I love a good story and Kent Greenfield’s sidebar in the January/February issue of the Washington Monthly provides one.
“The public be damned,” railroad magnate William Henry Vanderbilt snorted at a reporter in 1882. The impertinent scribe had asked whether Vanderbilt ran his railroads with an eye toward public benefit. At the time, Vanderbilt was among the most powerful men in American business—and by his own estimation the richest man in the world. His figurative middle finger to the American public was big news, appearing on the front page of hundreds of newspapers within twenty-four hours.
The week before his comment, two trains had collided on his railroad inside the Fourth Avenue tunnel in New York City, killing two passengers and injuring hundreds. Many New Yorkers blamed the accident on Vanderbilt’s unwillingness to cut into profits by spending money on safety measures. His contemptuous words, spoken as he dined in his private train car, salted an open wound. The satirical magazine Puck ran a cover cartoon of a ballooned, profligate Vanderbilt wearing a diamond pin, smoking a stogie, and leaning back in a leather chair with a foot on the throat of an eagle dressed in Uncle Sam garb.
He also tells the backstory to one of the most consequential cases in the history of corporate law: Dodge v. Ford. In that case, the court ruled that Henry Ford couldn’t withhold dividends from shareholders in order to use the money to build a new auto manufacturing facility.
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction in profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.
Greenfield’s point is that shareholders have been put on a pedestal above “the interests of workers, customers, and society.” He call’s this “corporate law’s original sin.”
You can read the whole piece here, and his fuller treatment on corporate personhood here.
Henry Ford was an asshole but he always had an eye to the long game of business. If you make everyone but the super rich into peasants, who can buy your products?
Whenever I hear about economists who are baffled, baffled! why lower gas prices haven’t translated into higher consumer spending I want to facepalm.
A business corporation is organized and carried on primarily for the profit of the stockholders.
Interesting. I think you can see things going off the rails right about here. I don’t know a whole lot about corporate law, but I have read the Dartmouth College case, and I can see how the reasoning here is derived from that.
Except for one thing–Dartmouth College is not a business corporation, so it exists for reasons other than profit-making. That’s something that’s been all but forgotten these days. A corporation is an artificial person that has been organized for any purpose whatsoever. Profit making is just one possibility.
(The other thing I know about corporate law is that corporations are defined as artificial persons as far back as Blackstone. One thing I found particularly curious was that Blackstone defines a monarch as an artificial person, because the office of the monarch exists separately from the person who holds it. The kind is dead, long live the king.)
So I actually haven’t read all of Greenfield’s stuff, but I think I generally agree with him. Corporate personhood is kind of a red herring. What’s really at issue in the kinds of abuses we’re seeing is the profit-making aspect, and to go with my red herring I also have an elephant in the room: the limitation of liability.
Who guarantees the limitation of liability? The government. But that guarantee is fundamentally in the form of a contract. It’s true that the Constitution prohibits the government from interfering in contracts, but it can also be a party to contracts. (It’s easy enough to describe the government itself as a corporation, after all.) In this case the government is saying, “Go ahead and invest in this corporation. We guarantee that you won’t be held liable for any losses greater than your investment.” So that’s their side of the contract. But what do they get in return?
It’s been a long time since I’ve taken Corporations, but at least one of the “returns” in exchange for limited liability is the view that encouraging people to deliver goods/services through an organized enterprise can be a good thing, and individuals are less likely to engage in an organized enterprise if doing so would subject them to ruinous personal liability for the screwup (intentional or not) of someone else in the enterprise.
For example, if I’m interested in creating a taxi company (or an airline, etc.), I may be more likely to do so with the understanding that if one of my employees is involved in an accident, the victim may sue and recover against my company (and even put my company out of business), but would not be able to take away my home and destroy me financially. We as a society want taxis, airplanes, and other such things, so some liability protection is socially beneficial.
As for the article itself, it’s not entirely clear to me what point is being made. Greenfield notes that courts are very deferential to the business judgment of corporate officers, and so Ford may very well have been able to build the plant and also withhold a dividend if he had stated that doing so was in the long-term business interest of the company (which may very well have been true, since that plant seems to have been very productive for decades). Courts do approve of good citizenship-type spending, even spending on things that don’t benefit the company in any tangible way, so long as the company’s officers can argue that the spending somehow relates to the company’s long-term best interest (maybe it improves the company’s reputation in the community, for example).
The issue for courts is that a corporation is a collection of parties with occasionally divergent interests – shareholders, executives, managers, and employees. Technically, the shareholders own the company and so, in the courts’ view, all other stakeholders in the company should be working to advance their interests either in the short- or long-term. I can see where Ford could be perceived as playing with house money and assuming for himself the power to do with corporate funds whatever he wished, when instead it would have been better to explain that investing the funds in the company was better for shareholders in the long-run then issuing a special dividend.
Thanks for the explanation. I suppose a lot would depend on the corporate charter too. If US corporate law is based in contracts, then if you go to court you’re basically saying that the contract–the charter–should be enforced according to your interpretation.
So for me it comes down to three main points:
Well, I’m not entirely sure what you mean when you ask if U.S. corporate law is based on contracts. Ordinary state law defines what a corporation is, specifies the requirements for forming a corporate entity, and specifies the liability protections – those sorts of things aren’t really contractual in nature. Corporate charters are usually barebones documents that function like a company’s “constitution,” providing a skeletal framework for the number of directors, purpose of the company, etc. It’s adopted by the board of directors but I don’t think is really viewed as a contract with anyone. A shareholder could presumably sue for a violation of a charter that results in harm to the shareholder or to the company, but that would just show that the directors are abusing their power.
State law also defines what duties are owed to different corporate constituents. For example, in Iowa, a director is shielded from liability for opposing a merger with another company on the basis that the merger, in the director’s view, conflicts with the interests of its customers, suppliers, shareholders, employees, or the communities in which it operates. I think Iowa is pretty unique in that regard, and clearly someone in Iowa drafted that law out of fear that a non-Iowan would launch a hostile takeover of an Iowa company. Nonetheless, a state could always enact a law forcing corporate decisionmakers to exercise their authority in consideration of parties other than shareholders. I suppose you would then have to figure out how to draft such a provision in a way to give it real teeth. You would also have to consider whether enacting such a law would just cause companies to incorporate under the laws of another, more lax state (most U.S. companies are incorporated in business-friendly Delaware).
Keep flogging this one, BooMan. It has some good history that not a whole lot of people are up to speed on. Most progressives know a lot of that but Greefield’s piece is a good one to Facebook or Tweet.
I’ve been wondering why we are not seeing the benefits of low oil prices. Specifically, the airlines are not passing any of their savings on to their customers. Here in chicagoland a gallon of milk costs more than a gallon of gas.
Probably because there is no actual competition in many American markets anymore—the various markets are largely oligopolies, so there’s no rush by suppliers to try to increase market share when input prices drop.
Our holy “free markets” are simply not competitive markets–the giant corporations basically dictate and set prices, not the invisible hand of the “market”. This is just more evidence of it.
So Vanderbilt’s “Public Be Damned!” snarl essentially became a tenet of corporate law, ha-ha. And to think today’s PR gurus would counsel against such CEO honesty! It seems Vanderbilt knew better…
Since corporate law is state law, which the article makes clear uniformly prioritizes the shareholders in all corporate decisions, presumably Congress could pass a federal law (under the Commerce Clause) requiring that the boards and officers of all corporations which make any interstate sales must take the interests of the workers, community and environment into account when making decisions affecting the affairs of the company, not just the interests of shareholders. Federal law trumps state law.
A fantasy in our brainwashed “capitalist” country and culture, of course. And we know exactly what Roberts’ Repubs and their “conservative” judicial activism would do with it! But legal nonetheless…