Should Corporations Serve Shareholders or Society?

: The Origins of the Debate April 6, 2011 | By: Lainie Rutkow Filed under: Uncategorized i!cu!!ion! a"out corporation!# in$luence on %ealt% o$ten i&plicitly or e'plicitly rai!e t%e $ollowing (ue!tion: i$ t%e law allow! corporation! to a&a!! &oney and con!e(uent power, t%en w%y doe!n#t t%e law re(uire corporation! to protect, and not %ar&, %ealt%) *%i! !i&ple (ue!tion %a! "een a!ked, in +ariou! $or&!, $or at lea!t a century,

Adolp% A Berle *%e de"ate !urrounding t%i! (ue!tion in+ol+e! two co&peting +er!ion! o$ t%e corporation,-1. /n t%e $ir!t +er!ion, t%e corporation i! +iewed a! t%e property o$ t%e indi+idual! w%o purc%a!ed it! !%are!0 t%e !tock%older! or owner!, According to t%i! +iew, 1t%e corporation#! purpo!e i! to ad+ance t%e purpo!e! o$ t%e!e owner! 2predo&inantly to increa!e t%eir wealt%3, and t%e $unction o$ it! director!, a! agent! o$ t%e owner!, i! $ait%$ully to ad+ance t%e $inancial intere!t! o$ t%e owner!,4-2. *%o!e w%o ad%ere to t%i! +iew argue t%at corporate law !%ould go+ern 1little &ore t%an t%e pri+ate relation! "etween t%e !%are%older! o$ t%e corporation and &anage&ent,4-5. /n t%e !econd +er!ion, t%e corporation i! +iewed 1a! a !ocial in!titution,4-6. 7roponent! o$ t%i! +iew "elie+e t%at corporate law !%ould "e 1deli"erately re!pon!i+e to pu"lic intere!t concern!,4-8. w%ic% include! %ealt% and !a$ety con!ideration!, 9%ile $ederal and !tate court! %a+e %eard &any legal c%allenge! o+er t%e $unda&ental nature o$ a corporation, co&&entator! trace t%e de"ate#! $or&al origin to two article! pu"li!%ed in t%e Harvard Law Reviewin t%e early 1:50!,-6. /n 1:51, Adol$ A, Berle, a pro$e!!or at ;olu&"ia Law <c%ool, wrote Corporate Powers as Powers in Trust, /n t%i! article, %e argued t%at 1all power! granted to a corporation or t%e &anage&ent o$ a corporation , , , are nece!!arily and at all ti&e! e'erci!a"le only $or t%e rata"le "ene$it o$ all t%e !%are%older! a! t%eir intere!t appear!,4-=. Berle "elie+ed t%at corporation! were !i&ply +e%icle! $or ad+ancing and protecting

4-@. allowing t%e& 1a wide range o$ di!cretion a! to w%at policie! will "e!t pro&ote t%e intere!t! o$ t%e !tock%older! . t%e!e argu&ent! &eant t%at corporation! are 1a$$ected not only "y t%e law! w%ic% regulate "u!ine!! "ut "y t%e attitude o$ pu"lic and "u!ine!! opinion a! to t%e !ocial o"ligation! o$ "u!ine!!. !uc% a! Deneral Blectric. c%allenged Berle#! po!ition in For Whom are Corporate Managers Trustees. B. -10. odd pro+ided !e+eral interpretation! o$ t%i! +iew relati+e to t%e re(uire&ent! o$ corporate law. >e clai&ed t%at !ociety#! +iew o$ t%e corporation a! a . For odd. Fir!t. odd !upported t%i! argu&ent "y noting t%at e&ployee !ati!$action lead! to greater producti+ity and ulti&ately increa!ed pro$it!. . >e !ugge!ted t%at any ot%er account o$ corporation!# $unction and purpo!e would 1de$eat t%e +ery o"?ect and nature o$ t%e corporation it!el$. Cerrick odd. w%ile not i&&ediately increa!ing !%are%older wealt%. Cerrick odd. we &ay t%en properly &odi$y our idea! a! to t%e nature o$ !uc% a "u!ine!! in!titution a! t%e corporation and %ence a! to t%e con!ideration! w%ic% &ay properly in$luence t%e conduct o$ t%o!e w%o direct it! acti+itie!. odd argued t%at court! %ad pro+ided great latitude to corporate &anager!.4-:. Ane year later.E F B. >e (uoted t%e %ead! o$ !e+eral &a?or corporation!. &anager! could actually increa!e pro$it! "y $ocu!ing on t%e need! o$ group! ot%er t%an !%are%older!. a pro$e!!or at >ar+ard Law <c%ool. could generate good will in t%e co&&unity. !ince con!u&er! would "e &ore likely to t%ink $a+ora"ly o$ t%e corporation and "uy it! product!. E/$ we recognize t%at t%e attitude o$ law and pu"lic opinion toward "u!ine!! i! c%anging. For e'a&ple. odd !ugge!ted t%at. Gr. By t%i! logic. to argue t%at "u!ine!! leader! %ad co&e to recognize t%at corporate &anager! needed to con!ider !ocial re!pon!i"ility w%en running t%eir co&panie!. t%i! would ulti&ately "ene$it !%are%older!. <uc% good will could "ene$it !%are%older!. 1t%ere i! in $act a growing $eeling not only t%at "u!ine!! %a! re!pon!i"ilitie! to t%e co&&unity "ut t%at our corporate &anager! w%o control "u!ine!! !%ould +oluntarily and wit%out waiting $or legal co&pul!ion &anage it in !uc% a way a! to $ul$ill t%o!e re!pon!i"ilitie!.!%are%older!# intere!t! and t%at corporate law !%ould "e interpreted to re$lect t%i! principle. %e e'plained t%at i$ 1!ocial re!pon!i"ility4 &eant t%at corporate &anager! paid &ore attention to t%e need! o$ t%eir e&ployee! and con!u&er!.-12. He't.4-15.4-11. . odd !ugge!ted t%at corporate c%arita"le gi+ing.

"ut wit% an une'pected twi!t.4-1=.o&&entator! continue to &ention t%e BerleI odd de"ate. w%o %ad e!pou!ed t%e +iew t%at corporation! !%ould "e run e'clu!i+ely to ad+ance t%eir !%are%older!# intere!t!.-18. +ariation! o$ t%i! de"ate !ur$ace eac% ti&e ad+ocate! c%allenge corporate practice! t%at %a+e %ar&ed or &ay %ar& t%e pu"lic#! %ealt%. Berle. By arguing t%at corporate law !%ould re$lect !%i$t! in pu"lic opinion a"out t%e purpo!e o$ corporation!. Berle conceded t%at t%e law %ad !upported odd. . a! new corporate practice! co&e to lig%t and new regulation! are propo!ed. *oday.4-16. /n 1:86. /n all likeli%ood. in t%at it did allow director! !o&e di!cretion to con!ider !take%older! ot%er t%an a corporation#! !%are%older!. . /n t%i! "ook. pu"li!%ed The 20th Century Capitalist Revolution. t%e de"ate o+er corporation!# $unda&ental purpo!e will continue $or year! to co&e. %e &entioned %i! de"ate wit% odd and !tated t%at 1-t. And. . /ntere!tingly. Berle#! "ook wa! pu"li!%ed one year a$ter t%e Hew Ger!ey <upre&e .%e argu&ent %a! "een !ettled 2at lea!t $or t%e ti&e "eing3 !(uarely in $a+or o$ 7ro$e!!or odd#! contention. c%anging . t%e law gi+e! corporation! !o&e opportunitie! to con!ider ot%er !take%older!. and t%at corporate &anager! !%ould 1recognize t%at t%e attitude o$ law and pu"lic opinion toward "u!ine!! -wa!. For t%o!e w%o act to protect and pro&ote t%e . *wenty year! a$ter articulating %i! original po!ition. w%ic% de$initi+ely e!ta"li!%ed corporation!# a"ility to &ake p%ilant%ropic donation! and o$$ered !upport to odd#! argu&ent!. -16. t%e BerleI odd de"ate did re!ol+e. *%e de"ate ari!e! w%ene+er policyF&aker! conte&plate regulation! t%at would re(uire corporation! to engage in "e%a+ior! t%at would protect t%e pu"lic#! %ealt%. *%e ec%oe! o$ odd#! argu&ent are o$ten %eard a&ong t%o!e w%o c%a&pion corporate !ocial re!pon!i"ility and re!pon!i"le "u!ine!! practice!.purely pri+ate enterpri!e wa! !%i$ting. w%en conte&plating %ow corporation! !%ould $unction wit%in !ociety. encap!ulated "y t%eir Harvard Law Review article!. t%i! deci!ion con+inced Berle t%at e+en i$ corporation! &u!t "e run wit% t%eir !%are%older!# "e!t intere!t! in &ind.ourt decided A P !mith Manu"a#turing Company v $arlow 21:853. odd pa+ed t%e way $or t%o!e w%o would later argue t%at corporation! can and !%ould act to "ene$it con!tituencie! "eyond t%eir !%are%older!.

at 118=. Berle AA. *%eorie! o$ t%e corporation. at 822. . *%eorie! o$ t%e corporation. Harvard Law Rev. Harvard Law Rev. -:. For w%o& are corporate &anager! tru!tee!. Cinne!ota Law Re+. . Harvard Law Rev. &u'e Law (. -18. For w%o& are corporate &anager! tru!tee!. at 201. Allen 9*. Lela!co G. For w%o& are corporate &anager! tru!tee!. Allen 9*. odd BC. Aur !c%izop%renic concept o$ t%e "u!ine!! corporation. Cardo%o Law Rev 1::2K16:261F2@1. e$ining t%e corporate o"?ecti+e: !ection 2. 1:52K68:1168F1165. For w%o& are corporate &anager! tru!tee!. Berle AA. Cillon . at 201. 2006K60:60=F66=. t%i! nuanced under!tanding o$ a corporation#! purpo!e i! key. &u'e Law (. -10. Harvard Law Rev. 1::0K1::0:201F262. odd BC. Cardo%o Law Rev 200=K2::625F 66@.orporate power! a! power! in tru!t. -16. at 1165. 1:51K66:106:F10=6. 1::0K1::0:201F262. -11.01o$ t%e AL/#! 7rinciple!. -5. 1:52K68:1168F1165. at 10=6. at 1161. Harvard Law Rev. Jerr GB. Cat%e!on G>. -16. -6. Harvard Law Rev. 1::6K=@:1665F16:1. -12. 1:52K68:1168F1165. <u!taina"ility &ean! pro$ita"ility: t%e con+enient trut% o$ %ow t%e "u!ine!! ?udg&ent rule protect! a "oard#! deci!ion to engage in !ocial entrepreneur!%ip. * C &avis Law Rev. -@. odd BC. -15. -=. at 266F268. at 106:. odd BC. -2. . 1:52K68:1168F1165.orporate cooperation.pu"lic#! %ealt%. Harvard Law Re+. at 1186. Al!on BA. 1:52K68:1168F1165. Cillon . <c%wartz B. relation!%ip &anage&ent. . at 118:. at 660. *%e $unda&ental rig%t! o$ t%e !%are%older. -6. at 16@8.orporate power! a! power! in tru!t. odd BC. odd BC. Cardo%o Law Rev 1::2K16:261F2@1. )eorge Washington Law Rev. References -1. 1:52K68:1168F1165. For w%o& are corporate &anager! tru!tee!. For w%o& are corporate &anager! tru!tee!. and t%e trialogical i&perati+e $or corporate law. at 268. -8. 1:51K66:106:F10=6. 1:@6K82:811F 855. Aur !c%izop%renic concept o$ t%e "u!ine!! corporation. Harvard Law Rev.

entury . A&azon . Berle AA. Hew Mork: >arcourt. .oK 1:86. >ar+ard Law Re+iew 5. Brace and . Photo Credits: 1. *%e 20t% .-1=. at 16:.apitali!t Re+olution.olu&"ia Uni+er!ity 2.