Corporations are Psychopathic?
Do corporations have to maximize shareholder value?
Corporation: “A body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed with various rights and duties including the capacity of succession”. Merriam-Webster
Corporations and trusts were created to facilitate raising capital for large projects. They allow financial risk to be spread over a large number of investors, each of whom risk a relatively small amount of the total cost and who share in the profits, if any, on a proportional basis. Early examples are the Hudson Bay Company and the Dutch East India Company which were granted a government or royal charter (monopoly) to trade in a defined region.
In the US, corporations were initially created by a separate enabling law for each one, but in 1896 New Jersey enacted legislation to enable formation at will. Other states followed soon after.
Corporations are granted many of the rights and privileges of a legal person but with additional benefits;
They can sell ‘shares’ or fractional ownership to investors which can be freely traded.
Investor’s liability is limited to the amount invested
They can declare bankruptcy
The result is that a corporation can raise money to pursue a speculative opportunity with the financial risk spread out over a large number of relatively small investors. If it’s successful the investors gain. If not, their loss is limited to their initial investment.
Corporations are managed by a board of directors elected by shareholders. In some cases, other stakeholders (see below) have seats on the board or on a separate supervisory board. This is common in Europe and mandated in The Netherlands and Germany. What is true in all cases is that corporations are creations of some type of government regulation.
Stakeholders vs Shareholders
Shareholders own a portion of a corporation and have a financial interest in its success. Stakeholders are those who are affected by the corporation’s actions. For example, employees, suppliers, lenders, and the local community all have an interest in the corporation’s behavior. Stakeholders may or may not be shareholders, and the interests of stakeholders and shareholders may not always align.
An early example that illustrates this conflict is the case of Shlensky v Wrigley. In 1968 a shareholder named Shlensky sued the Chicago Cubs baseball team when they refused to hold night games. Although these additional games would have increased profits, the board refused since the lights would disturb the peace of surrounding neighborhoods. (Shlensky lost.)
Maximizing Shareholder Value
So whose interests do corporations serve? In spite of legal precedent, there is a common myth that a corporation’s primary mission must be to maximize shareholder value. The source of this belief may be a 1970s article in the New York Times where economist Milton Friedman wrote “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”
“Modern corporate law does not require for profit corporations to pursue profit at the expense of everything else”. - US Supreme Court - Burwell v Hobby Lobby Stores Inc.
This single minded focus on profitability may ignore the potential costs to external stakeholders and the overall economy. Examples include sale of dangerous products like cigarettes, pollution caused by factory emissions or automobiles, and exploitation of workers.
Friedman recognized this possibility, but his position was that a corporation should follow government regulations but go no further than the requirement. It’s telling that his argument assigns the protection of stakeholders to the government. This philosophy encourages a focus on profitability rather than building for long term success which can be counter productive.1
Maximizing Stakeholder Value
In 2019 181 members of the Business Roundtable released an updated definition of the purpose of a corporation to include consideration for all stakeholders.2 Although symbolic, it signaled a change in thinking based on the unsustainable inequality in wealth and income. Since then there has been a gradual weakening of support and a return to the traditional focus on winning at any expense.
“The American dream is alive, but fraying. Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”
Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co.
But even if a corporation were to take a more altruistic approach with support from like minded investors and management, it is likely to be at a disadvantage to a more profit focused competitor. In the extreme, the corporate personality is that of a psychopath who pursues profit at any expense.3 Essentially proving the old adage “Nice guys finish last”.
'by aggressively pushing the limits of existing regulations, a hardball player can sometimes win tremendous competitive advantages'. Harvard Business Review
Corporations and Politics
As corporations become more powerful they can use their influence to further modify corporate governance in their favor. A major turning point in the US was the 2010 Supreme Court decision in Citizen’s United v. The Federal Election Commission4, which removed constraints on corporate ‘citizens’ spending to influence elections. Since then, the influence of wealthy individuals, corporations, and special interest groups has grown dramatically.
This tendency is on full display over the last several election cycles, ending with the current administration whose leadership team is made up primarily of billionaires. As the voices of ordinary citizens and ethical leaders are drowned out by the flood of money and influence can our democracy survive, or is it in danger of a continuing decline into oligarchy?
Questions
Can our democracy survive the influence Trump’s billionaire cabinet?
How can voters regain their power and strengthen our Democracy?
Has corporate media sacrificed critical analysis to the pursuit of of profitability?
The concept that Corporations are individuals and can behave accordingly is the root of the problem. Compounded by government sanction and favored status by the Supreme Court. But even more foundational is greed. We see a turn toward financial management as the primary mission of a new administration that, like a Corporation has no soul. Just a ledger!