Protecting Markets from Society

• Published date: 01 March 2015
• DOI: 10.1177/0032329214559182
• Date: 01 March 2015
• Author: Carl Gershenson
• Subject Matter: Articles

Politics & Society

2015, Vol. 43(1) 33 –60

© 2015 SAGE Publications

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DOI: 10.1177/0032329214559182

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Article

Protecting Markets from

Society: Non-Pecuniary

Claims in American

Corporate Democracy

Carl Gershenson

Harvard University, Cambridge, MA, USA

Abstract

The state incentivizes investors to entrust capital to public corporations by granting

shareholders enforceable rights over managers. However, these rights create legal

“access points” through which social movements can make nonpecuniary claims on

the corporation. I use original historical research on the Securities and Exchange

Commission’s administration of federal securities law to show that concern over

nonpecuniary claims motivates the state to enact the role of “market protector.”

In this role, the commission insulates managers of corporations from shareholders’

claims that it deems illegitimate because they are insufficiently profit-oriented. Thus

the inverse of Polanyi’s observation that society protects itself from markets is

also true: the state creates market boundaries so that “always embedded” markets

function more like autonomous, profit-oriented markets. Accordingly, the extent to

which corporate democracy represents general, social interests or narrow, profit-

oriented interests is largely a function of political contestation and state policy.

Keywords

markets, corporate democracy, corporate accountability, economic sociology,

political sociology

Corresponding Author:

Carl Gershenson, Department of Sociology, Harvard University, 33 Kirkland St., Cambridge, MA, 02138,

USA.

Email: cgershen@fas.harvard.edu

559182PASXXX10.1177/0032329214559182Politics & SocietyGershenson

research-article2015

34 Politics & Society 43(1)

In 1991, managers at Cracker Barrel Old Country Store, a popular restaurant chain,

circulated a memo calling for the termination of employees who did not display the

“normal heterosexual values which have been the foundation of families in our

society.”1 In response, an institutional shareholder submitted a proposal for inclusion

on Cracker Barrel’s proxy statement. The proposal would have expanded Cracker

Barrel’s antidiscrimination policy to include sexual orientation. Cracker Barrel’s man-

agement decided to omit the proposal from the proxy. The Securities and Exchange

Commission (SEC) approved management’s decision, arguing that the institutional

investor was interfering with the hiring and firing of low-level employees—precisely

the kind of “ordinary business decision” best left to the expertise of management. The

institutional investor sued the SEC, embroiling the commission in a prolonged legal

dispute over the limits of corporate democracy in the United States.2

At this dispute’s heart was the ability of shareholders to access the proxy statement,

the main instrument of corporate democracy. Each year the statement is mailed to

shareholders, who cast votes for directors and policy proposals. Qualifying sharehold-

ers have the right to place proposals on the proxy statement. These proposals cannot

target the “ordinary business decisions” of the corporation unless they also implicate

“substantial policy issues.”3 In the Cracker Barrel case, the SEC wanted to make proxy

access more restrictive by removing the “substantial policy issues” exception. In its

place, the SEC proposed a bright-line rule that entirely sheltered employment policies

from corporate democracy. Such a policy would empower management, but strip

shareholders of the right to influence corporate practice in ways concordant with their

values.

The Cracker Barrel incident is one episode in a long history of the SEC’s conten-

tious oversight of corporate democracy. This contentiousness stems from an internal

contradiction of American corporate governance: the institutions that enable share-

holders to undertake profit-oriented behavior in securities markets simultaneously

allow shareholders to subvert profit-oriented behavior. That is, while capital markets

cannot function without granting shareholders a strong set of enforceable rights over

management,4 these same rights make it possible for policy-oriented shareholders to

make nonpecuniary claims on the corporation. These rights provide legal “access

points” to corporate outsiders, but their effects receive little attention even in accounts

of corporate governance most attuned to the role of politics.5 Most corporate gover-

nance scholars simply assume the primacy of profit orientation among shareholders,

managers, and other market actors.

No market is ever truly insulated from social forces; however, often markets are

treated as such.6 The discipline of economics—especially financial economics—is a

major vehicle for the “ideological embeddedness” (or disembeddedness) of markets.7

Prominent economists have made normative claims as to the desirability of autono-

mous capital markets8 or work from the assumption that this description is accurate.9

Sociologists working in the tradition of Polanyi differ. Polanyi argues that as liberal

forces pushed the market toward autonomy, society moved to protect itself, because

unrestrained markets would lead to the destruction of land, labor, and capital.