Can Corporations Be Made to Fit Democratic Theory and Vision?

Part of the Series

Gar Alperovitz | America Beyond Capitalism

This is an exclusive Truthout series from political economist and author Gar Alperovitz. We will be publishing weekly installments of the new edition of “America Beyond Capitalism,” a visionary book, first published in 2005, whose time has come. Donate to Truthout and receive a free copy.

This “Chapter Four” is part eight of Truthout’s continuing series of excerpts from Gar Alperovitz’s “America beyond Capitalism.”

A second line of attack on what many now call the “democratic deficit” zeroes in on the multiple ways the organization of the larger economy impacts democratic life.

One form of the question focuses on the challenge economic inequality poses to democratic practice – and the degree to which different institutions do or do not foster equality. “[I]f income, wealth, and economic position are also political resources, and if they are distributed unequally, then how can citizens be political equals?” asks political scientist Robert Dahl. “And if citizens cannot be political equals, how is democracy to exist?”

The superior ability of the rich to participate politically is not limited to buying influence via donations and lobbyists (and television ads); they also have superior education, more time, more developed skills, greater personal security, and far greater access and experience in managing politics and government. A recent study found that 81 percent of individuals who donate at least $200 to congressional campaigns make over $100,000 per year; 46 percent make at least $250,000. Those among the bottom fifth vote less, attempt to speak to or influence public officials less, participate in organized groups less, and indeed, are only one-tenth as likely to make any form of campaign contribution as those in the top decile.

Michael Lind’s formulation of the antidemocratic result is succinct: “From its fortified command post in the large organizations of the private sector, protected by the concentric moats of alumni preference, college tuition, professional licensing and pro-managerial state laws, the white overclass dominates U.S. politics.”

If meaningful democracy requires greater equality among the citizenry, and if, as we have seen, existing economic arrangements simply do not permit “after-the-fact” strategies to significantly alter inequality, what then? Either nothing can be done, or clearly a rather different long-term arrangement of economic institutions is necessary, at least in principle. Strikingly, the emerging theory – beginning now from the question of democracy -converges with the emerging theory illuminated by Chapter 1’s examination of the problem of equality on its own terms. (And, as we have seen, the logic that flows from such considerations points ultimately in the direction of asset-based strategies and alternative wealth-holding institutions.)

The same question – though rarely stated openly – is also implicit in discussions of campaign finance reform. There is not much disagreement about the extraordinary importance of money in modern political campaigning. The Center for Responsive Politics estimates total spending for and by congressional candidates, presidential candidates, and the parties in 1999 to 2000 at over $2.5 billion – plus roughly another $200 million dollars for “issue” advocacy campaigns.

“Only those who have accumulated lots of money are free to play in this version of democracy,” observes William Greider. “Only those with a strong, immediate financial stake in the political outcomes can afford to invest.”

Until the foundational question of whether some other way to reduce inequality is confronted and resolved, it is unlikely that the democratic question of how to curb the influence of money in politics can be effectively dealt with. And given the failure of traditional approaches, for better or worse this again brings the problem of democratic renewal back to asset-based strategies and new institutional approaches to altering wealth ownership.

Intimately related to economic inequality is the matter of time – in this case as it concerns democracy as well as liberty. From Aristotle on, it has been obvious that democracy becomes meaningless if people do not have time to participate. Barber, concerned that a third of the workforce works more than forty-five hours a week, emphasizes that democracy requires “time to be educated into civil society, time to participate in deliberation, time to serve on juries, occupy municipal magistracies, volunteer for civic activities.” Various ways to reduce the workweek, as we have seen, have begun to be put forward. However, most of these in turn require some way to distribute income more equitably – hence, also wealth – so that time itself can be more equitably distributed.

The implications different economic arrangements have for democratic practice are also obvious in connection with the political influence of large corporations. As we have noted, Thomas Jefferson, Louis Brandeis, and such theorists as Henry C. Simons (along with many traditional conservatives), to say nothing of Karl Marx, all held large corporations to be incompatible in various ways with democratic practice. Although their alternative systemic solutions – entrepreneurial and smaller-scale capitalism, on the one hand, socialism, on the other – no longer appear viable, the underlying question has not gone away.

We are here at the very heart of the system problem. The key question: Is there any way to achieve democratic control in the face of the self-evident power of giant enterprises? Are there any viable longer-term alternatives?

A host of studies have documented some of the most obvious realities. The large corporation regularly

1. Influences legislation and agenda setting through lobbying
2. Influences regulatory behavior through direct and indirect pressure
3. Influences elections via large-scale campaign contributions
4. Influences public attitudes through massive media campaigns
5. Influences local government choices through all of the above – and adds the implicit or explicit threat of withdrawing its plants, equipment, and jobs from specific locations
6. Influences choices at all levels by virtue of the simple fact that in the absence of an alternative, the economy as a whole depends on the viability and success of its most important economic actor – a reality that commonly forces citizen and politician alike to respond to corporate demands. [/bullets]

One of the main “countervailing” forces checking the political powers of the corporation has been organized labor. With the steady decline of labor union membership, however, there has also been a weakening of labor’s direct and indirect capacity to constrain corporate influence. Corporations now commonly account for three out of every four political donations in congressional elections – outnumbering labor contributions almost 14 to 1.

Robert Kaplan is blunt: “[T]he influence that corporations wield over government and the economy is so vast and obvious that the point needs no elaboration…. Democratic governance, at the federal, state, and local levels, goes on. But its ability to affect our lives is limited.”

A former president of the American Political Science Association, Charles Lindblom, concludes his prizewinning book Politics and Markets with this judgment: “The large private corporation fits oddly into democratic theory and vision. Indeed, it does not fit.”

The classic twentieth-century strategies aimed at making corporations more accountable centered, first, on antitrust efforts; second, on various forms of public regulation. Such strategies do not attempt to move beyond the corporation as an institution; they essentially hope to use publically backed efforts to constrain its activities. With antitrust now of marginal importance both economically and in terms of its original “democratic power” applications, regulation is the main remaining traditional alternative.

But it is also increasingly clear that the effectiveness of regulatory strategies is extremely limited in many areas, and under attack in several others. During the final decades of the twentieth century, deregulation occurred in connection with trucking, airlines, railroads, telecommunications, energy transmission, and large sectors of the financial services and banking industry. Corporations also have been able to develop powerful lobbying and other tactics to influence federal agencies and commissions established to oversee their functioning.

Scholarly analyses have illuminated the foundational logic that commonly reduces the impact of traditional regulatory strategies. One large body of research provides detailed studies of the systematic and regular processes through which “iron triangles” of corporate and other pressures hedge in and co-opt regulatory systems – allowing just enough re-form to buy off critics without seriously challenging basic corporate priorities. Quite regularly, political scientist Marver Bernstein observes, “faced with the organized opposition … a commission finds its survival as a regulating body dependent heavily on its facility in reaching a modus operandi with the regulated groups.”

Nobel laureate George Stigler demonstrated early on that regulation often is actually sought by leading firms in an industry as a way to maintain dominance. Even when it is thrust upon the industry, regulation commonly “is designed and operated primarily for its benefit.” The result is what another respected conservative, James Q. Wilson, calls “a government of cartels and clients.” (Ralph Nader characterizes the same implicit collusion as “corporate socialism, a condition of federal statecraft wherein public agencies control much of the private economy on behalf of a designated corporate clientele.”)

As the comments of conservatives like Stigler and Wilson suggest, these are not simply liberal or academic concerns. We have noted the experience of William Simon, Richard Nixon’s secretary of the Treasury – and his “incredulity as businessmen ran to the government in every crisis, whining for handouts or protection.” David Stockman, the architect of the so-called Reagan Revolution, came to the conclusion that the political power of “strong clients” like Boeing, Lockheed, General Electric, and Westinghouse was simply overwhelming. They “know how to make themselves heard. The problem is, unorganized groups can’t play in this game.”

The “Chicago school” conservative economist Henry C. Simons analyzed the underlying logic of power and came to the conclusion that “regulatory strategies” involved the worst of all solutions. Even public ownership was better, he felt – even from the perspective of free-market economic theory. At least it provided for public disclosure of information and open oversight. The state, Simons proposed, “should face the necessity of actually taking over, owning, and managing directly … industries in which it is impossible to maintain effectively competitive conditions.” Likely candidates included railroads, “utilities, oil extraction, life insurance, etc.” For similar reasons Simons suggested that it might make sense for metropolitan governments to “acquire much or most of the land in their areas.”

Although the problem of “regulatory capture” is real, it does not follow that there is no role for regulatory strategies in a longer-term foundational approach. Many gains have been achieved in connection with the environment and other matters. A central question is, under what conditions can regulation be made to work effectively and efficiently? Part of the answer clearly involves the extent to which an engaged citizenry has the experience, time, and money to force regulatory agencies to hold corporations to publicly determined standards.

But this in turn brings the question back, again, to issues of citizen democratic experience, on the one hand, and inequality, on the other. Both also drive the question back, once more, to the institutional foundations – particularly economic – that are required to nurture a truly democratic citizenry.

At this stage of the reassessment process, no fully comprehensive proposal has as yet been put forward that even in theory fully confronts the challenge to democratic practice presented by the power of the large corporation. Various thinkers have, however, begun to offer a number of suggestions that move in the direction of a comprehensive approach that might one day plausibly be combined with other emerging ideas to produce an integrated strategy. These proposed partial solutions center on the legal status of the corporation; the role of public and quasi-public “stakeholders”; the degree to which the corporation can be democratized from within; and the leverage that public or quasi-public ownership of corporate stock can confer.

The large for-profit corporation is a creation of society. It has no independent right to exist absent a public charter that spells out its rights and obligations. For much of the nineteenth century, significant scale corporations in the main were authorized only to undertake specific public or quasi-public projects – for example, the construction of waterways and canals. Large, independent, limited-liability corporations evolved slowly, gaining real economic purchase only after the Civil War.

A number of writers have urged replacing or supplementing current state chartering of corporations with federal chartering to avoid states “racing to the bottom” to set minimum chartering requirements (a reform also urged by Henry C. Simons years earlier). Senate Minority Leader Tom Daschle and former House Minority Leader Richard Gephardt, among others, have proposed related legislation to establish “R corporations” that would receive preferential tax treatment if they agreed to a stipulated code of conduct. Sociologist Charles Derber has proposed that corporate charters define an explicit public purpose and include social, environmental, and accountability requirements.

More fundamentally, Rabbi Michael Lerner, the editor of Tikkun, suggests a “Social Responsibility Amendment” to the U.S. Constitution that would require each corporation to renew its charter every twenty years. If a corporation could not prove that it serves the common good, its charter would be revoked and its assets distributed to another community group that could better meet important social goals.

A second line of strategy centers on proposals by another group of analysts that employee, community, and other stakeholders be granted seats on corporate boards so they can directly represent their interests. Ralph Estes of the Stakeholder Alliance suggests that corporations also be required to provide the Securities and Exchange Commission with an extensive array of information on social and environmental performance – and that such information be made available to workers, to consumers, to suppliers, and to the communities corporations serve through mandated “Corporate Reports.” In addition, “stakeholder councils” with limited powers would be established to provide oversight for the enterprise.

The challenge confronting proposals to redefine the legal status of the corporation is obviously similar to that facing regulatory strategies. Although changes in citizen capacities might one day alter the underlying relationships, currently the corporation clearly has sufficient independence to avoid or severely limit the proposed constraints. Similarly, while stakeholder representation also offers the possibility of greater accountability, it has done little so far to alter the fundamental power relationships in U.S. companies where it has been tried, or in countries such as Germany where a related approach – “codetermination” – has been attempted. Indeed, many observers feel that unless bolstered by much more fundamental reforms, such participation can all too easily lead to the “co-optation” of labor representatives and other stakeholders.

The third line of proposed strategies emphasizes internal corporate democratization: Columbia University professor Seymour Melman theorizes that workplace democracy might ultimately “encompass every major aspect of activity necessary to production, and thereby construct an alternative to the hierarchical systems of both business and government – an alternative to state capitalism.” A comprehensive system of self-governing employee-owned enterprises, Robert Dahl holds, “would tend to … give all citizens a more nearly equal stake in maintaining political equality and democratic institutions in the government of the state.” David Ellerman, the former adviser to the chief economist of the World Bank, proposes that all corporations be restructured as partnerships, with all workers included as partners with ownership and governance rights.

The thrust of such democratization proposals is in line with a trend among sophisticated corporate managers that emphasizes the efficiency gains greater employee empowerment can produce. It is also in line with the developing thrust of worker-ownership proposals for small- and medium-size locally based firms. However, there are obvious limits to this approach as well. Critically, most of the ideas for internal democratization simply do not confront the external political and power dynamics of the very large-scale firms that are of central concern. Even democratized corporations have reasons to exercise their inherent political power when their particular interests are at stake.

A final line of developing strategies involves significantly greater institutional change. This focuses on the large blocks of stock held by public and private pension funds.

In the 1970s Peter Drucker coined the phrase “pension fund socialism” to underscore the potential leverage that large-scale capital accumulations might give major pension funds. A few years later the activist-writers Jeremy Rifkin and Randy Barber suggested that pension funds be required to finance a Midwest regional “rust-belt” reinvestment plan centered on worker and community-based firms; a more recent treatise by sociologist Robin Blackburn has offered detailed analyses and recommendations for a comprehensive long-term strategy. Blackburn and others also have urged unions and public authorities to shift their current pension investment priorities to achieve other public goals – and a number have invested successfully in housing, on the one hand, and businesses that provide jobs in certain states, on the other.

The broader corporate-accountability and democracy possibilities that an extension of public pension fund strategies might ultimately offer is suggested by recent developments in California. CalPERS (California Public Employees’ Retirement System), the state employee pension fund, is the second-largest U.S. pension fund and third-largest in the world. It has long used its financial power to encourage corporate governance reforms, recently divesting itself of tobacco stock and rejecting investments in companies fleeing the country for offshore tax relief. CalPERS’ leadership also helped organize a national coalition of state treasurers who oversee combined portfolios of more than a trillion dollars to force investment banks to reassess conflicts of interest.

Beyond this, CalPERS requires companies seeking investment support to follow a specified code of conduct in their international investment practices: firms from emerging-market nations are judged according to their governments’ records on human rights, labor rights, corruption, and investor protections. “Show me a company locating offshore in Bermuda or polluting the environment and I’ll show you a company that’s going to screw its shareholders,” declares California treasurer Phil Angelides. “Transparency, democracy, labor rights, these are all issues that should be part of fund managers’ due diligence.”

Though the financial interests of the public pension fund as shareholder can sometimes be in tension with other issues of public and employee concern, the evolving experience of CalPERS and other pension funds suggests that a growing body of “democratic accountability” experience vis-à-vis the corporation is steadily being developed by such efforts.

There are also some obvious structural parallels – and potential connections to be made – between the new strategies and some of the strategies emerging in connection with equality:

In Chapter 1 we reviewed wealth-related proposals by Roemer, Meade, and Kelso that involve large-scale publicly backed stock ownership aimed at producing a supplemental income stream for citizens. Those of Roemer and Meade also require some form of public authority – very similar to the agencies that manage public pension funds – to oversee the investment of stock on behalf of the citizenry.

The developing trajectory of public pension fund practice, on the one hand, and the proposed publicly backed income-producing strategies, on the other – taken together – point logically in the direction of a system-wide wealth-ownership approach that, at least in theory, might one day offer ways to achieve both greater democratic accountability and greater equality.

Standing back from the steadily evolving reassessment process, the historically interesting questions are the pace at which each of the emerging strategies for dealing with the power of the corporation might continue to develop and be refined – and whether key aspects of each might be integrated with other emerging approaches to one day achieve a fully comprehensive democracy-enhancing approach.