ALM Properties, Inc.
Page printed from: http://www.nlj.com
Select 'Print' in your browser menu to print this document.
A new corporate model
The National Law Journal
Almost a century ago, Henry Ford's car company had become lushly profitable, but the great automaker decided that his shareholders didn't need large dividends. Instead he believed that the gains could be better used to reduce the price of his cars. He could thereby "spread the benefits of this industrial system to the greatest number possible, to help them build up their lives and their homes." Toward that end he had already announced that he would pay his workers the then-remarkable wage of $5 a day.
The consumer society was thus born and the model set for a nation offering the most generalized prosperity the modern world would know. Ford's plans, however, did not sit well with his shareholders, particularly the Dodge brothers, who had gotten 10 percent of the company in exchange for some technology they had contributed to his firm in its early years. The Dodges were eager to start their own company and sued Ford, charging that he wasn't running a corporate business but a "semi-eleemosynary institution." The Michigan Supreme Court agreed. In ordering Ford to pay larger dividends, the court made this statement, which became black-letter corporate law: "A business corporation is organized and carried on primarily for the profit of the stockholders."
Throughout the global pre-eminence of American business in the 20th century, however, Ford's broad views on corporate social responsibility never really disappeared. Most often they were subsumed into the "enlightened self-interest" theories that were used to justify a firm's philanthropy and other actions that did not immediately maximize profits, such as the payment of good wages. Courts in turn deferred to the business judgment of boards that those arrangements would bring long-term benefits to a business's bottom line by way of advertising or the creation of consumer good will.
That outlook, however, faced a stiff challenge from the tender-offer and leveraged-buyout fervor that rattled the business establishment in the 1970s and '80s. During that "greed is good" era, the creation of optimum investor value was heralded not only as the natural logic of our economic system but as the elixir that would restore America's industrial competitiveness.
The resulting "cutthroat" or "vulture" capitalism grabbed the imagination of a new kind of business leader. But its downsides became readily apparent in a decreased living standard for most working Americans. It also triggered wide-spread instances of corporate kleptomania such as the stock-options backdating scandal and the exorbitant executive-compensation regimes that seemed fundamentally unjust. And pervasively dishonest practices that came to light during the financial meltdown eventually gave rise to protests like the Occupy Wall Street movement.
LEGAL AND POLITICAL RESPONSE
The law's reaction to all this, as principally seen in the decisions of Delaware courts, has been to generally give a free hand to management to resist hostile takeovers promising big immediate gains for investors. Correspondingly, they have also recognized that boards serve not just the interests of shareholders but those of others who also depend on their businesses. In addition, those judges have been increasingly willing to strike at corrupt corporate activity.
Their rulings are evidence of the mixed feelings that most Americans seem to have about our current economic system. They understand that the basic capitalist rules of our society have served us well. When businesses are operated for profit, they are the most productive and furnish the goods and services that assure our material well-being. Yet most people also sense what moral thinkers have long maintained: Maximum material prosperity is not an absolute value particularly if it is not evenly shared. Short-termism in business, like in the rest of human relationships, can have devastating costs.
The past election is an accurate reflection of that sentiment. As even the conservative commentator George Will said about President Obama's victory, "[H]e has the meager mandate of not being Bain Capital." Contemporary business leaders, however, have been more broad-minded about the need for reforms. During a commencement address at Harvard University, Bill Gates called on the graduates to develop "a more creative capitalism" that would not only make a profit but serve people "suffering from the worst inequities." In like fashion, the founders of Google Inc. made this statement in the prospectus of their initial public offering: "We believe strongly that in the long term, we will be better served as shareholders and in all other ways by a company that does good things for the world even if we forgo some short term gains."
THE BENEFIT CORPORATION
In even more pronounced fashion, a number of state legislatures have recently created a new legal form that a business may take, the "benefit corporation." In doing that, they built on the earlier "constituency statutes" passed in reaction to the profit-maximizing goals of the tender-offer era. Those enactments gave directors the legal warrant to take the interests of all of a firm's stakeholders into consideration in their decision-making.
The "B" corporation laws go further and specifically allow the charters of those firms to state mixed purposes allowing their management not only to seek financial gain but also to engage in less remunerative activity that will produce positive social good. Some critics, however, have raised important questions about the standards that would hold management of those companies accountable for their activities. Derivative suits now allow shareholders to challenge disloyal, self-interested activity by managers of traditional profit-oriented corporations. Could similar rules be effectively applied when a company's goals are vaguer?
Yet this innovation can be seen as an American response to business models like the successful workers' councils that collaborate with management to run firms in Germany and hold them to broader social purposes. They might even find some resonance in the state capitalism of China, where a new generation of leaders speaks openly of the need to follow Henry Ford and pay workers good wages to buy the products they make. In whatever legal form businesses take, they are entrusted with a large share of the material resources of our world. As the Dalai Lama says, they must therefore have three bottom lines: profit, social justice and the environment. It's hard to argue with that moral wisdom.
Daniel J. Morrissey is a professor at Gonzaga University School of Law.