James Leroy Wilson's blog

Tuesday, March 25, 2008

Corporate Greed is the Law

A six year-old article by Robert C. Hinckley was recently brought to my attention, particularly this portion:
The provision in the law I am talking about is the one that says the purpose of the corporation is simply to make money for shareholders. Every jurisdiction where corporations operate has its own law of corporate governance. But remarkably, the corporate design contained in hundreds of corporate laws throughout the world is nearly identical. That design creates a governing body to manage the corporation-usually a board of directors-and dictates the duties of those directors. In short, the law creates corporate purpose. That purpose is to operate in the interests of shareholders. In Maine, where I live, this duty of directors is in Section 716 of the business corporation act, which reads:

...the directors and officers of a corporation shall exercise their powers and discharge their duties with a view to the interests of the corporation and of the shareholders....

Although the wording of this provision differs from jurisdiction to jurisdiction, its legal effect does not. This provision is the motive behind all corporate actions everywhere in the world. Distilled to its essence, it says that the people who run corporations have a legal duty to shareholders, and that duty is to make money. Failing this duty can leave directors and officers open to being sued by shareholders.

What is the problem with this? Is there anything wrong with making money? No, but money is just one subjective value among many in the marketplace, and in society as a whole. Imagine one private, non-corporate business owner is caught in a recession. He's built substantial reserves, and resolves that he won't lay off any employees in a recession except as a last resort. The business loses money, but at great personal cost to himself, the owner doesn't lay anyone off. The recession ends, and he's saved himself the cost of rehiring, or hiring and training new employees. The company is more productive than ever.

This owner was free to be this compassionate toward his workers because he owned the bottom line; he was accountable to no one but himself. And he decided he valued his employees more than he valued profits. Because he was responsible only to himself and not to shareholders, he could balance his desire for profits with other emotions, such as sympathy and compassion. To say he was right or wrong to retain his workers misses the point: the decision was, quite literally, nobody else's business. And that's how it would be in a free society.

In a genuinely free market, there will be owners like this one. There will also be owners who would more readily lay employees off in hard times - perhaps because he can't afford any other recourse, perhaps because he's greedy. There may be also be corporations created by private contract committed to bringing profits to shareholders. The CEO's of such corporations would feel like they have no choice but to lay people off if the shareholders will be happy with the bottom line in the next few quarterly reports. The CEO doesn't own the bottom line; he's accountable to shareholders who expect a return on their investment. In any case, this privately-created corporation would not enjoy a privileged legal status in the market. The owners - shareholders - would be held liable for the misdeeds of the corporation.

I'm not saying that it is wrong to lay people off if a company can't afford it. I'm not saying there shouldn't be corporations, if they can develop out of free, voluntary associations. But I do object to the corporation as a child of the State, protected by the State, whose sole responsibility is to deliver profits to shareholders. I don't agree with Hinckley that the law should be changed to make corporations more "socially responsible," because that is far too subjective to be enforced consistently. But by writing the rules for corporations, and favoring this form of organization (such as recognizing them as "persons" under the law) over other business arrangements, the State distorts society by favoring "profits" over other values such as decency or compassion.

Individuals weigh their desire for money with other desires and values. Employees of a company, on the other hand, are duty-bound to act in the best interest of their company, and the company's interest is making money. The decisions a CEO, forced to think only of profits, might not be the same that he would make as an owner. The free market is actually distorted if profits is a state-sanctioned preferred value.

We should get rid of state-sanctioned corporations. Individuals should be left free to form corporations on their own, on terms determined by themselves, reflecting their own values. If profits continue to be the primary value of the market, that would at least reflect the organic values of the people. The State shouldn't have to encourage it.


  1. Wes Bertrand10:57 AM PDT

    Well put, James. This may be the biggest blind spot of present advocates of capitalism. Objectivists are normally the blindest in this regard, as Ayn Rand never critically examined the nature and history of corporations ("The Aristocracy of Pull" and "The Pull Peddlers" notwithstanding). Worse still, they heap praise on the corporate structure and its consequences (e.g., CEO pay)--even though, as you wrote, corporations are children of the State!

    It appears that the early market-based joint stock company was the corp's conceptual precursor. Naturally, it didn't take long for the government to get heavily involved

    I analyzed corporations in a section of my book, btw:
    The Immorality of Politics
    Corporations: The Semi-Good, The Bad, And The Ugly


  2. In principle, a corporation's officers and directors act in the interests of the entity and its shareholders. In reality, however, they usually act in their own interests, and this is even easier to do in a publicly held corporation. All shareholders own is a right to vote for directors and to receive dividends, if the corporation declares any. Many individual shareholders are not able to follow what is going on or to do anything about it, and institutional shareholders are staffed by the same parasites who make up slates of directors and officers. Thus, failing CEOs are able to get huge payouts even though this is manifestly contrary to shareholder interests.