April 11, 2004

Corporate obligations

Professor Bainbridge reminds us, without meaning to, why the modern corporation, unrestrained, is such a threat to civilized and ethical society.

In a post critical of L.A. Times columnist James Flanigan's suggestion (registration) that corporations aren't paying enough in taxes, Bainbridge describes some facts about corporations:

  1. Corporations are not moral actors.
  2. Directors and managers owe duties to shareholders rather than society.
  3. Directors and officers are obliged to maximize shareholder wealth within the law.

Fact #1 reminds us that a corporation is a collection of human beings knit together by legal relationships, and that we make a mistake when we say that this abstract set of relationships itself has moral obligations. Instead, as Bainbridge points out, it's the people who act in the name of the corporation who are morally obligated. "Enron" didn't act; Ken Lay did. Punishing "Enron" is like punishing a concept. (It's like declaring war on "terrorism.")

Facts #2 and #3 simply state the job duties of the director and managers. It's no more surprising that obligations to society aren't included than it would be for these to be included in the job description of a car mechanic or golf pro.

But I'm sure Bainbridge doesn't deny that the people who do these jobs have obligations which go beyond their job descriptions. A human being doesn't stop being a moral actor when she takes the reins of the legal fiction called a corporation. Just like the car mechanic (and even the golf pro), this human being remains constrained by ethical obligations even if the constraints are not imposed on her by her job.

What I want to say is that the corporate organization in its current incarnation as a fictive legal entity with rights of speech, ownership, and due process, dangerously obscures the responsibility of the human beings who make decisions in its name.

This criticism is the same familiar criticism that is often leveled against bureaucracies and governments. There are many reasons why the individuals acting in the name of a large organization escape accountability. The organization can disguise the decisions of the individual and makes these appear to the world as the "acts" of the organization, enabling a miscreant to take advantage of the opportunity to avoid blame for his misdeeds.

The average person (and even some business columnists) can easily make the understandable mistake of attributing a decision claimed to be by "General Motors," to an entity called "General Motors" instead of to its directors. It's a sad fact of human frailty and intellectual limitation, but the sad result is that the human beings running the corporation are too often not held accountable for even their honest mistakes--let alone their calculated misdeeds.

People who call themselves "conservative" know this. They've sharpened their teeth on these arguments for years, but they've always aimed them at the government, bureaucracies, labor unions, and other large organizations with social obligations other than maximizing their profits. Sadly, though, a person of any political stripe who recognizes the importance of personal responsibility shouldn't shy away from crying foul when the organization that discourages accountability is one that Milton Friedman likes.

We want openness in government because we want accountability. Especially when the institution has as much power and as much ability to misuse it as a government. Modern corporations don't quite have the same power as (some) governments, but the danger they pose is great nonetheless. For the sake of that same accountability we treasure so much in government, we should keep the modern corporation tightly under control with iron-clad regulations, and maintain a healthy fear of what can happen when the regulators fall asleep, or are paid to look away.


NOTE: I look forward to reading Bainbridge's defense of corporations in the two papers linked to in his post.

Posted by Carey at April 11, 2004 08:27 PM

Carey, where exactly is your difference with Bainbridge? I'm a bit confused.

Bainbridge didn't say that corporate executives shouldn't be charged with criminal acts if they commit them. He objected to the idea that there is a 'social responsibility' beyond that proscribed by law: e.g. they have to pay taxes, but not fail to avoid taxes in ways that are legal.

Near as I can tell, you're either (a) making an amorphous attack on a legal entity that doesn't actually exist, or (b) you're advocating that we dissolve the idea of a corporate entity.

Can you make your objection a bit more concrete?

Posted by: A. Rickey at April 12, 2004 05:00 PM

Thanks for pointing out the vaguenesses of my post.

I wasn't trying to argue against Bainbridge. Instead I wanted to point out that what Bainbridge said (I believe accurately) about corporations means that the unregulated corporation is dangerous.

There are many reasons for this. The reason I focused on in my post was the common mistake (made by the journalist whom Bainbridge criticizes) of failing to attribute corporate actions to the people who run the corporation. When this happens, those people aren't held accountable in the way that they should be, and both "honest mistakes" and willful misdeeds go unnoticed and uncorrected. (What constitutes "mistakes" and "misdeeds" here is of course open to debate.)

I'm not quarreling with Bainbridge that if the law permits corporations to avoid taxes, the directors of the corporation are legally obligated to take advantage of those laws. It's because Bainbridge is correct on this point that the laws ought to rigorously confine corporate behavior to prevent their acting in ways which benefit shareholders, but harms everyone else.

Posted by: Carey at April 12, 2004 10:40 PM