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Stakeholders vs. Stockholders 

 by Steven Hill

It has been five years since the state of Pennsylvania passed the most sweeping anti-corporate takeover law in the United States. At the time the mighty wallet of the financial world condemned the law, threatening federal lawsuits as well as a boycott of Pennsylvania. Forbes called it "socialism Pennsylvania-style," Business Week labeled it "a dangerous game," and the New York Times opined that the anti-takeover statute was the "sorriest example of state intervention."

The threats of federal lawsuits against the Pennsylvania law never materialized, and the controversy eventually died down. The law has been in effect for five years, and despite the initial hysteria and red-baiting, its effects have been mixed and uncertain, depending on whom one talks to.

But the enduring legacy of the Pennsylvania law may well be that it introduced a truly pathbreaking notion -- that of the rights of stakeholders, as opposed to the rights of the stockholders -- into the fray of corporate-community relations. States and communities seeking new strategies to cope with job losses and corporate disinvestment associated with global free trade would do well to understand the opportunities provided by a legal framework solidifying stakeholder rights.

"Communitizing" the economy The stakeholders of a company are the employees, customers and suppliers of that company, as well as the inhabitants of the surrounding community where the company resides. If the company is likened to a tree, trying to grow tall and prosper, then the stakeholders are the roots and leaves of the tree, at the same time dependent upon and yet feeding the company. The stakeholder provision of the Pennsylvania anti-takeover law allowed corporate directors who are weighing takeover bids to consider not only the stockholders' interests, but also those of the stakeholders. Business Week said the stakeholder provision "undermined a key concept of capitalism: a board's fiduciary duty to shareholders." Translated, this meant that the law took away some influence from the stockholders -- the absentee owners who often live hundreds if not thousands of miles from the community -- and gave that influence to those who lived in the community in which the corporation was based. This provision was a step toward, not nationalizing corporations, but instead communitizing them.

A fundamental issue at stake in an era of global free trade -- played out in the battle of the stakeholders versus the stockholders -- is one of economic partnership between community and private investors. Pushed by the anguish and fear in communities impacted by corporate disinvestment and job flight, some state and local governments have begun taking baby steps in the direction of legally codifying the rights and jurisdiction of their stakeholders. Anti-takeover statutes and voting restrictions on large shareholders have been passed in 23 states, though none of them are as sweeping as the Pennsylvania statute. Louisiana, Ohio and Texas, as well as some municipalities, have passed laws requiring disinvesting companies to financially compensate abandoned communities and municipalities. Called "exit fees," these reparations are intended to assist in the diversification of the local economy, the re-training of workers, and to provide badly needed funds to social services necessary to help unemployed workers get over the hump. In February 1993, at the urging of local government officials, Michigan Judge Donald Shelton issued a court order blocking G.M.' s plans to relocate its Ypsilanti assembly plant to Arlington, Texas, asserting the rights of the "common welfare," in this instance the protection of local jobs (the order was later reversed upon appeal). These stakeholder trends can be strengthened and broadened, and directed toward a community-affirming approach.

The German Approach The concept of stakeholder rights still remains fuzzy and mostly unknown in the U.S. But those who find the concept appealing may sharpen their focus a bit by looking across the Atlantic to Germany. In 1976 Germany passed a controversial law called the Co-determination Act, establishing supervisory boards (called Aufsichtsrat) composed of 50% worker representation in all firms with personnel of more than two thousand. The Aufsichtsrat do not interfere in the day-to-day running of the company, but instead they approve major policy decisions, especially those with human resource implications. When combined with powerful worker councils located in virtually every German work site, the Aufsichtsrats oblige managers to confer extensively with employees and unions. The Aufsichtsrat can use its influence quite powerfully, and is one of the reasons that German workers have the highest wages, the shortest working hours, the finest benefits, and one of the strongest labor movements in the world. There are flaws in the Aufsichtsrat system, and by no means is it one of true co-determination between labor and management. But the framework is there, waiting to be improved upon.

Supervisory boards, exit fees, and anti-takeover laws are just the beginning. Why shouldn't elected community stakeholder representatives sit as equals on the company board of directors, alongside stockholder and worker representatives? This would be an improvement on the German Aufsichtsrat, forming a three-way economic "separation of powers," much like the balance of power delegated to the executive, legislative and judicial branches of the U.S. political system. And since corporations are such dominant players in our communities, why shouldn't voters help elect corporate CEOs, the "executive" branch of these crucial institutions that operate with so very little community oversight?

Greater economic democracy will result if communities solidify the legal framework of their stakeholders. The Pennsylvania law, five years old this April, was just a beginning. But it gave a glimpse that, with occasional assistance from state and local government -- and where these are non-cooperative from state and local voter initiatives -- free trade-impacted communities can effectively "communitize" multinational corporations.

[Steven Hill is the western regional director of the Center for Voting and Democracy. He is co-author of "Reflecting All of Us" (Beacon Press, 1999). He lives in San Francisco. For more information, see or write to: PO Box 22411, San Francisco, CA 94122.]

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