government expects that a business pays its taxes properly and promptly. These are all examples of the expectations that stakeholders have of businesses to act in a responsible manner.

Rising stakeholder expectations are motivating organizations to consider the impacts of their actions in a broad, transparent, and systematic manner. Businesses are a major actor in modern society, and stakeholders expect that businesses be a positive contributor to societal well-being. Stakeholders want companies to be more than purveyors of a product or a service; they expect them to fulfill a more positive societal role.

Corporations today operate according to a model of corporate governance known as “shareholder primacy.” This theory claims that the purpose of a corporation is to generate returns for shareholders, and that decision-making should be focused on a singular goal: maximizing shareholder value. This single-minded focus which often comes at the expense of investments in workers, innovation, and long-term growth has contributed to today’s high-profit, low wage economy.

Many business leaders, policymakers, and average Americans accept this doctrine of corporate governance as “natural” law the unshakeable reality of business. However, shareholder-focused corporations are not natural market creations, and the idea of “maximizing shareholder value” is relatively recent. This misguided focus, driven by the neoliberal conception of shareholders as the only actor within the firm who is critical to corporate success, is the result of decades of flawed theory in corporate law and policy. Increasing economic evidence suggests that shareholder primacy is not benefiting other corporate stakeholders, including workers, suppliers, consumers, or communities.

With corporate rights should come societal responsibilities, but the rules of corporate America today do not guarantee that firms advance the public interest. Corporations are legal entities that exist only once a state government approves their incorporation, which grants them tremendous privileges to operate apart from the natural persons who form them and run them. These privileges as currently exercised have allowed corporations to organize trillions of dollars of capital and create wealth beyond what most countries possess, ultimately exacerbating economic inequality by building incredible wealth for shareholders while contributing to decades of wage stagnation.

It is time to change corporate governance law, reflected in a new framework, to ensure that the wealth created at the behest of public charters benefits the stakeholders who, collectively, generate prosperity. The changes to corporate governance that we recommend are intended to fundamentally rebalance power among stakeholders. Most notably, the rules that mandate the sole, shortsighted focus on stock price must be rewritten. Corporate decision-making must also consider every stakeholder who contributes to corporate success and ensure that all key stakeholders have a voice in governance of the firm.

This post explores policy reforms that can replace shareholder primacy with a new stakeholder corporate governance model. Specifically, we propose four legislative reforms:

  • Boards of directors should be accountable to all stakeholders, not just shareholders. Specifically, board “fiduciary duty” should run to all stakeholders;
  • Corporate purpose statements should include a requirement that corporations positively benefit society;
  • Multiple stakeholders should be represented on corporate boards; and
  • Large corporations should be required to charter federally, in order to enable the reforms above.