The corporate race to the bottom leads to Delaware. Let’s stop that.

corporate-flagDelaware is the preferred state for thousands of companies seeking a corporate charter, including those with no real connection to the state. In fact, as the New York Times reported, all these companies’ legal addresses are in Delaware: the Silicon Valley company Google, Wall Street company JPMorgan Chase, Arkansas company Walmart, Georgia company Coca-Cola, and Michigan company General Motors.

That’s by design. By offering promises of weak regulation, friendly courts, and special tax breaks, Delaware is outcompeting other states to become the destination of choice in a race to the bottom. Not only are almost half of all public corporations in the country incorporated in Delaware, there are more corporate entities in the state than people!

As a result, Prof. Kent Greenfield writes in Democracy Journal, Delaware’s corporate dominance is translating into national dominance of pernicious worldviews like “shareholder value” above all else and workers easily discarded as commodities. Incorporating on paper in Delaware also provides a lucrative tax break for companies, allowing them to cut their tax bill to other states. This “Delaware loophole” was worth about $9.5 billion over the past decade. Furthermore, Delaware’s dominance essentially allows the state to force other states to bear any destructive real-life impact of its weak rules—while robbing voters in those other states to hold the companies, and their politician friends, accountable.

What’s the solution? Other states could step up and assert their legal authorities over companies that do business within their borders. But the cleaner, more comprehensive fix would be national regulation—or at the least, a dramatic rethinking of the reasons why the race to the bottom exists:

“The second fix is more ambitious: Stop using state law to govern the organization and structure of the most powerful economic institutions in the world. Other countries govern corporations at the national level, and we should too. At the national level we can subject corporate law to the constraints of democratic pluralism, making sure the costs of corporate behavior are not externalized to those shut out of the democratic process. Corporations of a sufficient size to affect national interests should be chartered at the national level.

Only then we can have a national debate about shareholder value, stakeholder rights, corporate political expenditures, and the like, in a setting where all our voices matter. Now, in Delaware, our voices matter not at all.”

For the full read, see “End Delaware’s Corporate Dominance,” Democracy Journal (2016).

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