Yesterday we began exploring the legal doctrine of corporate “personhood,” the idea that a corporation is a separate legal entity from its owners and/or operators, with its own assets and liabilities. We also explored why the separate legal entities called corporations are defined as “persons” under Title 1, Section 1 of the U.S. Code, and thus are entitled to due process of law under the Fifth and Fourteenth Amendments.
Today we’ll explore what’s wrong with corporate “persons.” Simply, as a matter of law, they are sociopaths. While there were good policy reasons for the law to develop that way, we must change that. We must install a conscience in corporate “persons,” or they will destroy our nation and our world.
And since it’s Friday, your intrepid Kossologist has looked to the stars for your fortunes. You might want to stuff your fortune in a mattress, or at least stay in bed.
Installing a Conscience in Corporate “Persons”
Yesterday we looked at how the peculiar notion of corporate “personhood” was derived. Unlike the states, which have inherent sovereignty as states, our federal government has only limited and derived sovereignty. It may only regulate what the U.S. Constitution explicitly says it may regulate. That is the essence of the Tenth Amendment. The “default” answer to the question “May the federal government regulate X?” is No. Unless the U.S. Constitution says the federal government may regulate it, the federal government may not.
And the U.S. Constitution does not mention corporations or other private groups of persons. It mentions only four classes of human actors: (1) persons; (2) States; (3) Indian Tribes; and, (4) the federal government itself. The regulation of corporations was to be left to the states, and that would have been fine but for the Commerce Clause, which assigns to Congress the task of regulating interstate commerce. That requires the Congress to regulate corporations and other groups of persons, but as what kind of actors?
In one of the first laws passed by Congress, Title 1, Section 1 of the United States Code, Congress decided that corporations and other groups of persons were included in the class of “persons.” That allowed Congress to regulate the entities themselves, not merely the individuals who were members, owners, and/or operators of those groups. It meant the entities could have their own assets and liabilities, distinct from the personal assets and liabilities of their members, owners, and/or operators. And it meant the entities themselves, and not merely their members, owners, and/or operators, were entitled to due process of law under the Fifth Amendment.
Corporate personhood is limited personhood.
The legal fiction of corporate personhood actually gives corporations fewer rights than are enjoyed by the human persons who belong to, own, and/or operate them. Corporations can’t vote or run for political office. And corporations have no right to life in the way human beings do. You don’t have to get government permission and pay a fee to have a baby, but you must do both to create a corporation. And the government can (and sometimes does) say “No, you can’t create that corporation.” The government can’t impose capital punishment on a human person but for a narrow range of criminal offenses (mostly premeditated homicide), and it must prove the charge beyond a reasonable doubt. But the government can bankrupt or shut down a corporation for any of a wide range of criminal or civil offenses, and the civil offenses need only be proved by a preponderance of evidence.
And we properly accept this lesser “person” status for corporations, because they’re not really “persons.” Their personhood is a legal fiction, rather than something inherent in their being. We recognize that it is a legal fiction – it’s taught as such in law schools – and because it’s a fictional personhood, we can constrain it in ways that most of us would rightly find abhorrent for real, human persons.
Still, the fictional corporate persons seem to and often do dominate our lives. They drive real human persons out of business. Left unchecked, they can and sometimes do dominate our political discourse and leave real human persons all but voiceless. They can and often do cause great harm, and worse, when they cause harm they often seem to take an almost savage glee in having done so. For-profit corporations commonly behave in ways that, were an individual human person to behave thus, would be classified as sociopathic. Why do they do so, and how can we stop them?
For-profit corporations are not permitted a conscience.
One of the seminal cases in corporate law is Dodge v. Ford Motor Company, a Michigan Supreme Court case from 1919. Henry Ford was running a successful automobile business in 1916, and John and Horace Dodge were 10% owners of his corporation. The corporation held a capital surplus of over $60 million, and Ford’s practice had been to distribute much of the yearly surplus in the form of special dividends to shareholders. But in 1916, Ford decided he wanted do something more than simply make money:
My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.
Ford announced that he would use the $60 million capital surplus to build more automobile plants, to employ more workers, and to reduce the cost of his cars so that more people could own them. John and Horace Dodge were not impressed with this philanthropic impulse. They had not invested in Ford’s company “to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.” They’d invested in Ford’s company because they’d been assured that if the business made a profit, they would get a portion of that money. Now Ford wanted to change the rules and use the money for something else.
The Michigan Supreme Court held that the Dodge brothers were right. Because he was running a for-profit corporation, Henry Ford had solicited investors on the promise that if his company made a profit, the investors would get a portion of the proceeds. He owed a fiduciary duty to to run his business for a profit, not as a means “to spread the benefits of this industrial system to the greatest possible number.” However noble Ford’s motives, he was being noble with other people’s money.
Henry Ford could have a conscience, but Ford Motor Company could not.
There are, as always, exceptions to this general legal principle. A corporation can spend money on charity if its directors can show that doing so will enhance the corporation’s reputation and thus attract more business. But the general rule of law is that for-profit corporations exist to generate profits for their shareholders. And because that is a rule of law, it offers a road map for how to give corporations a conscience. A corporation’s conscience must exist in law, so investors can know about it and factor it into their investment choices.
“I’m in the widget business.”
Let’s say you’re a majority owner and the CEO of WigiCorp. You make widgets. Your dad made widgets. You grew up around widgets. You know what makes a widget good, and you know how to make them well. If you’re at a party and someone asks what you do, you might well answer, “I’m in the widget business.”
And you might give the same answer if someone asks how widgets affect the environment, whether our reliance on widgets adversely affects foreign or domestic policy, or public safety. “I’m not in the environment business, the policy business, or the public safety business. Dad made widgets. I make widgets. I know all about widgets, but I don’t know anything about environmental science, foreign or domestic policy, or public safety. I’m in the widget business.”
That’s pretty much how many corporate officials think, when it comes to the actions of their corporations. They’re in that business, and if they are good at it, they can tell you all about that business: its production methods, its markets, its profitability, and its costs. Their business model is about widgets, and in many cases the business model focuses exclusively on how best to maximize the profits and minimize the costs of producing and marketing widgets.
The problem, of course, is that producing and marketing widgets does have effects outside the widget business. It does affect the environment. It may affect foreign or domestic policy. It will impact public safety, and the social fabric of communities where widgets are made and/or bought. And the bigger a business widget-making is, the more likely that it will do all of the above.
Maybe you didn’t get into the widget business because you wanted to change the environment, affect foreign or domestic policy, impact public safety, or remake the social fabric of communities. But you’re probably doing all of those things anyway, as inevitable byproducts of producing and selling widgets. A human person with a conscience would care about those things. A corporate person should care about them too.
But when Henry Ford tried to act on his human conscience, the Michigan Supreme Court said Ford Motor Company could not, because that act of conscience wasn’t being done with Henry Ford’s own money. It was being done with other people’s money. How do we get around that?
Regulation installs a corporate conscience.
Sensible, responsible business practice regulation is about putting WigiCorp in the environment business, the foreign and domestic policy business, the public safety business, and the social fabric business. Because WigiCorp’s widget business probably impacts all of these, the people who run WigiCorp should have to factor them into the business model. And they should have to do so in a way that is accessible to investors, so investors can factor those elements of WigiCorp’s business model into their investment decisions.
Is WigiCorp taking proper care of the environment, and if not, what will that cost WigiCorp? Is WigiCorp doing business in ways that may impact government policy, and is it paying its share of those policy costs, in fees and/or taxes? Is WigiCorp running its business as safely as it can, and paying the costs where failures can’t be avoided? And is WigiCorp working to protect and strengthen the social fabric of communities where it makes and markets widgets?
And if not, will WigiCorp be able to remain profitable, or will it be fined or even shut down for not meeting its legal responsibilities?
If the answers to that first group of questions are “Yes,” or “Yes, as best WigiCorp can,” then if WigiCorp also produces and markets widgets well, it should be a healthy corporation and worth your investment. If the answers are “No,” then even if WigiCorp produces and markets widgets well, it should be a bad investment. That formula works both to give WigiCorp a conscience, and put investors on notice of whether and to what degree WigiCorp is acting on its conscience, thus overcoming the “other people’s money” objection of Dodge v. Ford Motor Company.
But that formula only works if WigiCorp will be fined or even shut down when it doesn’t meet its legal responsibilities.
Responsible regulation requires rigorous review.
It’s not enough to pass laws and enact sensible, responsible business practice regulations. Congress also has to fund the agencies that review corporate behavior and enforce those regulations. That may mean agencies that advise you, the second-generation widget maker, on exactly how your widget business impacts the environment, policy, public safety, and the social fabric, because it’s likely you don’t know those things. And you should know whom you can ask to get the correct legal answers.
Those answers must not be coming from someone with a profit incentive to tell you an answer you want to hear, rather than the answer you need to hear. (As an example of that, consider Moody, S&P, and the other for-profit investment ratings agencies that rated hugely risky derivative instruments as if they were safe government bonds.)
And when you don’t avail yourself of that information, or fail to act on it, government must step in with the big hammer of criminal and/or civil sanctions, and impose punishments severe enough to let both corporate officers and investors know that breaking the law is not profitable … period.
No, we won’t get perfect regulations, or perfect enforcement. The law is always an imperfect instrument. But it’s the best instrument we have to rein in sociopathic corporate persons. We have to force them to have a conscience, and make sure investors can know what that conscience is and whether the corporation is acting on it. That protects everyone.
Especially We the People.
Pisces – Try to avoid the pothole you drove into last week. Especially while drinking tomato juice.
Aries – You’re ruled by the planet Mars. So far as we know, there’s no intelligent life on Mars. That explains it.
Taurus – Cross walks are not a dare. Just sayin’.
Gemini – Your future is partly cloudy. Or partly sunny. Or you need a smaller glass.
Cancer – Finally, you’ll get your chance to screw up that other thing you’ve never been allowed to do.
Leo – No, your knees aren’t supposed to bend that way. Stop doing it.
Virgo – Consider that your dishes might enjoy talking to other kinds of dishes in the dishwasher. End dish segregation.
Libra – Yes, that again. But this time, smile.
Scorpio – The taxes can wait. The litterbox can’t. Even if they do look the same.
Sagittarius – So you finally found it. We told you it was there all along.
Capricorn – Try not to look so gleeful when you do that. It makes people jealous. And angry.
Aquarius – Sorry, but chocolate is not a food group.