Corporations, the Democratic Deficit, and Voting

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2014

Corporations, the Democratic De7cit, and Voting Corporations, the Democratic De7cit, and Voting

Jeffrey Moriarty

Bentley University

, jmoriarty@bentley.edu

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Corporations, the Democratic Deﬁcit, and Voting

WAHEED HUSSAIN AND JEFFREY MORIARTY*

BSTRACT

Many corporations are enthusiastic participants in the political arena. The

most common, and most studied, forms of corporate political activity are

lobbying and campaign ﬁnance (Hillman, Keim, & Schuler, 2004). Increasingly,

however, corporations are engaging in a new kind of political activity. They are

taking on roles traditionally played by the state, notably, by providing public

goods like education, environmental protection and disease prevention, and

helping to sustain and enforce civil regulations like the UN Global Compact,

the Business Charter for Sustainable Development, and the Voluntary Standards

on Security and Human Rights (Kobrin, 2009; Matten & Crane, 2005; Ruggie,

2004; Scherer & Palazzo, 2011; Vogel, 2010).

Many writers argue that a “democratic deﬁcit” is created when private

actors such as corporations take on state functions (Brenkert, 1992; Matten &

Crane, 2005; Scherer & Palazzo, 2011). The problem, it is said, is that the

course of public life is being shaped by agents who are not accountable to the

public. We evaluate this claim and consider what should be done about it. We

focus in particular on a recent attempt, put forward principally by Palazzo and

Scherer (Palazzo & Scherer, 2006; Scherer, Baumann-Pauly, & Schneider,

2013; Scherer & Palazzo, 2007, 2011; Scherer, Palazzo, & Baumann, 2006), to

address the democratic deﬁcit by “democratizing” corporations. We argue that

their proposal, while promising, has a signiﬁcant defect. We then propose a

remedy for this defect. In sum, our goal is to call attention to a new kind of

corporate political activity, to highlight its main ethical defect, and to examine

in detail an attempt to address it. More generally, this paper contributes to our

understanding of the evolving role of corporations in society.

I. I

NTRODUCTION ...................................... 430

II. T

HE NEW CPA: AVOIDING AN OLD PROBLEM BUT FACING A

NEW ONE .......................................... 433

III. I

S THERE A DEMOCRATIC DEFICIT? ........................ 435

* Waheed Hussain is Assistant Professor of Philosophy, University of Toronto. Jeffrey Moriarty is

This paper is equally the work of both authors. For helpful discussion of it, we thank participants in

the ethics of lobbying symposium, sponsored by the Georgetown Institute for the Study of Markets and

Ethics in November of 2013. For comments, we thank Chris MacDonald and Jason Brennan.

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IV. PALAZZO AND SCHERER’S MODEL OF DEMOCRATIC ACCOUNTABILITY . 439

V. A P

ROBLEM WITH THE MODEL ........................... 441

VI. T

HE SOLUTION ...................................... 443

VII. C

ONCLUSION ........................................ 447

EFERENCES ............................................ 448

I. I

NTRODUCTION

Let’s begin with what we will call the “standard model” of institutional

responsibilities in a democratic society. Generally speaking, democracy is an

ideal that requires that the members of society govern their common affairs

together. Social institutions in a democratic society must be structured so that,

directly or indirectly, citizens collectively determine how to organize important

aspects of social life and how to address the important challenges they face.

Perhaps the most important institution in this regard is the state. The various

agencies of the state make binding laws, develop regulations, and deploy

various collective assets, all on behalf of the people, carrying out the organiza-

tional plans and social policies that citizens have endorsed.

According to the standard model, business corporations have a subordinate

role to play in social life. The role of the corporation is primarily to pursue

proﬁts within the constraints established by law and ethical principles (Friedman,

2002/1962; Jensen, 2002). It is up to the state and the people more generally to

decide broader questions about how to organize social life and how to address

important social challenges. Among its important functions, the state must

shape the legal and regulatory framework in society so as to ensure that the

pursuit of proﬁts by corporations will advance the public policy objectives

adopted by the people.

In recent years, it has become increasingly apparent that the standard

model of institutional responsibilities has broken down. Corporations no longer

conﬁne themselves to a subordinate role in social life. Instead of merely

pursuing proﬁts within the scope of laws and regulations established by the

state, corporations have taken on public functions that were once the exclusive

domain of the people and the state, functions that include making laws, articulat-

ing regulations, and setting public policies (Matten & Crane, 2005; Vogel,

2010).

Take the case of forests. Forests play a key role in regional and global

ecosystems. As such, they are an essential social resource, and hence an

important part of the common life of a democratic community. So, according to

the standard model, members of a democratic society would collectively deter-

mine social policies regarding how to preserve and responsibly exploit forests,

and these policies would be articulated and implemented by the state. For

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example, democratic majorities would decide on policies regarding clear-cutting

and reforestation, and these policies would be articulated by the state in laws

and agency regulations. Private corporations would then have to respect these

rules, on pain of state sanction, as they pursue proﬁts.

But in several important ways, the people are no longer in control of forest

policy in society (Scherer & Palazzo, 2007). First, corporations play an impor-

tant role in the legislative and regulatory processes. Through donations and

various forms of lobbying, they shape the laws and regulations that the state

enforces (De Figueiredo, 2002).

Second, when the legal and regulatory frame-

work is sparse or nonexistent, the corporation’s own internal policymaking

process essentially determines how forests will be managed. Finally, in many

cases, forestry companies are acting in remote areas where the state itself has a

very weak presence. In these cases, as well, the corporation itself effectively

decides on forestry policy, without any type of involvement by the people.

These three cases illustrate the basic idea that in many arenas, the corporation is

no longer a subordinate player, but plays a central role in making laws,

developing regulations, and carrying out social policies.

From now on, we will use the term “corporate political activity” (CPA) to

refer to cases in which corporations perform activities that on the standard

model are assigned to citizens or the state. These activities include making laws,

articulating regulations, and deploying assets to carry out important public

policies. It is helpful to distinguish between two kinds of CPA, depending on

how the corporation becomes involved in performing public functions.

The most common kind of CPA comprises lobbying and campaign ﬁnance

(Hillman, et al., 2004). In lobbying, corporations attempt to shape society’s

1. There is skepticism about the power of donations alone to inﬂuence laws and regulations

(Ansolabehere, De Figueiredo, & Snyder, Jr., 2003). But there is strong evidence that lobbying in-

ﬂuences them (De Figueiredo, 2002). As a result, we ﬁnd that corporations spend far more on lobbying

than on campaign ﬁnance (Milyo, Primo, & Groseclose, 2000).

2. It might be objected that, if the corporation owns the forest, then “the people” have no right to

say what it does with it. This is incorrect. To be sure, people have certain fundamental rights that

democratic legislatures have no authority to abridge. The rights to freedom of thought and expression

are among them. But a corporation’s right to do what it wants with the forests it owns is not. Instead,

the nature and scope of corporations’ (and other parties’) property rights are legitimately circumscribed

by a democratic society. Within broad limits, society as a whole can decide which resources will be

owned by the state (e.g., oil ﬁelds, waterways, airwaves) and which will be owned by private citizens

(e.g., farms, ranches, factories), and how the use of those resources will be restricted. In the background

of this discussion is the difﬁcult question of what precisely the scope of democratic authority is

(Christiano, 2010a). We cannot hope fully to resolve this issue here. However, we say more about why

the new CPA creates a democratic deﬁcit in section 3.

3. A recent example of corporate involvement in public policy can be seen in the response to the

collapse of the Rana Plaza garment factory in Bangladesh in April of 2013 that killed 1100 workers.

Many observers said: “something must be done.” But governments did not take the lead; corporations

did. A group of powerful multinational corporations based in the U.S. and Europe agreed that they will

not do business with suppliers whose factories do not meet certain safety requirements (Greenhouse,

2013). One result of this is that building and ﬁre codes for factories in Bangladesh are now effectively

being set by Western multinational corporations, not the people of Bangladesh.

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legal and institutional framework by “presenting briefs, testimony, and argu-

ments to legislators and their staffs” in formal meetings, charity events, and

other venues (Stark, 2010, p. 503). In campaign ﬁnance, they attempt to do so

by donating money from political action committees (PACs) to legislators’

campaigns or to their political parties, or purchasing advertising in support of

legislators or in support of issues with which those legislators are identiﬁed

(Stark, 2010). This is what we will call “old” CPA.

Increasingly, however, corporations are engaging in a new form of political

activity. They are attempting to inﬂuence the state’s rules and regulations not

just through, but outside of, formal political processes. Among other activities,

corporations pursue climate change and public health policies (Kobrin, 2009;

Ruggie, 2004), enforce citizenship rights (Crane, Matten, & Moon, 2008;

Matten & Crane, 2005), promote peace (Fort & Schipani, 2004), and partner

with other corporations, non-governmental organizations (NGOs), and other

political actors to create and enforce systems of civil regulation (Ruggie, 2004;

Vogel, 2010). In many cases, corporations take on these roles not at states’

request, but on their own. In doing so, they effectively arrogate to themselves

the traditional functions of the state (Ruggie, 2004). This is what we call “new”

CPA.

It might be wondered why corporations engage in the new CPA. The reason

is probably the same as the reason why they engage in the old CPA, viz., they

think it is in their interest to do so (Hillman, et al., 2004). Through lobbying and

campaign ﬁnance, corporations incentivize legislators and regulators to pass (or

not pass) favorable (or unfavorable) laws or write (or not write) favorable (or

unfavorable) regulations. Creating public policy and rule-making, on the other

hand, can be seen as attempts to placate powerful political actors who threaten

corporations with negative publicity or boycotts if they do not take steps to

address social problems (Vogel, 2010).

An important difference between the old and new CPAs is how each operates.

The old CPA operates “through” the state. Corporations attempt to affect formal

political processes through lobbying and campaign ﬁnance to obtain certain

outcomes (e.g., favorable laws and regulations). But the people who they

attempt to inﬂuence are public ofﬁcials (e.g., legislators, regulators), who are

accountable ultimately to the people in periodic elections. By contrast, the new

CPA unfolds “beside or around the state” (Vogel, 2010, p. 69) or “above and

beyond the state” (Scherer & Palazzo, 2011, p. 903). When they engage in new

4. Corporations are targeted in part because they have deep pockets. But corporations can also be

painted as complicit in creating social problems (e.g., by inserting themselves into the political arena),

or as beneﬁting from these problems (e.g., by operating in countries with extreme poverty to take

advantage of low labor costs) (Wettstein, 2009). It is unclear that these threats, if carried out,

substantially impact corporations’ ﬁnancial performance (Vogel, 2010). But corporations do appear to

respond to them. Vogel suspects that the reason they do is that corporate executives “value public

approval and dislike negative media attention” (2010, p. 77). They prefer to be seen as heroes rather

than as villains in the media.

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CPA, corporations perform putatively political functions without direction from,

supervision by, or accountability to, states. Focusing on this difference, in the

next section we identify a familiar problem with the old CPA and show how the

new CPA avoids it. We then identify a new problem with the new CPA.

II. T

HE NEW CPA: AVOIDING AN OLD PROBLEM BUT FACING A NEW ONE

Perhaps the most common complaint against old CPA is that it is corruptive

(Stark, 2010; Sunstein, 1994). Stark says that “[d]emocratic ofﬁcials are en-

trusted with power by the citizenry on the condition that they make decisions

based on no other consideration than the interest of the public” (Stark, 2010,

pp. 501–502).

When public ofﬁcials receive gifts from private parties, either as

part of campaign ﬁnance or in the process of being lobbied, this may cause them

to make decisions not based on the public’s interest, but instead on the interest

of a private party. Of course, even if it is known that a public ofﬁcial has

received gifts from a private party, it is often hard to tell if she is acting in the

private party’s interest. The ofﬁcial may believe that her actions are in the

interest of the public as a whole. But even if ofﬁcials make decisions “based on

no other consideration than the interest of the public,” their receiving gifts from

private parties may lead people to suspect that they are not acting solely on the

public’s interest. As Sunstein says, even the “specter of quid pro quo exchanges

violates” the norm against corruption (1994, p. 1392).

The accusation of corruption is implied in the familiar refrains that a certain

member of Congress has been “bought and paid for” by a private party such as

the National Riﬂe Association (NRA) or the Club for Growth, or that another

member of Congress is “in the pocket” of the AARP or the Service Employees

International Union (SEIU). The idea is that the member of Congress who has

been “bought and paid for” by, or who is “in the pocket” of, the special interest

group is not doing what she should be doing, viz., promoting the public good.

The new CPA largely avoids this problem of corruption, since it goes

“around” or “beyond” the state rather than “through” it. This problem exists

because there is someone in the political process, viz., the public ofﬁcial, who

has a duty to act solely in the public’s interest. The problem is that she may act

in the interest of the private party instead. By contrast, none of the major

players in new CPA—viz., representatives of corporations and NGOs—has a

duty to act solely in the public interest.

So there is no problem if they do not.

This is not to say, of course, that there is no possibility for any kind of

corruption in the new CPA. Corporate executives have a duty to promote the

5. The public ofﬁcial’s duty to make decisions “based on no other consideration than the interest of

the public” can be met even if she does not in fact make decisions that are in the public interest. She

fulﬁlls her duty if she reasonably believes that her decisions are in the public interest.

6. More precisely, none of the major players in the new CPA has a duty to act solely in the interests

of the public as a whole, as government ofﬁcials do. They do, of course, have a duty to represent the

interests of a portion of the public, i.e., the members of their particular organization or group (e.g., the

Sierra Club).

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interests of their ﬁrms, and they may be tempted by considerations of private

gain not to do so. But this kind of corruption exists in the new as well as in the

old CPA.

While the new CPA may be better than the old CPA with respect to corrup-

tion, it has seemed to many writers worse with respect to accountability. The

feature of the new CPA that makes it better with respect to corruption is the

same as the one that makes it worse with respect to accountability; namely, the

new CPA goes around or beyond the state rather than through it. In the old CPA,

the ofﬁcials that corporations attempt to persuade through lobbying and cam-

paign ﬁnance are ultimately accountable to the public in periodic elections. This

is not the case with the new CPA. In this case, the agents performing putatively

political activities (e.g., corporate executives) are not accountable to the public.

For this reason, many writers claim that the new CPA creates a “democratic

deﬁcit” (Scherer, et al., 2013; Scherer & Palazzo, 2011).

Palazzo and Scherer are perhaps the most prominent contemporary propo-

nents of this idea. They say that corporations that shape public policy and

engage in rulemaking “have no democratic mandate for this engagement”

(Scherer & Palazzo, 2011, p. 907). In democratic countries, “political authori-

ties are elected periodically and are subjected to parliamentary control. By

contrast, corporate managers are neither elected by the public, nor are their

political interventions in global public policy sufﬁciently controlled by demo-

cratic institutions and procedures” (Scherer & Palazzo, 2011, p. 907; see also

Matten & Crane, 2005). Palazzo and Scherer believe that this deﬁcit must be

repaired, and that the best way to do so is by changing how the corporation is

governed. In particular, they say that “[i]f corporations assume responsibility for

state functions and generate global rules, then it becomes obvious that it is

necessary to control corporations just as the democratic state needs to be

controlled by its citizens” (Scherer, et al., 2006, p. 517, emphasis in original;

see also Matten & Crane, 2005). Corporations’ “internal structures and pro-

cesses,” Palazzo and Scherer say, “have to become more democratic” (Scherer,

et al., 2006, p. 517).

Corporations’ increasing engagement in the new CPA has brought in-

creasing concern about its democratic character, with Palazzo and Scherer as

key contemporary writers on this subject. But these ideas are not wholly new.

Brenkert (1992) says that corporate social responsibility, understood as the

7. The feature of the new CPA that helps it to avoid the problem of corruption may also create

skepticism about its public value. Ideally, what comes out of the formal political process are sets of

laws and regulations that advance the common good. This hope is founded, in part, on the fact that the

primary political actors in this process—viz., public ofﬁcials—have a duty to advance the common

good. But there is no person who has this duty in a new CPA process. So we might have correspond-

ingly less hope that the rules and regulations that come out of it will advance the common good. On the

other hand, in the new CPA, corporations are aiming to beneﬁt the public (if only as a means of

advancing their own long-term welfare), while in the old CPA, they are aiming to beneﬁt themselves or

their industries. Our view of the public value of the old and new CPA may depend on our degree of trust

in the government to provide for the public good.

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attempt by private ﬁrms to establish public welfare policy, is problematic. If

private corporations organize collective efforts to promote the public welfare,

he says, they must be made “amenable to greater public control and direction”

(1992, p. 164). Even Friedman (2008/1970) draws a similar conclusion. One

of his arguments against socially responsible acts by corporations is that they

are tantamount to “the imposition of taxes and expenditure of tax proceeds”

(2008/1970, p. 66). Friedman says that, because these are “governmental func-

tions,” it is “intolerable...[that those who perform them] should be selected as

they are now,” that is, by shareholders (2008/1970, p. 67). If corporate manag-

ers engage in socially responsible actions, then they must “be elected through a

political process,” i.e., democratically (2008/1970, p. 67).

In the remainder of this paper we will explore this problem for new CPA. We

begin by asking whether it is true that the new CPA creates a democratic deﬁcit.

We then consider an attempt, put forward by Palazzo and Scherer, to address it

by “democratizing” corporations. We argue that this attempt has a serious

problem, and propose a remedy for it.

III. I

S THERE A DEMOCRATIC DEFICIT?

The democratic deﬁcit might be summed up as follows: in shaping public

policy and making rules, corporations are taking on state functions. But they are

not being governed like states. Put this way, we can see that those who claim

that there is a democratic deﬁcit are making some important assumptions. One

is that states should be governed democratically. Another is that corporations

are not, in general, governed democratically. Both of these assumptions seem

correct.

But other assumptions being made here are more problematic. One is that

shaping public policy and making rules are state functions (Matten & Crane,

2005; Scherer, et al., 2013; Scherer & Palazzo, 2011). That is, the assumption is

that these activities in some sense belong to the state, so that when a corporation

takes them on, it is necessarily performing state functions. A second, related

assumption is that any entity that takes on these functions should be governed

like the state, i.e., democratically. Both of these assumptions seem to us to

require justiﬁcation. It is difﬁcult, however, to ﬁnd justiﬁcations in the writings

of those who make them. In this section we consider challenges to these

assumptions and show how they can be deﬂected. The end result will be a better

appreciation of how a democratic deﬁcit is created when corporations engage in

the new CPA.

Against the assumption that shaping public policy and rulemaking are state

functions, it might be claimed that it is entirely up to the citizens of a state to

decide what roles the state will play. States normally perform certain functions,

but this does not prove that they should perform them, much less that they

“own” them. The citizens of some states may decide that they want the state to

prevent the spread of HIV/AIDS through taxpayer-funded public health cam-

paigns (a public policy). The citizens of other states may decide against this.

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The citizens of some states may decide that they want the state to limit how

much carbon businesses and individuals emit (a set of rules). The citizens of

other states may decide against this. And so on. Almost any activity that we

typically associate with the state, including minting currency and providing

security, could be provided by private agents instead (Hasnas, 2003). On this

objection, then, when a corporation provides health services, or helps to create

and enforce environmental regulations, it is not necessarily performing state

functions. It depends on what the state’s citizens want the state to do.

What do citizens want the state to do? According to the conventional wisdom,

the context for—and part cause of—the rise of the new CPA is a deﬁcit of

another sort: a governance deﬁcit. States around the world are increasingly

thought to provide, relative to citizens’ wants, inadequate responses to public

needs and inadequate regulation of commercial activity (Newell, 2001; Palazzo

& Scherer, 2006; Scherer, et al., 2013; Vogel, 2010). The most commonly cited

reason for this is the economic forces collectively known as globalization,

featuring powerful multinational corporations and mobile capital. On the one

hand, some corporations operate in states with weak or non-existent democratic

institutions (Scherer & Palazzo, 2011). On the other hand, corporations that

operate in states with ostensibly strong democratic institutions are increasingly

able to get their way in politics, by threatening to decamp to other, less

demanding states (Christiano, 2010b; Shamir, 2004). Vogel concludes that

“[e]conomic globalization” has “undermined both the willingness and capacity

of governments to make global ﬁrms politically accountable” (2010, p. 73).

Corporations’ increasing performance of new CPA activities can be seen as an

effort to ﬁll the governance deﬁcit.

One might claim that the conventional wisdom challenges the assumption

that, when corporations effectively create public policy and make rules, they are

performing state functions. After all, corporations are engaging in these activi-

ties in an environment in which states are not engaging in them. But this would

be a mistake. The conventional wisdom does not suggest that the state’s citizens

have decided to turn over certain functions formerly performed by the state to

private actors, or even that these functions will not be performed by the state.

Rather, it suggests that, given current economic trends, citizens have trouble

expressing their will through the state’s formal political mechanisms. The fact

that states do not have certain public policies or create certain regulations

8. The idea that corporations are “under-regulated,” or are asked to provide too few public goods, is

not uncontestable; indeed, it may appear ludicrous to some. A recent theme of the politics of the

Republican Party in the U.S. is that businesses, especially small businesses, are choked by a sea of legal

red tape. But it is instructive to consider what citizens ask of businesses when they are conﬁdent that

their demands will be met. Consider, for example, the Alaska Permanent Fund. Through this fund, the

citizens of Alaska tax oil companies and distribute the revenues to current and future generations of

Alaskans. Corporations elsewhere in the U.S. are not subject to this high a level of taxation. This

suggests that what U.S. citizens really want is to tax corporations highly and share the wealth widely

among themselves. Citizens do not do this elsewhere in the U.S. because they believe that corporations

will be able to avoid complying with their demands.

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cannot be taken as evidence that this is what citizens want. If anything, citizens

seem to want their states to craft more adequate public policies, and create and

enforce more regulation. This, in turn, suggests that corporations, when they

engage in the new CPA, may well be performing state functions, understood as

functions that citizens want their states to perform.

In response, it might be granted that corporations are performing state

functions when they engage in the new CPA, i.e., when they shape public

policy and make rules. But it might be objected that there is nothing wrong

with—and in particular, nothing anti-democratic about—their doing so. This

goes to the second controversial assumption mentioned above: that any entity

that shapes public policy and makes rules should be governed like the state, i.e.,

democratically.

Some might argue that we demand control over state functions when coercion

is involved. And there typically is coercion involved when the state shapes

public policy and creates commercial regulation. States fund their provision of

public initiatives by requiring citizens to pay taxes. States enforce commercial

regulation with the threat of legal action against violators. Because coercion is

involved in these activities, it might be said, there would be a democratic deﬁcit

if we did not have a say over them. But there is no coercion involved, the

objection continues, when corporations effectively shape public policy and

make rules. When corporations provide goods such as security services and

education to workers, they do so out of their own revenue, not out of the taxes

that they require people to pay. Flouting the civil regulation that corporations

help to create and enforce is met with social or market penalties, not legal

penalties (Scherer & Palazzo, 2011; Vogel, 2010). As a result, the objection

concludes, we have no right to a democratic say over the new CPA, and cannot

complain of a democratic deﬁcit when we lack one.

The objection should be resisted. First, it takes too narrow a perspective on

the idea of coercion. The market is a social institution, one whose various rules

are backed by the coercive power of the state. If someone tries to gain access to

corporate resources, for example, without the permission of the corporation’s

ofﬁcers, the state will use its police powers to prevent her from doing so. The

fact that corporations have resources to devote to addressing public problems is

itself a consequence of the fact that they are the beneﬁciaries of a complex

system of property, contract, and exchange that is ultimately enforced by the

state (Cohen, 2011; Waldron, 1993). Coercion could not be a standard for when

democratic oversight is required because coercion and the threat of coercion is a

constant background element in economic interaction in our society, even if we

are not always aware of it.

Once we resist the temptation to focus on coercion and bring the institutional

character of the market more clearly into view, we can see a sharper response to

the objection. The essence of democracy is the idea that citizens should be able

to shape their shared social, political, and economic conditions. It is hard to see

how our basic institutions could be justiﬁed unless they enabled us to control

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our society in this way (Hussain, 2012). To the extent that corporations shape

public policy for satisfying certain social needs and make and enforce commer-

cial rules, however, this does not happen. Instead, the state’s social, political,

and economic conditions are being shaped by a small group of corporate

executives. While these executives may engage in the new CPA in response to

pressure brought to bear by politically powerful groups of citizens, they are not

accountable to the citizens as a whole, and need not include them in their

decision-making processes (Brenkert, 1992). Indeed, the corporate executives

who shape the social, political, and economic conditions of a certain state may

not even be citizens of that state (as, e.g., when the executives of Western

multinationals set rules affecting building and ﬁre codes in a developing country

[Greenhouse, 2013]).

The problem is not just that, insofar as corporations shape the social, politi-

cal, and economic conditions of a state, citizens do not shape them. It is that

corporations’ shaping of these conditions threatens to degrade or undermine

citizens’ will and ability to shape them. When corporations create public policy

and make rules, citizens’ incentives to do so are weakened. They may reason-

ably conclude that their resources are better spent pursuing their private inter-

ests. But democratic self-governance is a skill—or perhaps better, a set of skills.

It requires the ability to identify and rank values, speak on one’s behalf and

listen to others, plan for the long term, and compromise. Like any set of skills,

these skills will atrophy over time if they are not practiced (Mill 1998/1861).

The new CPA thus threatens to create a democratic deﬁcit that cannot easily be

repaired.

Let us then conclude, with many other writers, that the new CPA creates a

democratic deﬁcit. Now the question is, what should be done about it? We have

presented the democratic deﬁcit in the form of a conditional: to the extent that

corporations take on state functions by providing public goods and making

rules, then they should be governed like states, i.e., democratically. It may

9. Questions might be raised about what constitutes objectionable “shaping” of society’s shared

social, political, and economic conditions. A famous singer, for example, might shape society’s shared

social conditions (for the worse) by popularizing a dance move that degrades women. Our argument

might seem to imply, implausibly, that the singer’s actions create a democratic deﬁcit. Two points can

be made in reply. First, we assume a threshold of signiﬁcance. That is, actions create a democratic

deﬁcit only if they shape society’s social, political, and economic conditions to a signiﬁcant degree.It

will be hard to say in some cases whether this line has been crossed, but results like this are sometimes

unavoidable. An analogy is found in limits on money in politics. It is thought to be anti-democratic for

rich people have too much power in politics. So campaign contributions are capped. In the U.S., for

example, citizens can donate no more than $2600 to a candidate in a federal election. But a precise

answer cannot be given as to why the “too much” threshold is $2600 and not $2500 or $2700. A

corporation’s shaping forestry policy, we think, crosses the signiﬁcance threshold—given forests’

importance for ecosystems, erosion prevention, and air quality—but a singer’s popularizing a dance

move may not. Second, and more importantly, not all shaping is the same. Citizens in a liberal

democracy are properly understood to have a nearly unfettered freedom to express themselves as they

see ﬁt. As a result, popularizing a degrading dance move would be protected by democratic norms, even

it shaped society’s shared social conditions signiﬁcantly. We thank David Shoemaker for pressing this

objection.

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appear, then, that there are only two options. Either corporations should be

democratized (in particular, their performance of state functions should be

subject to democratic control), or they should stop performing state functions.

But there is a third option. That is, corporations should continue performing

state functions but society should live with the resulting democratic deﬁcit.

Democracy is important, but it is not the only thing that matters. We might think

that the good that comes out of corporations’ performing state functions is

worth the democratic deﬁcit.

We cannot hope to resolve all of these issues here. But we will take one

important step toward doing so by evaluating the viability of an attempt to

“democratize” corporations offered recently by Palazzo and Scherer (Palazzo &

Scherer, 2006; Scherer, et al., 2013; Scherer & Palazzo, 2007, 2011; Scherer,

et al., 2006). We cannot say whether corporations should be democratized,

should stop performing state functions, or continue to perform state functions

without being democratized, until we understand what it might mean to democ-

ratize a corporation. We choose Palazzo and Scherer’s model of democratic

accountability for corporations for three reasons: ﬁrst, it was speciﬁcally de-

signed to address the democratic deﬁcit caused by the new CPA; second, it has

received a great deal of attention, especially in the business ethics literature; and

third, despite its ﬂaws, it provides an intriguing way to think about how to

restore democratic control over corporations. While focused on Palazzo and

Scherer’s model, our analysis of it, as we will show, enables us to draw more

general conclusions about accountability for corporations engaged in the new

CPA.

IV. P

ALAZZO AND SCHERER’S MODEL OF DEMOCRATIC ACCOUNTABILITY

Palazzo and Scherer’s model of democratic accountability for the corporation

is based on the ideal of deliberative democracy. According to this ideal, free,

unforced, and rational deliberation among citizens should be sovereign in

society. Assuming the standard model of institutional responsibilities, this is

accomplished when society’s public ofﬁcials—its legislators and regulators—

are accountable to the citizens. However, when the state is no longer able to

play a central role in directing the course of public life, whoever steps in

to perform the state’s functions in society must be subject to deliberation.

It follows that private actors who take up various state functions in society

must become subject, in some way, to free, unforced, and rational deliberation

among citizens. Palazzo and Scherer sometimes express this point in terms of

legitimacy. It is illegitimate, they say, for private actors to perform state

functions without being democratically accountable to society (Palazzo &

Scherer, 2006).

Palazzo and Scherer propose to make corporations accountable to society by

embedding them in a form of ongoing dialogue among citizens and their

representatives in a society-wide process of democratic decision-making. They

describe their model as a “complex communicative process of accountability

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where...limits[oncorporate behavior] are deﬁned and redeﬁned in a continu-

ous process of deliberative discourse” (Palazzo & Scherer, 2006, p. 82).

The discourse at issue consists primarily of the exchanging of reasons by all

parties affected by (proposed) corporate actions and practices. Corporations are

required to present reasons to justify their actions or practices. Those who are

affected by them may present reasons for changing those actions and practices.

All parties must be willing to take these reasons seriously and change their

behavior when the balance of reasons tells in favor of doing so (Palazzo &

Scherer, 2006). Public authorities play a background role in this process,

guaranteeing “the transparency of discourse, the monitoring and enforcement of

corporate compliance, the comparability of information and standards, and the

access of less powerful actors to deliberation” (Scherer & Palazzo, 2007,

pp. 1112–1113).

According to Palazzo and Scherer, once the process is up and

running, corporations can legitimately perform various state functions in society

just in case their involvement can be “regarded as the result of [this] process of

public deliberation” (Palazzo & Scherer, 2006, p. 80).

Palazzo and Scherer do not claim that every instance of corporate activity

should be subject to social deliberation. To do so would invite the objection that

corporate democracy of this form is hopelessly inefﬁcient (Hansmann, 1996).

Instead, they say, “the deliberative concept...follows the principled priority

of systematic routine as advocated by Habermas” (Scherer & Palazzo, 2007,

p. 1111, emphasis in original). The default position is that corporations can act

according to their own internal decision-making procedures. But this must stop

when there is “a public discourse on the legitimacy of a given issue” (Scherer &

Palazzo, 2007, p. 1111). At this point, Palazzo and Scherer, corporations must

begin exchanging reasons with the public.

As this implies, for Palazzo and Scherer deliberative oversight does not

require democratizing corporations by giving control of them to their employees

(Scherer & Palazzo, 2007). They advocate a form of democratization that

involves the whole citizen body. The point is to “establish a democratic control

on the public use of corporate power” by subjecting corporate activity to the

“overarching processes of (national and transnational) public will formation”

through which citizens collectively direct the course of public life (Scherer &

Palazzo, 2007, p. 1108).

10. Various other features of social life may need alteration to achieve these goals (Cohen, 1989).

For example, to ensure that all citizens can participate in the deliberative process, it may be necessary

to restructure ownership rights in the mass media so that everyone has adequate access to newspapers,

television, the Internet, and other channels of communication. It may be necessary to enact limits on

work hours to ensure that citizens have the time to consume information, think about important public

issues, and participate in public debate. It may further be necessary for citizens to have access to

adequate resources, so that they can engage with them in deliberation as equals rather than as

dependents.

11. Yet another way of democratizing corporations is found in early versions of stakeholder theory,

which require the creation of boards of directors with representatives from each stakeholder group

(Evan & Freeman, 1988). For a critical discussion of this view, see Moriarty (2012).

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Palazzo and Scherer identify the Forest Stewardship Council (FSC) as an

example of the form of democratization they have in mind (Scherer & Palazzo,

2007, 2011). The FSC is an umbrella organization that brings together NGOs,

government agencies, and corporations to agree on principles of sound forest

management and to certify wood products as complying with these standards.

Democratization in the case of the FSC is not pointed inward, making the

involved corporations more accountable to their employees or other stake-

holders. It is rather pointed outward, integrating them into more encompassing

processes of democratic deliberation among a wide range of actors in society

trying to make decisions about issues of public concern. As Palazzo and Scherer

put it, corporations do not, in participating with the FSC, “invite stakeholders

into their internal decision-making processes,” but rather move themselves out

to “the political processes of public policy making” (Scherer & Palazzo, 2007,

p. 1110). Given this focus, Palazzo and Scherer label their model of democratic

governance for corporations understood as public actors “political corporate

social responsibility,” or “political CSR” (Scherer & Palazzo, 2011).

V. A P

ROBLEM WITH THE MODEL

Palazzo and Scherer believe that, to close the democratic deﬁcit that appears

when corporations engage in the new CPA, corporations’ actions must be

subject to social deliberation. It seems correct to say that, if a corporation is not

required to explain itself to others, or listen to those others’ points of view, then

it is not truly accountable to them. But we might wonder if that is all that is

required. Is a corporation’s performance of a state function legitimate—is it

accountable to the people—just in case it is the subject of deliberation among

affected parties? Or must this deliberation come to a particular conclusion that

the corporation is in some way subject to?

Surprisingly, Palazzo and Scherer do not directly address these questions. It

would be odd, however, if they answered ‘yes’ to the ﬁrst one. This would

imply that the corporation, provided that it ﬁrst engaged in deliberation with

affected parties, could legitimately perform whatever state function it wanted,

even if virtually all of those parties disapproved. As expected, then, several

passages in Palazzo and Scherer’s writings suggest a ‘no’ answer. They say that

“[modern] theories of political legitimacy link the rightfulness of domination to

the consent of the governed citizens” (Palazzo & Scherer, 2006, pp. 79–80), and

that deliberation leads “to better and broader accepted political decisions and...

thus contributes to sustaining moral legitimacy” (Palazzo & Scherer, 2006,

pp. 80–81). This suggests that the legitimacy of a corporation’s performance of

a state function requires more than just deliberation about it. It suggests that an

agreement of some sort is also required.

The problem is that deliberation, while perhaps capable of reducing disagree-

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ment, is unlikely to eliminate it.

This is familiar to all casual observers of

politics, and indeed debates of all kinds among people with divergent interests.

Even well informed people deliberating in good faith may fail to come to

agreement. There are many reasons for this; we will highlight four.

One is time. It takes time to gather the relevant data, analyze it, construct

arguments based on it, subject those arguments to critical scrutiny, develop

counter-arguments, and so on. But time is not unlimited, especially in the

business world. And we would not want to change the business world so that

citizens and corporations had unlimited time to deliberate. The result is some

disagreements that could be resolved but, due to time constraints, are not.

A second source of disagreement derives from trust in information. In

deliberative processes, the state plays a role in ensuring that the public has

access to relevant information (Scherer & Palazzo, 2007). But even when all

parties have all the same information, they will have different degrees of trust in

different sources of information. An NGO and a corporation may publish

competing studies on the effects of a new pollution control measure, one which

concludes that it is cheap and effective (the NGO’s), the other of which

concludes that it is expensive and useless (the corporation’s). Some will trust

the corporation’s study more than the NGO’s, and some will trust the NGO’s

study more than the corporation’s. This may lead to a deliberative impasse.

A third source of disagreement is cognitive bias. There are many such biases,

but one that is especially problematic in this context is the self-serving bias.

This bias leads people to think that outcomes that beneﬁt them, or beneﬁt them

disproportionately, are fair (Bazerman & Messick, 1996). This leads to conﬂict

because the interests of different parties to social deliberation are likely to

diverge in important ways. Suppose that there is social deliberation about

whether a corporation should adopt a new pollution control measure. Many

affected parties will likely agree that the outcome should be fair—i.e., it should

balance beneﬁts and burdens across affected parties—but they will likely

disagree about which outcome is fair. Each side will be especially sensitive to

the beneﬁts it will enjoy and the burdens it will suffer (Christiano, 2004).

A fourth and perhaps the most important source of disagreement is value

pluralism (Gutmann & Thompson, 1996). Some citizens will think that, e.g.,

preserving old-growth forests is more important than economic growth; others

will think the opposite. This will lead them to different conclusions about the

extent to which corporations should be permitted to cut down old-growth

forests. Some citizens will think that we have powerful moral duties to those

who will be living in future generations; others will deny this. This will lead to

different conclusions about how much effort corporations and individuals should

make to reduce their carbon emissions. Values can be debated, but disagree-

ments about values cannot be easily debated away.

12. Indeed, in some cases, deliberation may increase the intensity of conﬂict. For a summary of the

literature on the effects of deliberation, see Mendelberg (2002).

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The claim that social deliberation in the real world is unlikely to lead to full

agreement, for these and other reasons, has been pressed forcefully by delibera-

tive democracy’s critics (Przeworski, 1998). But it is conceded by its propo-

nents as well (Goodin, 2008; Mansbridge, 2006). We are aware of no deliberative

democrat who thinks that social deliberation about contested issues will typi-

cally lead to consensus. Indeed, it seems more likely that it typically will not,

especially in liberal, pluralist societies. This goes for social deliberation about

the legitimacy of corporations’ performance of state functions. Where does this

leave Palazzo and Scherer’s theory?

Palazzo and Scherer recognize that “dissensual communication” is a problem

with which their model of democratic accountability for the corporation “will

have to deal” (Palazzo & Scherer, 2006, p. 83). But they offer no way to deal

with it. This reveals a signiﬁcant hole in their model. If deliberation were sure

or even likely to lead to agreement between corporations and citizens, then we

might think of deliberation as a plausible source of accountability. The corpora-

tion would be accountable to the citizens because it would ﬁrst discuss its plans

with them, and in the end it would do what citizens—and the corporation

itself—thought it should do. But it would be surprising for this to occur

regularly, for the reasons given above. And deliberation alone is not a full form

of accountability. It would be implausible to describe a corporation that did

whatever it thought was best, provided it ﬁrst talked things over with citizens, as

truly accountable to them. Given the likelihood of irresolvable disagreement,

there must be some way for participants in deliberative processes to come to a

resolution, one that can be used to guide corporate behavior. In the following

section, we offer a way to ﬁll this hole in Palazzo and Scherer’s model.

VI. T

HE SOLUTION

We suggest that dissensual communication can be overcome by voting.We

propose, in particular, a majority rule standard. Thus we claim that it is more

plausible to say that a corporation’s performance of a public function is legiti-

mate just in case there is (i) social deliberation about it, followed by (ii) major-

ity approval of it by affected parties in a free and fair vote. Put another way,

subjecting corporations’ action to social deliberation and voting, rather than

social deliberation alone, is a more plausible way of making them accountable

to the people, and hence of closing the democratic deﬁcit that arises when

corporations perform state functions.

To be clear, our suggestion is not that social deliberation should be eliminated

and replaced with voting, but that voting should follow deliberation. Voting is a

way of making decisions when deliberation does not result in consensus. Of

course, it is not the only way of making decisions. We might toss a coin or draw

straws. But voting—especially majority voting—is a particularly democratic

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way of deciding.

And indeed many supporters of deliberative democracy

endorse majority voting after deliberation (Goodin, 2008; Mansbridge, 2006).

Palazzo and Scherer’s silence on the question of voting is surprising because

the Forest Stewardship Council (FSC)—their primary example of a system of

democratic accountability suitable for the corporation—itself employs a voting

system in addition to a deliberative process. Members are divided into three

chambers: social, environmental, and economic. Each chamber is further subdi-

vided into a Northern and Southern group (group membership is determined by

the wealth of the country the member is from as opposed to its geographical

location). The FSC’s membership elects a board of directors that devises rules

and procedures for the organization, while the membership as a whole votes on

the FSC’s policies and principles. For a policy or principle to be approved, it

must receive majorities in each of the three chambers of the FSC.

The FSC,

then, is under no illusion that full agreement can be reached among individuals

and groups with disparate interests and values. Yet it does not think that this

delegitimizes corporate behavior. Its solution, like ours, is a system of majority

voting that follows social deliberation.

The introduction of voting into Palazzo and Scherer’s model of democratic

accountability for the corporation raises questions. We cannot hope to answer or

even raise them all here. We highlight what we believe to be the most salient

ones.

Some questions will have a familiar ring. One is: who should vote? A second

is: on what issues should they vote? In our view, these questions will be fully

answered by the answers that must be given to analogous questions about the

social deliberation that precedes voting. With respect to the ﬁrst question,

anyone who has a right to participate in social deliberation should also have a

right to vote. As seen, Palazzo and Scherer’s answer to the question of who

should be able to participate in deliberation is: everyone who is possibly

affected by the action in question. So they should believe that everyone who is

possibly affected by the action should be allowed to vote on it.

With respect to

the second question, people should be able to vote on any issue about which

there is social deliberation that does not result in consensus. Since “the delibera-

13. Two points. First, we choose majority rule because of its long association with the idea of

democracy and its widespread used by actual democracies. However, we offer here no independent

argument for the soundness of this decision procedure and acknowledge that competitors to it have

been advanced. Second, in proposing a majority rule decision procedure, we do not assume that

decisions should be made by a simple majority. We consider weighted voting systems below.

14. For a description of the FSC’s governance system, see http://www.fsc.org/governance.html.

15. Of particular interest is the role that corporations themselves play in social deliberation and

voting. Palazzo and Scherer think that they should participate in the same way that political groups such

as the AARP and the Club for Growth do. Representatives of these groups are properly understood as

advocates for their members’ points of view. We deny that corporations and their representatives should

play this role. Instead, we claim, they should function as technical experts in political processes,

presenting relevant evidence and making disinterested arguments. The reason is that corporations are

not politically representative organizations. We develop this argument in Hussain & Moriarty (2014).

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tive concept...follows the principled priority of systematic routine as advo-

cated by Habermas,” corporations are permitted to carry out their activities as

normal, until the public becomes concerned about a certain issue, at which point

deliberation must commence (Scherer & Palazzo, 2007, p. 1111; emphasis in

original). We claim that, if deliberation does not result in consensus, then voting

should follow.

But the introduction of voting into Palazzo and Scherer’s model raises new

questions as well. Perhaps the most important of these is: how much weight

should each party’s vote have? Many writers have argued that democracy

requires equality (Christiano, 2008; Dahl, 1959), and it is natural to translate

this into a one-party-one-vote scheme. But other writers think weighted voting

systems are better suited to realizing democratic ideals (Brighouse & Fleurbaey,

2008; Mill, 1998/1861). In these systems, each party’s vote is proportionate to

its “stake” in the decision.

A voting procedure appended to Palazzo and Scherer’s model of democratic

accountability should reﬂect the values already embedded in it. But support for

both “equal” and “weighted” voting systems can be extracted from their model.

In one place, Palazzo and Scherer say that deliberations between corporations

and citizens must be “free of any internal coercion that could detract from the

equality of the participants” (1996, p. 305, emphasis added). This suggests that

a one-party-one-vote scheme may be best. But, following Habermas (1996),

Palazzo and Scherer claim that all of those affected by a corporate action should

have a chance to deliberate about it. This suggests that a voting scheme in

which people’s voting power is proportionate to the extent to which they are

affected by the action, or their stakes in it, may be more ﬁtting. Moreover, the

FSC itself uses a weighted voting scheme. As mentioned, to be approved, a

policy or principle must receive majority support from each chamber (social,

environmental, and economic). But the Northern and Southern group within

each chamber each gets 50% of the voting power, regardless of their number of

members. In addition, to be accepted, motions must receive majority support

from the FSC as a whole. And each chamber is given equal voting power (i.e.,

33% of the vote), again regardless of their number of members.

Ultimately, we think this issue is too complex to be resolved here. We have

argued that Palazzo and Scherer’s model of democratic accountability for the

corporation should include a majority rule voting procedure, but its exact design

requires further analysis. Future research on this subject should be alive to the

possibility that different voting schemes may be appropriate in different con-

texts.

We have said that Palazzo and Scherer are silent on the issue of voting,

despite the fact that almost all deliberative democrats think voting is a practical

necessity, and the FSC uses a voting system. Where they come closest to

mentioning this issue, they seem to suggest that voting need not be a part of

their model. Thus while Palazzo and Scherer say that corporate political activity

should be subject to greater democratic control, they insist that their theory does

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not require a “radical democratization of [the corporation’s] decision-making

processes” (Scherer & Palazzo, 2007, p. 1111). They go on: “[c]ivil society

actors should not assume the role of the state or that of the corporation but,

rather, should limit their engagement to controlling the political and economic

systems” in which the ﬁrm operates (Scherer & Palazzo, 2007, p. 1111).

We agree with the ﬁrst of the above passages but not the second. That is, we

agree that making the corporation accountable to the public does not require

allowing the public to “grab hold,” as it were, of the reins of corporate power,

changing corporate leaders from decision-makers to mere executors of public

choices. This is so in two senses. First, not every action that the corporation

performs must be the subject of social deliberation or voting. Second, the public

does not so much tell the corporation what to do in the public sphere as

constrain its actions within it. In both of these senses, corporations remain

private concerns. But we disagree with Palazzo and Scherer in that we think that

realizing the ideal of deliberative democracy requires an exercise of control

over the corporation itself, not just the “political and economic systems” in

which it operates. The public’s limiting its control of the corporation to the

political and economic systems in which it operates is precisely what creates

the democratic deﬁcit that Palazzo and Scherer’s model of democratic account-

ability for the corporation is meant to address. To remedy it, the public must be

able to set limits on corporate behavior itself.

The discussion in this section may seem to diminish the attractiveness of

Palazzo and Scherer’s model. Putting aside the fact of disagreement—as Palazzo

and Scherer mostly do—we have the following sanguine view of the relation-

ship between the corporation and the public: The corporation contemplates

performing a state function; it engages in a deliberative dialog with the public

about it; agreement is reached; and the corporation performs the action. When

there is no disagreement, everyone gets the result that they think there is most

reason to bring about, i.e., what they think is the right result. The corporation, in

particular, is not asked to do something that it thinks, in the ﬁnal analysis, it

does not have most reason to do. Palazzo and Scherer’s model thus appears to

promise accountability without conﬂict or pressure. This is an attractive ideal.

We have stressed in this section that this ideal is in many cases unobtainable.

Dissensual communication is more likely to be the norm than the exception in

liberal, pluralist societies. This means that democratic accountability for the

corporation, on a proper understanding of Palazzo and Scherer’s model, will

involve conﬂict. When disagreement is introduced, we confront the possibility

that someone—one or more groups of citizens, or the corporation itself—will

have to live with a result that they think there is not most reason to bring about,

i.e., what they think is the wrong result. This further means that corporate

accountability will involve pressure. The corporation, in particular, may be

pressured to do something that it does not think it has most reason to do. This

does not mean that a corporation’s failure to obey the public’s will—following

social deliberation and expressed in a majority vote—should be met with

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state-sponsored force or threats of force. But corporations should feel signiﬁcant

pressure to conform, perhaps because the costs of failing to conform (e.g., loss

of FSC certiﬁcation) are high. Otherwise, the corporation cannot truly be said to

be subject to the people’s will.

While our discussion to this point has focused on Palazzo and Scherer, it

yields more general conclusions about democratic accountability for corpora-

tions engaged in the new CPA. To begin, any attempt to democratize corpora-

tions must involve more than deliberation. Since deliberation is unlikely to

result in consensus, a decision procedure is needed. Majority voting, we said, is

a democratic way of making decisions. But to say that democratically account-

ability for corporations requires majority voting raises new questions, such as

who should vote, on what they should vote, and how much weight each party’s

vote should have. Finally, the fact that a decision procedure such as majority

voting is necessary for making corporations accountable to citizens means that

repairing the democratic deﬁcit by democratizing corporations is likely to be

costly. These costs must be kept in mind in determining how the democratic

deﬁcit should be addressed.

VII. C

ONCLUSION

The new CPA—shaping public policy and rule-making—proceeds “beside or

around” or “above and beyond” the state, while the old CPA—lobbying and

campaign ﬁnance—proceeds “through” it. This helps the new CPA to avoid the

problem of corruption, which is one of the main problems with the old CPA.

But it presents a new and potentially more serious problem, viz., the democratic

deﬁcit. Insofar as corporations shape public policy and make rules, they are

performing state functions but are not being governed like the state, that is,

democratically. Palazzo and Scherer offer a way to eliminate this deﬁcit. We

have argued, however, that it is incomplete. They suggest that corporations can

be democratized through a society-wide process of deliberation. We have

argued that conﬂict is unlikely to be deliberated away, and voting will also be

required.

Where does this leave us? One thing we have stressed is that the new

corporate political activity, while avoiding one of the problems with the old

corporate political activity, is not problem-free. It creates a democratic deﬁcit,

which should be acknowledged. Another is that, to judge by our examination of

one of the most prominent efforts to repair the deﬁcit, doing so will involve loss

for some parties; not everyone can have their way. Future research must explore

the full costs of this and other ways of democratizing the new corporate political

activity. Ultimately, we will have to decide whether democratizing corporations

is worth the cost, whether it would be preferable for corporations to cease

shaping public policy and making rules, or whether we should simply live with

the democratic deﬁcit, given the potential beneﬁts of the new CPA.

2014] 447C

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