John Scalzi, one of my favorite science fiction writers, weighs in on the subject of corporate personhood. Let's take a look (Scalzi quotes in blue):
That corporate “personhood” exists is non-controversial, but their “personhood” is not of a manner that tracks precisely with being a real, human person.
No and yes. The notion that the corporation is a legal person is highly contested. I think the law is clear and that the corporation is a legal person. Others think that the corporation is not a legal person. They're entitled to their opinion, of course, even though they are egregiously wrong. Still others agree that the the corporation is a legal person under current law but argue that current law is ahistorial and/or bad public policy. They're wrong too, but less egregiously so. In any case, it is certainly true that corporate personhood doesn't track that of natural persons. The corporation lacks several of the constitutional rights possessed by natural persons, for example. See, e.g., Hale v. Henkel, 201 U.S. 43 (1906) (corporation gets Fourth Amendment protection against unreasonable searches and seizures but not protected by Fifth Amendment privilege against self-incrimination); Blake v. McClung, 172 U.S. 239 (1898) (corporation not covered by the privileges and immunities clause of the Fourteenth Amendment or of the comity clause of Article IV).
I don’t think it’s accurate or useful to describe their behavior with reference to the behavior of real live individual humans.
Huzzah. My point exactly:
In discussing corporations, it is easy to lose sight of the overriding fact—that firms are nothing more than groups of people. We often find ourselves ... engaged in a form of reification—treating firms as though they were things having an existence separate from the people who comprise them—when we say things like “General Motors did so and so.” General Motors is a firm; it is pure fiction to say General Motors did anything. Reification is often useful, or even necessary, because it permits us to utilize a form of shorthand—it is easier to say General Motors did so and so than to attempt in conversation to describe the complex process which actually may have taken place. Indeed, it is very difficult to think about large firms without reifying them. Reification, however, can be dangerous. It becomes easy to lose sight of the fact that firms aren't things, they are simply a group of people for whom the law has provided an off-the-rack relationship we call the corporation.
Back to Scalzi:
I disagree with the notion that most of them act like clinical sociopaths. Rather, I think the majority corporations act logically and rationally and in a manner consistent with the general reason for their existence. And the reason most corporations exist — and most large multinational corporations in particular — is simple: To maximize shareholder value.
The notion that corporations are sociopaths got widespread publicity in the egregiously awful documentary The Corporation
Moreover, there is evidence that corporate leaders do have a social conscience: A 1995 National Association of Corporate Directors (NACD) report, for example, stated: “The primary objective of the corporation is to conduct business activities with a view to enhancing corporate profit and shareholder gain,” albeit subject to the qualification that “long-term shareholder gain” may require “fair treatment” of nonshareholder constituents. The 2000 edition of Korn/Ferry International’s well-known director survey found that when making corporate decisions directors consider shareholder interests most frequently, albeit also finding that a substantial number of directors feel some responsibility towards stakeholders. As someone who thinks shareholder wealth maximization within the boundaries of the law is the appropriate normative goal of board decision making, I don't endorse these views. But I pass them on because they do tend to undercut the sociopath claims.
In any case, corporations acting in ways their decision makers find economically rational have conferred massive benefits on mankind. “The limited liability corporation is the greatest single discovery of modern times... Even steam and electricity are far less important than the limited liability corporation, and they would be reduced to comparative impotence without it.” So said Progressive Era leader Nicholas Murray Butler.
The corporation provided a vehicle for small and impecunious entrepreneurs to start and grow new businesses. Without the shield of limited liability, only very wealthy persons would dared go into business.
At the same time, however, the limited liability corporation provided an essential vehicle for vast industrial enterprises that produced the goods and services that we now take for granted in modern life. The numerous technological changes wrought by the Industrial Revolution, especially the development of modern mass production techniques in the nineteenth century, gave great advantages to firms large enough to achieve economics of scale. In turn, those advantages gave rise to giant industrial corporations. These firms required enormous amounts of capital, far exceeding the resources of any single individual or family. They could be financed only by aggregating many small investments, which was accomplished by selling stock or bonds to many investors—each of whom held only a tiny fraction of the firm’s total capital.
Limited liability corporations thus also contributed to society by making it possible for anyone to invest their savings in corporate stock. Under conditions of limited liability and diversification, shareholder passivity is possible because the shareholders stand to lose only a small portion of their individual wealth in the event one of their portfolio firms goes bankrupt. Indeed, if the bankruptcy of Firm A redounds to the benefit of competitor Firm B, diversified shareholders who own stock in both might even be better off. If the shareholders are personally liable for damages, however, they will want to monitor not only how the corporation conducts its business, but also the creditworthiness of their fellow investors. Hence, without the development of the limited liability corporation, we would not have a burgeoning class of investors holding corporate stock, because the costs of holding a diverse portfolio would be too large. The corporate form thus has done much to help the middle class build and preserve wealth.
The corporation's contribution, of course, comes not only in the material but also in the political. The corporation acts as a vital counterweight against the state – an alternative island of power within society. Hence, Novak argues the corporation has proven to be a powerful engine for focusing the efforts of individuals to maintain the requisite sphere of economic liberty. Those whose livelihood depends on corporate enterprise cannot be neutral about political systems. Only democratic capitalist societies permit voluntary formation of private corporations and allot them a sphere of economic liberty within which to function, which gives those who value such enterprises a powerful incentive to resist both statism and socialism. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest. Or, as Novak put it, private property and freedom of contract were “indispensable if private business corporations were to come into existence.” In turn, the corporation gives “liberty economic substance over and against the state.”
In sum, I stand with Micklethwait and Wooldrige's The Company: A Short History of a Revolutionary Idea
Back to Scalzi:
To maximize shareholder value. There is also a general need to do so on a regular schedule; the one that is most familiar is a quarterly one, consistent with the SEC requirement that publicly-held corporations must file 10-Q forms. There may be other goals or aspirations a publicly-held corporation might have, but when it comes down to it, those are the two that count.
If you acknowledge that in the final analysis the purpose of a corporation is to maximize value to the shareholders, and make sure that each quarterly report shows such value maximization as its trend line, then their actions make perfect, reasonable sense — and might even if you employed them on a human scale. Why do corporations avoid paying corporate taxes whenever possible? Because that maximizes shareholder value — and don’t you take every possible tax deduction you can?
There are a couple of things going on here. First, the claim that corporations tend to act in ways that maximize short term rather than long term shareholder wealth (see, even I can't avoid reification).There is an active debate as to whether corporations really do have a short term focus. I tend to think that, to the extent there is a short term bias in corporate decision making, it results from the incentives created by paying executives mostly in stock options rather than the need to file a 10-Q. Having said that, the introduction of the quarterly report probably did eventually help shape the current focus on quarterly results.
Second, and more important, Scalzi is making the ethical claim that if it is okay for individuals to make economically rational decision--to be maximizers of their personal utility--it is okay for corporate decision makers to make decisions that are economically rational for the organization. To quote Adam Smith:
It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.
Yes, I know Smith said some nasty things about joint stock companies. So what? "Even Homer nods."
Back to Scalzi:
But! You say! Like Soylent Green, corporations are made of people!
Great line.
And he's right, of course. And that's a very good thing! Properly understood, the corporation is a set of relationships among people who have various stakes in the enterprise. Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear the risk of losses and monitor the performance of management. Management coordinates the activities of all the firm’s stakeholders. The corporation thus is not a thing, but rather a nexus or web of explicit and implicit contracts establishing rights and obligations among the various people making up the firm. It is a fundamentally human endeavor. Indeed, the business corporation is really a community of human beings, acting together to provide goods and services to other human beings.
Within that larger corporate community, moreover, we often find sub-communities of people whose shared values and goals gives meaning to their lives. If it is true that we now bowl alone, it is also true that those who work for corporatio0ns do not work alone. Instead, As Michael Novak observes, “Some persons today are closer to their colleagues in the workplace than to their family.”
Back to Scalzi:
Here’s the deal: In order to change corporate behavior, you have to change the underlying goals of the corporation. If for example the reason for the existence of the corporation was not to maximize shareholder value but instead to offer steady, well-compensated employment to its workers here in the US, would that have a significant impact on how the corporation acted?
Bad idea. Very bad idea. Would most investors be willing to invest their retirement savings in corporate stock if this approach became law? If not, why not? Probably because most investors do not regard their investment in corporate stock as a charitable donation made to benefit nonshareholder constituencies. Their investment in corporate stock must bring them a rate of return commensurate with the risks they are taking. If it does not, they will divest stock in favor of other investments or, at least, monitor management more closely. In either case, the cost of equity capital will rise. Ironically, this approach to corporate goals thus will ultimately redound to detriment of nonshareholder constituencies and society as a whole, because the firms with the greatest need for infusions of equity capital are the very same small and medium size firms that produce most of our economic growth.
I don’t think you have to change the fundamental nature of corporations, personally, even if I think they’re stupid to think in quarterly terms rather than focus on longer-term strategy. What I do think you need to do is let their single-minded focus on maximizing shareholder value work for the overall benefit of the country. How you do this is of course a matter of some debate ....
That's Adam Smith's point, isn't it? Set up the rules of the game so that people's incentives direct them towards desirable ends. I happen to believe that the market does a better job of doing so than do government bureaucrats. I am right in so believing, of course, but I'm open-minded enough to admit that it is "a matter of some debate."
From the comments:
There’s also the matter that morality, civic duty, etc aren’t built into the ground rules for what it means to be a corporation.
Au contraire. As the American Law Institute's Principles of Corporate Governance Section 2.01(a) explains, a corporation “should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.” Subsection (b) thereof provides, however, that “[e]ven if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business: (1) Is obliged, to the same extent as a natural person, to act within the boundaries set by law; (2) May take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business; and (3) May devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes." I think that's a pretty fair statement of the law.
... inasmuch as shareholders can sell at any time, they have an interest in gains now rather than corporate health later (i.e., when they may not be holding the stock).
If markets are even remotely efficient, the current market price will reflect the equilibrium beliefs of all investors as to the present discounted value of the stream of income the stock will generate in the future:
A company is valuable to stockholders for the same reason that a bond is valuable to bondholders: both are expected to generate cash for years into the future. Company profits are more volatile than bond coupons, but as an investor your task is the same in both cases: make a reasonable prediction about future earnings, and then "discount" them by calculating how much they are worth today. (And then you don't buy unless you can get a purchase price that's less than the sum of these present values, to make sure ownership will be worth the headache.)
Ergo, even the most short term focused shareholders have an interest in the long run.
In sum, I think it's fair to say that Scalzi did a better job of writing an essay on corporate personhood than I would do of writing a science fiction story. Even so, John, let's bear in mind Ricardo's law, shall we?
