THE ROLE OF CORPORATE GOVERNANCE IN ADDRESSING INCOME INEQUALITY

ABSTRACT

This article examines the relationship between income inequality and the structure of business enterprises, focusing on the significant role of corporations. It argues that the traditional model of corporate governance, which prioritizes shareholder wealth maximization, has led to a redistribution of income away from workers towards capital investors. While labour and employment laws have attempted to mitigate these disparities, they have fallen short in addressing the fundamental power imbalances within the corporate structure. The National Labor Relations Act, intended to promote workplace democracy, has encountered obstacles and failed to sufficiently empower workers. To effectively tackle income inequality, the article contends that a revaluation of firm structure and governance is necessary. By reassessing the balance of power within corporations and advocating for increased worker participation in decision-making processes, a more equitable distribution of wealth can be achieved.

KEYWORDS

Corporate Governance, Income Inequality, Business Enterprises, Shareholder, Wealth Maximization

INTRODUCTION

In contemporary discourse, the debate surrounding income inequality often revolves around the concept of wealth redistribution. While some advocate for measures such as welfare programs or progressive taxation to address this issue, opponents argue that such interventions infringe upon economic liberty and disrupt the efficiency of market dynamics. However, this dichotomy overlooks a fundamental aspect of the problem: the original scheme of income distribution inherent in the structure of corporations.

Central to this argument is the observation that corporations, as entities designed to maximize shareholder wealth, concentrate economic power and profits in the hands of capital investors. Shareholders wield control through the election of the board of directors, with courts reinforcing a norm of shareholder primacy, emphasizing profit maximization above all else. In contrast, employees, despite their integral role in generating corporate wealth, lack commensurate rights to participation or profit-sharing.

Existing labour and employment laws, while aiming to mitigate the consequences of this power asymmetry, often fall short. While legislation such as the National Labor Relations Act (NLRA) endeavours to address workplace democracy and collective bargaining, its efficacy has been hindered by various factors, leaving workers with inadequate means to challenge the prevailing imbalance.

To truly tackle income inequality at its roots, a revaluation of firm structure and governance is imperative. This involves acknowledging and rectifying the separation of employment from ownership inherent in corporations. Rather than merely addressing the symptoms through labour laws, there is a pressing need to reconsider the very nature of the “employer” and empower workers within the corporate framework.

This article proposes a multi-faceted approach to addressing income inequality. Firstly, it examines the structure of business enterprises, particularly the corporate model, elucidating the mechanisms that perpetuate the concentration of wealth in the hands of capital investors. Secondly, it provides an overview of the limitations of existing labour and employment laws in rectifying this power disparity and mitigating income inequality. Finally, it advocates for a paradigm shift in firm structure and governance to empower workers and facilitate a more equitable distribution of wealth generated by corporations.

In conclusion, the issue of income inequality cannot be adequately addressed solely through traditional measures of wealth redistribution. Instead, it necessitates a comprehensive re-examination of the corporate structure and governance to rebalance the distribution of economic power and ensure fairer outcomes for all stakeholders. By fostering greater workplace democracy and empowering workers within the corporate framework, society can take meaningful steps towards mitigating income inequality and promoting economic justice.

WORKPLACE LAW AND INCOME INEQUALITY

1. Current Workplace Regulations Address Minimal Protections: Existing workplace laws primarily focus on providing minimum protections and endowments to employees. These regulations encompass liability for tortious behaviour, sexual harassment protections, federal antidiscrimination statutes, common-law duties regarding workplace safety, and requirements such as the federal minimum wage and unpaid family or medical leave.

2. Limited Impact on Income Inequality: While these regulations establish a baseline for economic participation, they do little to address income inequality directly. Although they may uplift the bottom tier of income earners, they merely serve as minimum requirements rather than tackling the root causes of income inequality across the spectrum.

3. Potential Role of National Labor Relations Act (NLRA): The NLRA allows employees to select collective representatives to negotiate terms of employment with employers. While collective bargaining under the NLRA has historically increased wages, its effectiveness in addressing modern income inequality is hindered by declining union membership and limited statutory scope.

4. Structural Limitations of Labor Law: Labor law, as structured under the NLRA, maintains a division between management and labour, with employers retaining control over core business decisions. Unions, although historically influential, are increasingly constrained in their ability to address income inequality due to the limited scope of collective bargaining and declining membership rates.

5. Need for Corporate Governance Reform: Rather than perpetuating a paradigm of adversarial labour-management relations, there is a growing recognition of the need to integrate employees into the governance of firms. This approach would represent a significant departure from traditional labour and employment law paradigms and necessitate reforms in corporate governance structures to ensure greater employee participation and influence.

CORPORATIONS, EMPLOYEES, AND THE DISTRIBUTIONS OF INCOME

The United States economic landscape is predominantly shaped by corporations, which serve as the primary vehicles for conducting joint economic enterprises, particularly on a large scale. While other business organizational forms exist, corporations dominate due to their role in driving business growth and prosperity since the Industrial Revolution.^[1] In the U.S., corporations are established through state corporate law, where incorporating individuals file articles of incorporation to outline the basic structure of the corporation. Control of the corporation then shifts to the board of directors, who manage the firm’s affairs and make strategic decisions, with shareholders typically selecting directors at annual meetings. However, employees find themselves outside this governance structure, lacking any formal legal role despite being integral to the corporation’s operations.

The power dynamics within corporations have significant implications for income distribution. Debates in corporate law over the past century have revolved around the allocation of corporate power between the board, officers, and shareholders. Shareholder advocates push for reforms favouring shareholder power, while management and stakeholder advocates argue for boards to consider a broader range of interests beyond shareholder wealth maximization. However, there has been little emphasis on changing the corporate electorate to include employees, leaving them without direct input into corporate decision-making processes. As a result, employees are treated as costs to be minimized rather than stakeholders with a legitimate claim to corporate profits.^[2]

The corporate power structure has contributed to growing income inequality in various ways. Corporations, driven by pressures to maximize shareholder wealth, have sought to reduce costs, including wages, leading to downward pressure on average labour incomes. Norms surrounding lifetime employment have eroded, replaced by practices such as downsizing and outsourcing, further exacerbating income disparities. Meanwhile, executives have seen their compensation reach unprecedented levels, with a significant portion of the top income percentiles comprised of corporate leaders. The rise in executive compensation has been attributed to flaws in corporate structure, where executives wield significant power to negotiate their own pay packages, often at the expense of shareholders and employees.

The consequences of rising income inequality have led to comparisons with the Gilded Age^[3], characterized by a concentration of wealth among corporate leaders and financial elites. The intertwining of financial interests with corporate control perpetuates a culture of back-scratching, where executives and financial professionals mutually benefit from their positions of power. These dynamics further widen income disparities, creating a self-perpetuating cycle of wealth accumulation among the elite while leaving the majority of employees behind.

Addressing the entrenched inequalities within the corporate landscape requires a revaluation of existing labour and employment regulations. Despite brief interruptions during events like the financial crisis, trends indicate a continuing divergence between corporate profits and labour income, as well as widening disparities in compensation across income percentiles. Some advocate for reforms within labour and employment law to address these disparities, recognizing the need to rebalance power dynamics within corporations and ensure fairer distribution of economic gains.

ADDRESSING INCOME INEQUALITY THROUGH STRUCTURAL CORPORATE LAW CHANGE

The current corporate governance framework has effectively excluded employees from meaningful participation in decision-making processes, despite their significant contributions to the ongoing business operations of firms. This exclusion is unwarranted, as employees play a role in the firm’s activities comparable to that of equity participants. Ronald Coase’s theory of the firm underscores the importance of the relationship between employers and employees^[4], highlighting the economic and structural reasons supporting employee involvement in firm governance.

Employee participation in governance holds the potential to address income inequality directly at its source. By granting employees a role in decision-making processes, firms can more equitably distribute economic gains, thus reducing the need for secondary measures like tax transfers. Traditional avenues such as collective bargaining and employee ownership have provided some means of participation^[5], but they often fall short of granting employees significant control. Employee stock ownership plans (ESOPs), for instance, may not afford meaningful governance rights to rank-and-file employees and could primarily serve managerial interests.

Moving towards complete or majoritarian employee ownership would entail a significant shift from shareholder primacy to employee primacy. However, such a transition faces practical challenges, including the financial impossibility of transferring all current shares to employees and the risk of shareholder exploitation in the absence of meaningful employee participation in governance.^[6]

Integrating employee representatives onto boards of directors presents a more balanced approach, allowing for consideration of both shareholder and worker interests in governance decisions^[7]. Employee representatives would advocate for worker rights and fair compensation, potentially curbing excessive executive pay and fostering a more equitable corporate culture. Additionally, empowering employees through mechanisms like nonbinding votes on transformative transactions can further amplify their voice in shaping the firm’s future.

Employee participation in governance would also challenge norms regarding executive compensation. Shareholder advocates and union pension fund representatives have long criticized excessive executive pay, and employee representatives would add their voices to this chorus. With employees voting for their own directors, powerful CEOs would face greater difficulty assembling boards composed solely of allies.

A small yet tangible step towards employee empowerment could involve implementing a nonbinding employee vote on transformative corporate transactions.^[8] This referendum, held prior to shareholder votes, would inform shareholders of employees’ perspectives and potentially bridge common interests between shareholders and employees.

In summary, employees have been marginalized from meaningful participation in corporate governance despite their crucial role in business operations. Granting employees a voice in governance can lead to a more equitable distribution of economic gains and challenge norms regarding executive compensation. Integrating employee representatives onto boards and implementing mechanisms like nonbinding employee votes can empower workers and create a more balanced corporate landscape. Ultimately, such reforms hold promise for addressing income inequality and fostering a fairer distribution of wealth within society.

CONCLUSION

Advocates for greater income equality argue that current corporate structures disproportionately benefit high-level executives and shareholders, allowing them to extract the majority of the firm’s economic surplus. They contend that granting employees rights to participate in business governance would empower them to claim a fairer share of the enterprise’s gains. By redistributing wealth more equitably, this shift could help alleviate the widening economic disparities in society. Thus, there’s a call to reform corporate structures to include employee participation in firm governance, aiming to create a more just and balanced distribution of economic outcomes.

^[1] LARRY E. RIBSTEIN, THE RISE OF THE UNCORPORATION 4 (2010).

^[2] See Brett H. McDonnell, Strategies for an Employee Role in Corporate Governance, 46 WAKE FOREST L. REV. 429, 429 (2011) (“corporate law does nothing to encourage any role for employees in corporate governance.”

^[3] Paul Krugman, Why We’re in a New Gilded Age, N.Y. REV. BOOKS (May 8, 2014), http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/ (explaining that an incredible surge in the “one percent’s” share of national income has marked the second Gilded Age).

^[4] R. H. Coase, The Nature of the Firm, 4 ECONOMICA 386, 403 (1937) (“We can best approach the question of what constitutes a firm in practice by considering the legal relationship normally called that of ‘master and servant’ or ‘employer and employee.’”

^[5] HENRY HANSMANN, THE OWNERSHIP OFENTERPRISE 91 (1996) (discussing how employee ownership is most likely to be successful when employees have similar status and economic interests).

^[6] See id. at 931–33 (discussing a new credit strategy to provide for employee–ownership financing, similar to home mortgages and student loan financing). In the interest of brevity, I am giving short shrift to the many thoughtful treatments of the possibilities for greater employee ownership. See, e.g., JOSEPH BLASI ET AL., IN THE COMPANY OF OWNERS: THE TRUTH ABOUT STOCK OPTIONS 223 (2003) (arguing that “most corporations in America would enjoy more motivated workers and larger profits if they embraced partnership capitalism cantered around employee stock options”).

^[7] Troy A. Paredes, Too Much Pay, Too Much Deference: Behavioural Corporate Finance, CEOs, and Corporate Governance, 32 FLA. ST. U. L. REV. 673, 757–61 (2005). Paredes has argued for a devil’s advocate or “chief naysayer” on corporate boards to advocate against groupthink and challenge the decision-making processes of boards and CEOs. Id. at 740–41 (“At bottom, considering the opposite results in a more balanced and presumably more accurate assessment of a course of conduct.”). I am making a similar argument as to employee representation on boards: they would ask directors to consider the ramifications of their decisions on workers, which would change the decision-making process.

^[8] Matthew T. Bodie, Workers, Information, and Corporate Combinations: The Case for Nonbinding Employee Referenda in Transformative Transactions, 85 WASH. U. L. REV. 871, 878 (2007).

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