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Thursday, February 2, 2006

Column: Lost in Translation

The Wall Street Journal recently reported a diplomatic kerfuffle between China and the United States that was caused by a single word – stakeholder.

It all started back in September, when Deputy Secretary of State Robert Zoellick delivered a major foreign policy address in which he urged China to become a “responsible stakeholder” in the international system.

The speech was meant to send a message to Beijing. The only problem was that the Chinese had no clue how to translate the word “stakeholder.” Any decent interpreter could tell you that a stake is a pointy stick, but why China should be holding a stake, and how do so responsibly, was lost on Chinese officials.

Ever since then, diplomats and scholars in the U.S. and China have been lobbing translations back and forth, each with a different spin on the S-word. The U.S. State Department translates “stakeholder” as a “participant with related interests.” The Chinese government, however, has yet to adopt an official translation.

Stakeholder is a legal term, but with several shades of meaning guaranteed to drive a translator up the wall. In its most traditional sense, a stakeholder is a person who holds money or property on behalf of two or more persons who are contesting the ownership of that property. An escrow agent, for example, would be a stakeholder if he or she is holding funds subject to a dispute. Escrow, by the way, comes from the Old French escroue, a roll of parchment that served as a deed.

Stakeholder entered the legal lexicon by way of the gambling dens of 16th Century England. Back then, wagers were placed on top of wooden stakes while the “stakeholder” supervised the betting. Long after the actual stakes disappeared from gambling, the word stake became a metaphor for the wager itself, as seen in such metaphors as “high stakes” and “raising the stakes.”

More recently, stakeholder has been broadened to include persons who – unlike escrow agents – find themselves involuntarily holding property subject to multiple adverse claims. A banker, for example, might discover that several parties are claiming the right to money on deposit at the bank. Rather than waiting for the lawsuits to come, the bank may file a “stakeholder” action and interplead the various claimants. Stakeholder Interpleader actions exist in various jurisdictions, including New York and in England.

In the meantime, the humble stake took on an entirely different meaning as a boundary marker for land surveying purposes. In the Old West, miners and land speculators would famously stake a claim – a usage that dates from 1857 – by driving wooden stakes into the ground. Those who made claims in this way might also be referred to as stakeholders.

But none of this was exactly what Mr. Zoellick was driving at. Rather, by referring to “participants with related interests” the U.S. diplomat was riffing on a much more recent use of stakeholder, this time in corporate law. In recent decades there has been a movement to grant legal rights to corporate stakeholders – meaning constituencies other than shareholders that are affected by a corporation’s activities. Stakeholders might include the corporation’s employees and customers, as well as the community in which the offices are located.

In 1990, the Pennsylvania legislature added a stakeholder provision to its anti-takeover law. This provision allows a company’s board of directors to consider the interests of stakeholders when voting on takeover proposals. Other states have followed and some politicians have even taken up “stakeholder capitalism” as a platform.

Although the use of the word stakeholder is new in this context, the underlying idea has been around for a long time. In the early days of the United States, corporate charters were exclusively granted by the state legislatures. The legislatures would sometimes require that the new corporation accept some duty on behalf of this-or-that constituency. In 1822, for example, a New Jersey bank charter required the bank to devote some of its money to aiding the fisheries at Amboy.

The corporate-law angle, unfortunately, only added to the confusion in Beijing. The director of China’s powerful Institute of International Strategic Studies confidently declared that stakeholder “means shareholder.” Nice try, but of course, the whole point of stakeholders is that they are not shareholders; that is, they have no ownership in the enterprise but they nonetheless have an interest in its performance.

As terms of corporate law, stocks and shares are as old as the hills. Stock comes from an Old English word (stocc) meaning “tree trunk.” At some point around the 15th Century, the word came to represent a money box or sum of money (perhaps because money, like a tree trunk, is a foundation for future growth). In the early 1600’s the word was borrowed for a new form of commercial endeavor: the joint stock company. Many of the first joint stock companies were formed to settle the New World. Thus, in 1607, Richard Hakluyt proposed

the raising of a PUBLIC STOCK to be employed for the peopling and discovering of such countries as may be found most convenient for the supply of those defects which this Realm of England most requires.

This might just have been the first recorded IPO in history.

But how to describe the ownership interest of the investors? Here again, Old English came to the rescue with a handy term – scearu – which refers to a cutting up, or division of the whole. Over time, scearu became the familiar share.

The corporation also began to take shape in the Elizabethan era. Initially, corporate charters were granted for things like universities and cities, not for commercial ventures. The City of London was an early corporation; New York City was chartered as a corporation during the colonial era (that the City’s top lawyer is still referred to as the “Corporation Counsel,” a title dating back to 1849.) The original purpose of the corporation was not to limit the liability of investors, but to allow collective entities to act as a single “bodie politique” in the words of John Cowell’s 1607 law dictionary.

New York’s incorporation statute of 1811 was the first to establish a streamlined method for setting up business corporations – it allowed five or more persons to form a corporation to manufacture such diverse items as “linens . . . anchors . . . hoop-iron and ironmongery.” The statute refers to corporations as a “body corporate and politic,” nicely echoing Cowell’s definition from 200 years earlier.

Small wonder the Chinese are befuddled by our legal terms. In fact, other cultures appear to have an equally hard time translating stakeholder. A brief review of online dictionaries shows Hungarian and Italian using the equivalent of “shareholder” while French and Spanish use terms that refer to an escrow agent. None of the dictionaries recognized the more recent sense of stakeholder.

Translating a legal term into another language is tough going. Imagine, then, translating a legal term into 20 different languages. That is the problem the European Union faces, and it is getting worse as yet more countries join the confederation. Every European regulation has to be translated – down to the subtle nuances – into languages as diverse as Czech, Latvian, and Swedish. The EU spends about $1.6 billion on translation services and yet, as of early 2005, it had a backlog of 60,000 pages of official documents waiting to be translated. The backlog is expected to reach 300,000 pages by the end of 2006.

EU officials have debated various solutions to the language problem, including limiting the entire bureaucracy to just one or two official languages: English, of course, has been suggested as a possibility, but so has Latin (talk about the revenge of the nerds), and even Esperanto, a language invented in 1887 by a Polish eye doctor. Unfortunately for Europe, there is no word in Esperanto for stakeholder.

(This column first appeared in the February 2006 issue of New York Law Journal Magazine).