Scholar warns that corporate social activism might erode democratic institutions, despite possible benefits.
Who would you trust more to promote democratic elections: your government, or your phone company?
According to one scholar, although “government” is seemingly the logical choice, “phone company” might be the more realistic one.
In a European Corporate Governance Institute working paper, Matteo Gatti of Rutgers Law School observes that after January 6, some politicians denied the legitimacy of the 2020 U.S. presidential election. Meanwhile, corporations—including AT&T—rebuked lawmakers who denied the election results by withdrawing their financial support. Gatti identifies this action as part of a broader trend toward “corporate governing,” where corporations engage in social advocacy and fulfill government-like functions.
Gatti argues that although corporate governing can benefit businesses and society, it could also erode democratic institutions by lowering public expectations for traditional political action. He warns that corporate governing fails to promote genuine progress because it only reaches corporate stakeholders, and corporate and societal interests often diverge. He urges business leaders, policymakers, and courts to implement safeguards that will prevent corporations from abusing their governing power.
Gatti defines corporate governing as two types of activity: socio-economic advocacy and government substitution.
Socio-economic advocacy refers to activities such as promoting governmental initiatives or providing expertise to a political cause. For example, corporations have condemned publicly restrictive immigration policies, the U.S. withdrawal from the Paris climate accord, and the Dobbs v. Jackson Women’s Health Organization U.S. Supreme Court decision.
Corporations also play active quasi-governmental roles, Gatti argues. He refers to this gap-filling practice as “government substitution”—when internal corporate actions offer constituencies better conditions than the government delivers. Gatti cites as examples intra-corporate racial equity programs, reproductive healthcare benefits, gender-neutral bathrooms, and sustainability programs.
Gatti explains that corporate governing may develop in the absence of traditional political action. He contends that since the 2010s, corporations have stepped in to fill the vacuum left by a dysfunctional government. According to Gatti, increasing polarization caused the public to lose faith in achieving social reform through traditional bipartisanship. Gatti argues that many people consider corporations more realistic sources of social change than the government because of this political gridlock.
As a result, employees and investors have pressured their companies to take action. Corporations have been willing to assume their new governing role because doing so can help them recruit talent and attract customers.
Although some corporate governing may seem unrelated to legitimate business operations, Gatti contends that corporate social initiatives are lawful and can increase company value. If corporations can legally donate money to charity, then they can also offer benefits and cultivate community goodwill without breaching their duties to investors, Gatti reasons.
In his view, many of the employee benefits that corporations offer, such as equal pay and reproductive healthcare, also directly benefit the corporation by helping it retain workers. Likewise, social justice initiatives can strengthen corporations’ relationships with their consumers, workers, and investors, helping the companies achieve strategic objectives.
Gatti counsels corporate leaders to undertake a risk analysis before engaging in corporate governing, just as they would with any other business decision. He warns that despite corporate governing’s potential payoffs, the risk of shareholder or government backlash can outweigh any benefit such activities confer. For example, Gatti notes that Anheuser-Busch lost billions of dollars in stock value after its LGBTQIA campaign provoked a boycott by ideologically opposed consumers.
Gatti also warns that corporate governing presents potential drawbacks for society. He concedes that corporate governing has promoted social change in some circumstances by influencing societal norms and policymaker decisions, but maintains that corporations acting as catalysts for social change is problematic. In his view, the corporate leader’s new policymaking role challenges democratic principles by concentrating power in the hands of an unelected and unaccountable representative.
Gatti also highlights that corporate governing initiatives only cover the corporation’s own stakeholders, limiting their potential impact. Within the corporation, the initiatives may alienate a large portion of the workforce by affecting employee privileges without consensus on divisive issues. Gatti warns that corporations also might lose interest in their governing initiatives as issues go out of style or become unprofitable, providing only temporary solutions to their stakeholders.
Finally, Gatti cautions that delegating social change to corporations could cause the public to abandon traditional politics. Because of the shortcomings of corporate governing he identifies, however, Gatti questions whether the resulting system would protect society adequately.
To mitigate the risks that corporate governing poses, Gatti proposes policy solutions, such as disclosure of advocacy initiatives. He argues that increasing transparency would help stakeholders understand the corporation’s position and trajectory. He also advocates shifting responsibility from corporate management to corporate board members, who are often independent and better positioned to evaluate initiatives objectively.
Gatti concludes that corporate governing, despite its perils, is a phenomenon that is here to stay. He urges legislators to implement his proposed policy solutions to make corporate governing less divisive and mitigate the risks it poses to stakeholders and the public.
