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

!%are%older!# intere!t! and t%at corporate law !%ould "e interpreted to re$lect t%i! principle, >e !ugge!ted t%at any ot%er account o$ corporation!# $unction and purpo!e would 1de$eat t%e +ery o"?ect and nature o$ t%e corporation it!el$,4-@. Ane year later, B, Cerrick odd, a pro$e!!or at >ar+ard Law <c%ool, c%allenged Berle#! po!ition in For Whom are Corporate Managers Trustees, odd !ugge!ted t%at, 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!,4-:. >e (uoted t%e %ead! o$ !e+eral &a?or corporation!, !uc% a! Deneral Blectric, 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!, E/$ we recognize t%at t%e attitude o$ law and pu"lic opinion toward "u!ine!! i! c%anging, 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!,E F B, Cerrick odd, Gr, odd pro+ided !e+eral interpretation! o$ t%i! +iew relati+e to t%e re(uire&ent! o$ corporate law, Fir!t, %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!, t%i! would ulti&ately "ene$it !%are%older!, odd !upported t%i! argu&ent "y noting t%at e&ployee !ati!$action lead! to greater producti+ity and ulti&ately increa!ed pro$it!, By t%i! logic, &anager! could actually increa!e pro$it! "y $ocu!ing on t%e need! o$ group! ot%er t%an !%are%older!, -10. He't, odd argued t%at court! %ad pro+ided great latitude to corporate &anager!, 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! , , ,4-11. For e'a&ple, odd !ugge!ted t%at corporate c%arita"le gi+ing, w%ile not i&&ediately increa!ing !%are%older wealt%, could generate good will in t%e co&&unity,-12. <uc% good will could "ene$it !%are%older!, !ince con!u&er! would "e &ore likely to t%ink $a+ora"ly o$ t%e corporation and "uy it! product!, For odd, 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!!,4-15. >e clai&ed t%at !ociety#! +iew o$ t%e corporation a! a

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

pu"lic#! %ealt%, t%i! nuanced under!tanding o$ a corporation#! purpo!e i! key, References -1. Jerr GB, <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, Cardo%o Law Rev 200=K2::625F 66@, at 660, -2. Allen 9*, Aur !c%izop%renic concept o$ t%e "u!ine!! corporation, Cardo%o Law Rev 1::2K16:261F2@1, at 266F268, -5. Cillon , *%eorie! o$ t%e corporation, &u'e Law (, 1::0K1::0:201F262, at 201, -6. Allen 9*, Aur !c%izop%renic concept o$ t%e "u!ine!! corporation, Cardo%o Law Rev 1::2K16:261F2@1, at 268, -8. Cillon , *%eorie! o$ t%e corporation, &u'e Law (, 1::0K1::0:201F262, at 201, -6. <c%wartz B, e$ining t%e corporate o"?ecti+e: !ection 2,01o$ t%e AL/#! 7rinciple!, )eorge Washington Law Rev, 1:@6K82:811F 855, at 822, -=. Berle AA, ;orporate power! a! power! in tru!t, Harvard Law Rev, 1:51K66:106:F10=6, at 106:, -@. Berle AA, ;orporate power! a! power! in tru!t, Harvard Law Re+, 1:51K66:106:F10=6, at 10=6, -:. odd BC, For w%o& are corporate &anager! tru!tee!, Harvard Law Rev, 1:52K68:1168F1165, -10. odd BC, For w%o& are corporate &anager! tru!tee!, Harvard Law Rev, 1:52K68:1168F1165, at 1186, -11. odd BC, For w%o& are corporate &anager! tru!tee!, Harvard Law Rev, 1:52K68:1168F1165, at 118=, -12. odd BC, For w%o& are corporate &anager! tru!tee!, Harvard Law Rev, 1:52K68:1168F1165, at 118:, -15. odd BC, For w%o& are corporate &anager! tru!tee!, Harvard Law Rev, 1:52K68:1168F1165, at 1161, -16. odd BC, For w%o& are corporate &anager! tru!tee!, Harvard Law Rev, 1:52K68:1168F1165, at 1165, -18. Lela!co G, *%e $unda&ental rig%t! o$ t%e !%are%older, * C &avis Law Rev, 2006K60:60=F66=, -16. Cat%e!on G>, Al!on BA, ;orporate cooperation, relation!%ip &anage&ent, and t%e trialogical i&perati+e $or corporate law, Cinne!ota Law Re+, 1::6K=@:1665F16:1, at 16@8,

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