Thursday, 10 May 2012

Corporate Slavery

  A corporation is legally a person, able to exercise many (though not all) of the legal rights of a natural person. Corporations can sue and be sued, can own property and enter into contracts, and can even be charged with criminal offenses, although for obvious reasons they cannot actually be imprisoned, even when they are found guilty. 

  This is the basis of a common criticism of corporations and corporate law. Despite the legal fiction that corporations are persons, they lack the frailties of natural persons which help to inform our morality. Imprisonment may be an effective deterrent (or at least a meaningful punishment) to a natural person (including the directors of a corporation), but has no meaning for the corporation itself. Corporations have no need for food, air, water or shelter, they cannot fall in love, have children, or stub their toes. They don’t age, and they don’t feel pain, fear or remorse. Given all this, it should come as no surprise that corporations sometimes (often) act as soulless monsters without any regard for the interests of others beyond the minimum duty of care imposed by law. So, it is sometimes argued that corporations should not be treated at law as persons.

  I am sympathetic to the concern motivating this argument, but something about it remains unsatisfying. Legal rights are not contingent on the specific frailties of mortal human beings. Suppose a person were to reveal, for example, that she was in fact 3,000 years old, and just happened to have a rare mutation that exempted her from the normal process of aging. Would we say that such a person should forfeit any of her legal rights on that basis? Well, we might want to modify the Copyright Act, since a term of life + 50 years is a bit extreme when the author is effectively immortal, but apart from that sort of thing I expect most of us would agree that the basic rights associated with personhood should remain intact.

  But it occurs to me that the problem with corporations is not that we treat them too much like persons, but not enough. That is, there is one critical respect in which a corporation is treated in a fundamentally different manner from natural persons, at least since the abolition of chattel slavery: corporations are owned.

  Now, before I continue, let me first emphasize that I am not calling for the emancipation of the corporation. Far from it. They already enjoy more than enough power and practical freedom. What I want to do, rather, is point out how this simple fact, that corporate “persons” are also at law someone else’s property, makes it almost inevitable that corporations (publicly held ones, at least) will tend to exercise their legal personhood as soulless monsters.

  First, we must note that as an artificial person, a corporation itself has no mind, and can only act through agents. Thus a corporation must have directors to make decisions on its behalf. The corporation is utterly at the mercy of these directors, who are necessarily empowered to affect its interests by entering it into binding agreements, spending its money and so forth. Whenever someone is empowered over a person in this way, the law imposes a strict duty on the empowered one, called a fiduciary duty, to exercise those powers faithfully in the best interests of the other (who is called the beneficiary). Parents owe a fiduciary duty to their children, physicians owe a fiduciary duty to their patients, attorneys owe a fiduciary duty to their clients, and so forth.

  But what does it mean to act in someone’s best interests? That usually depends on context and who that someone is, but will almost always include some reference to the question: “What would the beneficiary choose for himself, if only he were competent to act on his own behalf?” 

  That question has no meaning for a corporation, however. Remember that a corporation is property; it belongs to someone. That means that its best interest are not understood in terms of what it would want for itself, but in terms of its own value as an asset. So a corporation’s directors are thus under a fiduciary duty to maximize the corporation’s bottom line, to increase its market value. However valuable things like clean air, job security and peace and happiness might be to natural persons (including those natural persons who happen to be corporate directors), they are not a part of the best interests of a corporation, and for a director to pursue such goals on behalf of a corporation at the expense of share price is actually unlawful, a breach of fiduciary duty to the poor helpless corporation at their mercy. Essentially, then, the directors of corporations are legally obliged to make their corporations act as soulless monsters.

  I am not sure what to suggest as a remedy. Perhaps we need to rethink the whole notion of equity in corporations, and redefine it more as a kind of debt. Or perhaps we can, by statute, add factors that directors must consider as being in the “best interests” of the corporations they control. (To some extent, that is possible already by way of a Unanimous Shareholders Agreement, but the default position for a corporation is to care only about its bottom line.) That may seem an artificial and forced solution, but on the other hand, corporations are themselves an artificial concept.

  I dunno. Maybe I’m hoping for some good ideas to show up in the comments thread...


  1. Sorry, Tom, can't think of any viable solutions to this. In business school there were several suggestions, as well. But most of them centred around making the directors more personally responsible for acts that the corporation did that were against the best interests of society or broke laws.

  2. My understanding was that fiduciary responsibility was to the corporate shareholders as opposed to the corporation itself. Would that not mean that the best interests of the corporation would in fact be the best interest of the individual(s) with the controlling number of shares? [Note: I do realize that corporate shares can be owned by corporations, but ultimately this will track back to individual(s), however many layers of corporate ownership exist.]
    So, ultimtely corporate decisions and policy are made by the indiviual shareholder(s) that control the corporation, who in fact are often the director(s). So corporate decisions that negatively impact the environment or local economies are ultimately the decisions of individuals acting in their economic interest whatever the consequences.
    Mind, I don't think I've moved any closer to a solution. My only notion is an increase of directors' liability.

  3. Making directors more personally responsible is one approach, but it still seems to me a bit of a kludge. As well, there are some sorts of actions that corporations should be free to contemplate (such as deciding between fulfilling a contract and deliberately breaching it but paying the damages) that director liability can pose problems for. If the rational thing to do is to breach the contract, or even violate a safety regulation and pay the fine, then we need some principled means to change the rationale, not merely impose ad hoc sanctions in some cases while systematically ignoring others.

    Michael, you're right that the fiduciary responsibility is ultimately to the shareholders, but there's a corporate veil in the way, in part because (especially with publicly traded corporations) there are so many different shareholders with so many different and perhaps conflicting interests. Some shareholders may want the company to give its employees same-sex marriage benefits, for example, while others might be steadfastly opposed to doing so. Requiring directors to consider these sorts of shareholder interests would invite a nightmarish tangle of oppression claims. So the "interests of shareholders" (to which the fiduciary duty applies) boils down to only those interests the shareholders can be assumed to hold in common: the value of their shares.