Bringing corporate responsibility home to roost

BY DAVID MIN

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country…. Corporations have been enthroned, an era of corruption in high places will follow, and the money-power of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in a few hands and the Republic is destroyed.” — Abraham Lincoln

When we discuss modern life, it’s virtually impossible to do so without reference to the American corporation. The corporation is perhaps the single most influential innovation in American history, because it impacts every aspect of our lives — political, economic, social, individual — and has done so with increasing vigor since its modern inception. Today, in a world where every other pillar of American society is dominated by the economic, and where every other society is dominated by the American, the corporation has a profound effect on the world.

But what is the corporation, exactly? I make no pretensions to having a mastery of the corporate form, but my understanding of it is that it is a business form or structure that is unique in two main ways: first, any liabilities it incurs are limited to the corporation itself, and not to its investors (or “owners”); and second, it has a potentially unlimited lifetime, in that its status as a legal entity does not end until it reaches some sort of terminal event, such as bankruptcy, which need not ever occur.

Now, the obvious effect of these two traits would be to make the corporation more autonomous, closer to being an individual in its own right. Indeed, this hardly seems a controversial position today, to say that a corporation is an entity that is somewhat independent of the people who “own” it. Our own Supreme Court has progressively edged closer towards the position that the business corporation is a “person” for the purposes of constitutional protections, veering far away from its original position, enunciated in the early 1800s, that the corporation was deserving of constitutional protections only insofar as its investors’ constitutional rights were applied.

But what is wrong with this scenario? Who cares if business corporations have constitutional rights or not? Hasn’t the American corporation led to enormous growth in the economic well-being of our country, as well as the world? Enthusiastic proponents of the corporation argue that this form of business allows for the efficient pooling of capital by investors, more so than any other form of business.

But there are at least three problems with the corporation that may outweigh the advantages in more efficient capital allocation that the corporation provides. First, the corporation’s disjunction between management and ownership eliminates one of the main bases for ethically responsible business: personal accountability and reputation. As law students, we’ve likely all read or heard of the numerous studies showing that human beings are much more likely to be inhumane or immoral when placed in positions of anonymous authority. And yet the passive role of investors, which is inherent to the corporate form, promotes exactly this type of anonymity for the managers and directors and other agents who actually run the corporation. Thus, it is hardly surprising that large corporations with severe disconnects between their “owners” and responsibility for the corporations’ actions frequently engage in behavior that most of us might view as unethical, such as engaging in exploitative labor practices or knowingly selling dangerous products. While it is certainly possible that individuals engaging in business would carry out similarly unethical activities, it seems clear that individuals, attaching their name and reputation to such misbehavior, would be more the exception than the rule, whereas for corporations, the misbehavior would be more the rule than the exception. In a nutshell, it is far easier for people to act badly when they do not personally bear responsibility for their actions, as was the case in the Nazi regime.

Second, one might legitimately ask what the moral character of the corporation as autonomous entity is. Yes, there are bad people in this world who do bad things, but our society runs on the presumption that the vast majority of people comprising it are morally good actors, born and raised with communal values of empathy and respect. In some ways, this is the essence of democratic liberal society. And yet we assume exactly the opposite about business corporations. As thinkers on both the Right and the Left have noted, the sole legitimate purpose of the corporation, given its structure, is to maximize profit for its shareholders. The corporation is not supposed to behave morally; it is to behave profitably. This fact, in and of itself, is not a bad thing, but it seems perverse, in light of this fact, automatically to grant and preserve limited liability and eternal life, extremely valuable qualities, to the amoral corporation.

Finally, given the eternal lifetime, limited liability and consequent liquidity of ownership of the corporation, we face the very real problem of the corporation as the dominant entity in our society. Quite simply, the corporation has come to dominate the economic discourse in the world, which in and of itself is only somewhat problematic. However, when the corporation seeks to expand its sphere of influence into other aspects of our society, particularly the political, the problems are twofold: First, the positive purposes of the corporate form itself, namely efficient capitalism, are threatened; and second, the decidedly anti-democratic corporation’s enormous influence in the democratic political process threatens democracy itself (think about the fact that an overwhelming percentage of the American people are in favor of campaign finance reform, whereas an overwhelming percentage of American wealth is against it). The Enron debacle is a perfect example of what can happen when the corporation intertwines itself into the political process.

So what to do about it? I am not advocating the abolition of the American corporation. But what I would propose is a revisitation of the status that we grant to corporations. First and foremost, the Supreme Court should reverse course and clearly reestablish that corporations are not deserving of constitutional protections, except insofar as they are extensions of investors’ constitutional rights. There should be no doubt in anyone’s mind that the current course is not what the Founders, nor the drafters of the 14th Amendment, had in mind. Second, we should be much more circumspect about the endowment of the special privileges that we grant to corporations, and much more disposed to revoking these privileges. Clearly, limited liability and eternal life are valuable characteristics, and they are entirely legal in nature. If you doubt this, think about what would happen to the stock of a typical Fortune 500 company if you revoked one of these benefits.

Now critics (most of you, though maybe not if you’ve read this far) would likely scream bloody murder at the prospect of some additional governmental regulatory powers over the corporation, likely on two fronts: 1) that this would severely hamper the capital and consumer markets; and 2) that this is Fascist or Communist in its governmental scope. But we have many other business forms that could easily suffice for the corporation: partnerships, LPs, LLPs, and whatever else crafty business lawyers like many of your future selves can come up with. While these may not be nearly as conducive to efficient capital allocation as the business corporation, if the benefits of such are outweighed by the detrimental aspects, then why not revoke corporate status? Furthermore, the benefits of incorporation are entirely legal in nature. Unlike the partnership, or perhaps even the limited partnership, for which we might see analogues in the absence of a legal regime, through contract, the limited liability corporation could not exist without the Law. And so
to the extent that the Law creates corporations and endows them with valuable benefits, why shouldn’t the Law be allowed to revoke these benefits?

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