A corporation's obligation to obey the law

03/28/2011

A corporation's obligation to obey the law

Stephen Padfield takes issue with my assertion that "Corporations have the same obligation to obey the law as natural persons":

To the extent that corporations don't actually exist and thus can't be physically put in jail, this seems not quite correct. Furthermore, the actual human decisionmakers and "owners" often appear to be significantly immunized from jail for corporate malfeasance because of the responsibility dilution inherent in doing business in the corporate form. This is obviously to a significant degree an empirical question, but I'm certainly not going to take at face value the assertion that corporations are precisely as subject to the law as natural persons. Particularly when that assertion is trotted out in support of fending off attempts to regulate corporations more rigorously because, "They have no soul to save and they have no body to incarcerate."

Point well taken. The overlap may not be precise. But I think both theory and law suggest that the corporation has a duty to obey the law that is at least analogous to that of a natural person.

American Law Institute Principles of Corporate Governance sec. 2.01(b) provides that a corporation "Is obliged, to the same extent as a natural person, to act within the boundaries set by law."
Even Milton Friedman in his famed critique of corporate social responsibility opined that the corporation's proper objective is "to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom"
Although they can't be sent to jail, corporations can be fined and sued. In the extreme case, to the point of being forced out of business (e.g., Arthur Anderson), although admittedly that is rare.
It is true that directors and officers often escape liability due to the corporate form's insulating powers. Yet, as Martin Petrin has pointed out, "it has gone mostly unnoticed that corporate directors and officers can be held personally liable in tort to non-shareholder third parties based on failures in exercising their core corporate duties." Indeed, such liability seems to be on the upswing.

So maybe the parallel isn't all that inapt after all.

Posted at 11:53 AM in Corporate Social Responsibility | Permalink

Comments

Stephen Padfield takes issue with my assertion that "Corporations have the same obligation to obey the law as natural persons":

To the extent that corporations don't actually exist and thus can't be physically put in jail, this seems not quite correct. Furthermore, the actual human decisionmakers and "owners" often appear to be significantly immunized from jail for corporate malfeasance because of the responsibility dilution inherent in doing business in the corporate form. This is obviously to a significant degree an empirical question, but I'm certainly not going to take at face value the assertion that corporations are precisely as subject to the law as natural persons. Particularly when that assertion is trotted out in support of fending off attempts to regulate corporations more rigorously because, "They have no soul to save and they have no body to incarcerate."

Point well taken. The overlap may not be precise. But I think both theory and law suggest that the corporation has a duty to obey the law that is at least analogous to that of a natural person.

American Law Institute Principles of Corporate Governance sec. 2.01(b) provides that a corporation "Is obliged, to the same extent as a natural person, to act within the boundaries set by law."
Even Milton Friedman in his famed critique of corporate social responsibility opined that the corporation's proper objective is "to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom"
Although they can't be sent to jail, corporations can be fined and sued. In the extreme case, to the point of being forced out of business (e.g., Arthur Anderson), although admittedly that is rare.
It is true that directors and officers often escape liability due to the corporate form's insulating powers. Yet, as Martin Petrin has pointed out, "it has gone mostly unnoticed that corporate directors and officers can be held personally liable in tort to non-shareholder third parties based on failures in exercising their core corporate duties." Indeed, such liability seems to be on the upswing.

So maybe the parallel isn't all that inapt after all.