A Match Made in Law? On Corporations and Their Uncomfortable Fit with Democracy

Even though many people in the world live under democratic governments, they spend much of their lives under dictatorial rule. For about a third of their day, employees toil under the eyes of superiors who, as Elizabeth Anderson has pointed out in her 2017 book “Private Government”, rule arbitrarily and are not accountable to their subordinates. Under this dictatorial rule, workers neither have a right to be heard nor can they appeal their superiors’ decisions. What—if anything—could justify such a structure, especially in societies that put so much emphasis on democratic organizations in all other domains? And if it is not justifiable, what would be a better structure and how can we implement it?

In Political Theory there has been a lively debate on the question of democratic rights in the workplace in the last decades. The problems and prospects of workplace democracy have caught increasing attention. The research my colleagues in the ERC-funded “Corporatocracy” project and I conduct looks at this problem from a somewhat different angle. We are interested in the merits of corporations, the legal institutions behind most workplace organizations. Is there a good justification for the existence of these institutions in democratic societies? What problems do they cause and how might we be able to better regulate them?

What are corporations?

Corporations are legal constructs that are established and recognized by the state and endowed with numerous privileges. They are recognized as legal persons so that they can enter into contracts in their own name and sue and be sued in court. Historically, corporations originated in Roman law, and were subsequently used as the legal form of towns, monasteries, parishes, and the like. With the advent of Colonialism, the corporate form began to be used for the organization of colonial trade, most prominently in the British and Dutch East India Companies, and was then gradually shaped into the contemporary business corporation.

Corporations have distinct features that separate them from other legal persons like partnerships. A corporation is separated from its investors by entity shielding and limited liability, which means that in case either the corporation itself or one of its shareholders declares bankruptcy, debtors cannot confiscate the other’s assets in liquidation. To give an example, if I own a share of APA Inc. and have to declare bankruptcy, my debtors cannot claim APA assets, although they will be able to appropriate my share in APA. Likewise, if APA Inc. has to declare bankruptcy, its debtors cannot access my personal assets. With these privileges come certain standards and regulations that the corporation is subject to. These regulations, which are specified in Corporate Law, are mostly concerned with governing the relations of the different constituencies connected to the corporation, such as shareholders, creditors, employees, and the public at large. Very few of these standards, however, are concerned with the guarantee of democratic rights or the introduction of democratic procedures. Therefore, one question that is of concern to my work is whether democracy demands the introduction of more substantial possibilities for co-determination at this point. What kind of corporate structure does democracy demand and what would a democratic scheme of corporate governance look like?

Evaluating the internal organization of corporations

From the viewpoint of philosophy, we can also shed light on the fundamental questions that stand behind such discussions. For example, I am currently committed to answering the question of who constitutes the corporation. If we want to democratize the corporation, it is of crucial importance to get clear about who belongs to the demos of the corporation. The two subfields most concerned with decision-making procedures within the corporation—namely, literature on corporate law and debates around workplace democracy—have failed to seriously consider this question. On the one hand, corporate law scholars often take it for granted that shareholders are the core of the corporation as they supposedly own the corporation itself. Yet, this position has come under significant pressure as shareholders possess only a few of the rights conventionally associated with ownership. In fact, a shareholder of Apple cannot unilaterally modify or appropriate parts of Apple Inc. in exchange for their share. Doing so would constitute theft or damage to property.

The alternative understanding is to argue that shareholders possess shares as financial instruments and not as literal parts of the corporation. This understanding leads to a theory in which the position of the shareholders is much less central. They come to present merely one of many different groups that have a stake in the corporation, such as creditors and employees. Within this conglomerate of stakeholders, they might even be considered as one of the less important constituencies as shareholders tend to have diversified share portfolios and have low exit costs as they can simply sell their shares. In comparison, employees often depend exclusively on the income from their employment and have much higher exit costs as quitting to find a new job involves effort and significant risk. On the other hand, workplace democrats are fairly unanimous in their assessment that workers will have to constitute a part of the corporate demos. However, they rarely pay significant attention to other possible constituencies like customers, creditors, or suppliers. As there has been little attention paid to the inclusion of anyone but workers into the corporate demos, we currently lack any systematic analysis of who has a valid claim to co-determination. To provide such an analysis, we will have to establish well-justified general criteria that specify what it is that grounds a legitimate claim to co-determination.

External effects of corporations

The internal organization of corporations is not the only aspect of this legal form that is of concern to political theorists. The effects that corporations have on democracy at large have also come under increased scrutiny given recent political developments. For example, we have had issues with and around Twitter and Facebook and the process of democratic will-formation. These corporations have considerable power over what is being heard in the digital public sphere, possibly (dis-)advantaging certain political opinions or allowing for the spread of counterfactual propaganda. Even before that, there was the infamous decision of the US Supreme Court on Citizens United vs. FEC, granting speech rights to corporations and asserting that donations constitute political speech. This decision officially made corporations, immortal economic agents with enormous funds, into political actors. Corporations in general offer a robust legal infrastructure that is used to initiate and support lobbying efforts. Compared to natural persons, they have distinct advantages for undertaking such efforts. As legal persons, they can unite enormous amounts of funds under their names without being dependent on a single natural person. Unlike natural persons, who might change their political opinions, lose interest, become sick, and eventually die, corporations are set up to pursue a singular goal as long as they remain profitable. They can pursue their political goals persistently, even with different officials acting in their name, over decades, all backed by the considerable amount of assets at their disposal.

If it is the case that corporations cause several problems for contemporary democracies, as I have suggested, why do most societies nevertheless have legal provisions allowing people to incorporate? What do corporations contribute to society that could make up for the aforementioned ills? Now, this is where current theories of the corporation become fairly vague. Although it is individual states that grant corporations their legal status and privilege, it is not clear what their purpose in democratic societies is. Early corporations were chartered with specific purposes in mind. For instance, the Dutch and English East India Companies were created with the specific goal of establishing routes to India and later to exert imperial influence over the region. In contrast, contemporary corporations can—and, in fact, often are—founded for the pursuit of “any legal purpose” and do not require individual consent from state legislature anymore.

Why have corporations at all?

What benefits do democratic societies expect from having such provisions in their laws? Some argue that the corporation is simply a consequence of the recognition of a basic right to contractual freedom. Individuals have the right to associate, and the state should thus recognize and support such associations. If that is the case, then corporations are just recognized associations in the economic sphere, just as sports clubs are recognized associations in the leisure and sport sphere. However, this argument is flawed as it ignores the specifics of the corporation. Corporations are not just mere associations recognized by law. They are granted specific economic privileges, as I have shown above. States already recognize economic associations without granting them privileges like limited liability and entity shielding. These are partnerships. Partnerships enjoy legal personhood but lack corporate privileges, and it is impossible for them to obtain them, either because of explicit legal prohibitions or because of practical obstacles. The corporate form can thus not be justified with recourse to some basic right to association or contractual freedom, because we already have other associations fulfilling this purpose. In the economic sphere, partnerships already provide people with the opportunity to exercise their basic right to association and contractual freedom. Therefore, the justification for the institution of the corporation has to go beyond an appeal to the exercise of natural or human rights to association.

Economics provides one possible answer to the question concerning the rationale for corporations. Following its general theoretical paradigms, mainstream economic theory argues that economic activity in the corporation is beneficial if it can survive on the market. This is because, per neoclassical economists’ doctrine, markets as such generate efficient results that optimize the overall welfare of a society, absent any market failures. Neoinstitutionalists have elaborated on this claim and provided an account of what economic advantages the corporation as an institution provides, compared to the market. They argue that the coordination that takes place in corporations via hierarchical organization is, at times, more efficient than coordination via price on the market. So, for example, a factory can be run more efficiently if its workers are hired through long-term labour contracts instead of contracting them repeatedly on a day-by-day or weekly basis. Long-term contracts allow employees to specialize in their jobs and save the employer time, as they do not have to permanently recruit new employees. On the other hand, such contracts necessarily remain incomplete. The tasks of the employees are not perfectly determined so that superiors have the power to direct their work. While long-term contracts give the employees a longer planning horizon and more security, they also subject them to the power of their superiors, often with little possibility to object to directions.

While this economic explanation and justification of the existence of corporations is certainly internally coherent and gives a convincing account of what might be the corporation’s economic rationale, it has two significant flaws. Firstly, there is no conclusive evidence that hierarchical corporations are strictly more efficient than workers’ cooperatives, for example. Democratic societies should therefore ask themselves if they are willing to give up some democratic rights for economic benefits that are less than certain. Secondly, the economic explanation fails to pay due diligence to the democratic concerns I have described above. In most parts of democratic societies, we do not accept a limitation of democratic rights for efficiency gains. Democratic societies have abandoned the feudal system and have complex voting procedures even though government by experts or philosopher-kings might be the more economically efficient alternative. Yet, with corporations, we accept both internal and external anti- and a-democratic organizations for a purported efficiency gain. This state of affairs poses interesting questions. Why is it this precise point that we seem to consider a fair balance between efficiency and democracy? Are efficiency and democracy actually opposed in the organization of production? Which democratic reforms might we be able to make while retaining the efficiency gains?

A European perspective

The research agenda I have outlined is clearly concerned with a global phenomenon. Nevertheless, let me sketch out some European regional specifics that, at least to an extent, shape our inquiry and the possibility and likelihood of reform. Firstly, the European experience with the biggest and most powerful contemporary corporations has been marked by the fact that they are mostly based in the United States. The big five internet companies (Amazon, Apple, Facebook, Google, and Microsoft) all operate from the US and seem to take Europe and European regulation to be a somewhat secondary concern. The governing bodies of the EU have continuously pushed against some of the powers of the Big Five, upholding concerns that EU citizens seem to care more about than their US counterparts. One example of this has been the General Data Protection Regulation that enforces stronger privacy norms than in the US and was mainly targeted towards the Big Five. This could be interpreted as a more adversarial stance towards these companies and more willingness to engage in stricter regulation. However, European authorities have been much less adversarial and drastic than US authorities in other cases. In the Volkswagen emissions scandal, for example, VW paid a much larger fine in the US than in Europe even though it had sold much fewer cars with the dubious technology there. Increased political pressure on the Big Five might thus be based on a form of partisanship rather than general skepticism of powerful corporations.

Another difference that might shape our theoretical approach is the stronger labour regulation in the EU compared to the US. In terms of formal legal regulation, the most prominent example here is Germany with its strong co-determination law. Corporations organized under German law with more than 2000 employees have to assign half of the seats on its board to labour representatives. However, this gives labour representatives neither a majority nor veto power in decision-making as the head of our office building board is elected by the shareholders and holds the decisive vote in a stalemate. Nevertheless, this kind of compulsory co-determination is far stronger than any regulation in the US. On the European level, there is a regulation that mandates work councils for multinationals that assign information and consultation rights to employees, but these councils do not have decision-making power. Additionally, European countries offer better conditions for organized labour. Unionization rates are higher, collective labour agreements are more common, and collective bargaining more often takes place on the level of sectors instead of individual enterprises.

Even though such regional specifics clearly shape our approach to the business corporation, the problem, and therefore any possible solution, is global in scope. Business corporations have long left behind the limits of the national polity and expanded outward with subsidiaries and branches in many countries. Any attempt at reform should thus take into account the danger of corporations strategically re-locating to evade regulation.