April 14, 2004

I blogged this instead of watching hockey?

I've given the question of corporate wrongdoing, as carried on between myself and Ben from That's News to Me, some (ok, downright perfunctory) thought.

It seems that the most productive next step is simply to try to clarify what the issues are, and then decide if any are worth the blog-time to pursue further.

My concern is with the harm that often results from the "actions" of corporations. The scare quotes are necessary because I agree with Professor Bainbridge that corporations do not in fact "act" in the same way that individuals do. Specifically, corporations aren't "moral actors" in the way that all individuals are (at least if you subscribe to a belief about morality that says this of individuals). Therefore, when morally condemnable actions are taken by a corporation, it makes no sense to morally condemn the corporation. Far better, as Bainbridge points out, to condemn the directors.

But (and this is the point I was making in my first post), this is easier said than done. Many people fail to pin the responsibility for corporate harm on the directors for several reasons that all relate to the nature of the modern corporate entity.

  1. We fail to recognize that the corporation isn't a moral actor. Instead of blaming the directors of Bristol-Meyers Squibb or Abbott for their unconscionable pricing of Taxol or Norvir, we blame the corporations themselves. This sometimes results in punishment of the corporation (e.g. driving Arthur Anderson into bankruptcy and putting many rank-and-file employees out of work) and the failure to punish the individual executives responsible for the decisions.
  2. We confuse the moral criteria which apply to a corporation (maximize profit for shareholders within the law) with the moral criteria which apply to the individuals who serve as directors. We say, mistakenly, that these individuals have no moral obligations other than to maximize shareholder profit within the law. But this is plainly wrong; no one really thinks a person's moral obligations are exhausted by their job descriptions.
  3. To the extent that a corporate director can be fired for failing to maximize returns because she thought doing so in a particular instance was immoral, the corporate structure incentivizes (to use an ugly word) the commission of immoral acts. So long as they are technically legal, do them even if you think they're immoral. Throw into this mix the Posnerian/Holmsian arguments that you should do them even if they're illegal, so long as the monetary liability is less than the profit realized, and we have a dangerous incentive structure.
  4. That this incentive structure is ubiquitous and possibly unavoidable does not make it less dangerous in the case of corporations. Sure, the corner grocer might have a similar incentive structure to maximize profits (with a lesser threat of losing his job if, for moral reasons, he chooses to forego the occasional extra dollar of profit), but the corner grocer has much, much less power to adversely affect the lives of the people around him. If he's a ruthless opportunist, an occasional employee might get fired, or a few aluminum cans might not get recycled. But if the guy who runs Abbot Laboratories behaves in the same way, thousands of AIDS patients suffer (and some die) who wouldn't have had Abbot foregone a few percentage points of profit.
  5. Believers in the "mystic powers" of free enterprise will often say that the pursuit of profit is, virtually by definition, incapable of harming the society in ways that I seem to be afraid of. And this is the scariest thing of all. Sure, these true believers will sometimes even acknowledge the distributional problems (profit for whom?), but they usually go on to assert, without argument, that even the less-advantaged will ultimately be better off. A rising tide lifts all boats. What's good for GM is good for America. The corporation is, for the true believer, the exemplar of their brand of theology. Drug prices too high? They not only aren't, but they can't be, because, by definition, the more profitable the pharmaceutical industry, the more research, and the more research, the more cures, and the more cures, the more happiness. There is no such thing as an unconscionably, immorally large profit. That kind of religious zeal is frightening.

I think I agree with Ben about what constitutes "good" (i.e. effective and legal) corporate governance. This isn't a point of contention. What I'm interested in is the question of whether "good" corporate governance means that many people are at risk of getting hurt, and whether the government should therefore structure the laws and arrange the regulatory schemes to keep this well-governed corporation from hurting people.

I therefore agree with Ben that we ought to control corporations with incentives--i.e. laws and regulatory environments. I'm as pessimistic as Ben is about the feasibility of abandoning regulatory and legal control of corporations for some form of individual scrutiny of the directors. My discussions of the problems of accountability are meant not to support more accountability (nice, but difficult), but to argue for stringent and watchful regulation as a more effective alternative. If I caused confusion about this point, I apologize.

I disagree with Will Baude's suggestion that corporations are not inherently more dangerous than equivalently wealthy individuals. Corporations allow the individuals who decide in their name to hide from view and to disclaim responsibility; they tend to be reified by observers as the "moral actor" when in fact they are not (see Bainbridge's criticism of the LA Times columnist for making this error); and the corporation is "expected" to maximize profit at the expense of all other values in a way that individuals usually are not.

As convenient support for this last claim, I quote Ben:

Once we start with individual punishments, community allegiances, etc, we get into a world where the whole purpose of a corporation is put at risk -- we no longer know what managers should do (obey the law, or listen to shareholders?), what corporations are (entities which are required to obey the law, or a series of contracts, in which case the duty is still to maximize wealth), etc.

Corporations, unlike people, are presumed to have only one purpose. It's revealing that it's an argument against a policy merely to say that this singularity of purpose will be compromised.

Anyway, I've wasted far too much time on this. The Avalanche are in overtime again...

Posted by Carey at April 14, 2004 10:32 PM