Corporations have a big fat Achilles heel that we should be leveraging
Just the threat of revoking limited liability, without which no prudent investor would invest, would shake share prices. Merely a murmur should cause shareholder action.
We gave their shareholders limited liability, and we can take it away
The source of all economic dynamism to some, the root of all evil to many: Americans have long had dissonant views of corporations. Long rap sheets of corporate misdeeds are easy enough to compile, and some patterns could be seen therein. But probing the fundaments of corporatism can shed light on the questions of whether they are inherently anti-social by nature, or instead merely vulnerable to abuse, or perhaps have been mis-designed. And most importantly, what we can do about it.
Corporations are public entities, not private. They exist and function only under a public charter. Any member of the public can buy shares, as long as there is a willing seller. Like many fruitful public entities, corporations can be hijacked to private ends. But the public holds the reins; it has only to realize that.
Why is a public charter fundamental to a corporation? Because of the explicit arrangement, under the people’s laws, of ‘limited liability.’ Before this invention, an owner or partner in an enterprise was not only entitled to a share of the assets and profits, but would also be personally liable for a share of any debts the enterprise runs up. This naturally scared away prudent investors: you might make a 10% or 50% profit on your investment, but, if the enterprise is run into the ground or looted by an unscrupulous partner, you might not only lose your investment but also be on the hook for the company debts, possibly many times your ownership stake. Who would invest much of their money under those conditions? It also tended to keep companies small, so that the investors could keep an eye on everyone, and on the books.
Around the mid-19th century, some bright spark had the idea that if you legally relieve investors of liability for company debt, many more would be willing to invest; and moreover, a company could grow much bigger, because the cost to investors of gross mismanagement would be no more than the loss of their investment – not crippling personal debt. A gush of private capital would then be unleashed on the business sector; and the shareholders would mostly not micromanage.
Where then would the liability go – who is responsible for corporate debt? Essentially, it dissolves.[1] There are creditors, and the priority of their claims is ordered, but they have no claim on the bankrupt corporations’ shareholders, only on the corporate assets. The social backing of public corporations does not extend to guaranteeing their debts, as the government does by insuring accounts with commercial banks. Lenders to corporations must beware. Similarly, those owed damages by a malfeasant corporation have no claim on the shareholders.
This is why Ambrose Bierce half-jokingly defined the corporation as “An ingenious device for obtaining individual profit without individual responsibility.” (The Devil’s Dictionary, 1911)
In exchange for this amnesty to shareholders of bankrupt corporations, there are elaborate requirements for transparency in accounting, for decision-making procedures and corporate governance, and – too seldom – for social purposes.
Perhaps there is too much focus on public corporations, as if their nature were inherently prone to misdeed. After all, before and through much of the period of limited-liability corporations, privately-owned businesses committed the full range of misdeeds now thought to be innately corporate. Perhaps the corporate species gets the blame because most large enterprises (at least those that dominate US life) are now public corporations, and we should be looking at large enterprises, not corporations per se.
Still, this public dependence should properly be viewed as their Achilles heel and our leverage. Threaten seriously to remove limited liability, and see how fast corporations snap into line. Make it conditional on responsible, even benevolent corporate behavior. Institute biennial public reviews of corporations’ adherence to such conditions, with renewal of their limited-liability status on the line.
Corporate malignity has become grotesque. In a notorious case in recent years, Chevron managed to undertake a “private prosecution” of a lawyer, Steven Donziger, who advocated the rights of indigenous Ecuadorians whom Chevron’s oil operations in their Amazon homeland had sickened, and won a major damages judgement in an Ecuadorian court. Chevron alleged that Donziger led the plaintiffs to fabricate evidence, but the jurisdictional U.S. Attorney saw no case to prosecute. Chevron then got a judge, who owned Chevron stock, to appoint a private law firm to prosecute Donziger – and this law firm turned out to have had Chevron as a client. No matter: the judge slapped a prison sentence on Donziger for his refusal to divulge information about his Ecuadorian clients normally protected by attorney-client privilege.
Another indication of corporations’ pervasiveness in the political and legal firmament was in a story on NPR’s Fresh Air about the Congressional saga over Obamacare. The story described how one corporate sector favored a certain approach, while other corporate sectors opposed it and advocated others. Unmentioned in the story is what the American people wanted; the only story worth understanding, apparently, was what the various rival corporate sectors wanted.
[Update Feb. 15th: the Norfolk Southern Corp. derailment and chemical disaster in East Palestine, OH looks to be another case in point, as this corporation and its peers had lobbied persistently and successfully for the Federal government to loosen chemical-safety rail regulations – and to break, by legislation, an impending rail strike a few months ago that stemmed in part from safety concerns.]
And of course, as the belching of fossil-fuel emissions is now setting our landscapes and crops on fire and our seas to boil, the grandest corporate misdeeds of all are becoming evident – not just in their resistance to the necessary flight from fossil fuels, but the appalling revelation that key oil companies knew the consequences of their business decades ago, and fought to suppress the realization of what their product would wreak.
Now, how do you weaponize limited liability in a political firmament that corporations have in their pocket? (The question of how effective voting, and its power to dislodge officeholders, can be when the real rewards for corruption in office come afterwards, in the form of well-paid lobbying or other sinecures, is for an upcoming article.) Legislation is unlikely. Extra-political tactics like boycotts and shareholder action may sometimes work with a particular corporation, but not systemically. So go for referenda, the obvious solution to bypass the corporate-owned legislative sphere. State-level referenda are appropriate as well as feasible, because corporations are created under state not federal law.[2] Activists should find a state with low barriers to referenda and whose electorate is ripe for such measures. Such a referendum could address limited liability for corporations chartered in that state only; one state can’t amend another state’s corporate charter. So the same referendum should also challenge your state’s recognition of other states’ corporate charters: whether states are obliged to automatically, reciprocally, unconditionally recognize each others’ corporate charters seems to be an unexamined legal area. Time to test it.
Just the threat of revoking limited liability, without which no prudent investor would invest, would shake share prices. Merely a murmur should cause shareholder action. In particular, shareholders of fossil-fuel firms, considering that their liability would be essentially infinite (since the corporations they own have knowingly been mining and selling products that will all but extinguish Earth’s advanced life forms, plus humans), would run screaming from their shares.
There are other legal levers to pull aside from limited liability. Since corporate charters are legal instruments subject to the people’s will, and not Constitutionally protected, we can put whatever clauses in them we want. If we want to require every corporation to plant a tree for every dollar of profit it makes, or build a Little League baseball field, or whatever, we can do so. In fact, many corporate charters, or the state laws that enable them, do allude to social purposes in addition to profit and shareholder value. The idea that corporations’ prime directive is shareholder value alone is a misapprehension: “Executives often explain their deference to Wall Street by saying they have a ‘fiduciary duty’ to maximize shareholder returns. That’s been an article of faith since 1970, when Milton Friedman wrote in the New York Times that executives’ only responsibility was maximizing profits. The problem, however, is that it’s not true. Whatever your beliefs about the moral responsibilities of executives, a fiduciary duty is a specific legal obligation, and…as a matter of law American executives simply do not face any such requirement.”[3] At any rate, state law or referenda can amend corporate charters to remove any such ambiguity.
In the broader perspective, of course, we have a massive mountain to climb: de-growth with fairness, massive carbon re-absorption (of which re-wilding, re-foresting, and regenerative agriculture are the only prudent means), energy conversion, mitigation for the degree of climate breakdown already unavoidable. This certainly requires, as many have pointed out, systemic change; and although opinions diverge on change towards what, few if any have argued that corporations should remain the dominant form of commercial organization. Corporate reform may therefore seem secondary on the agenda. And after all, BP and Royal Dutch Shell for example are not incorporated in the US. But the US is still, for the moment, the world’s largest economy; and breaking corporate domination of its government and economy can only be a positive. It’s not yet clear whether corporations, even if reformed, have a place in whatever economic paradigm emerges as most likely to allow survival, security, equity, and a measure of comfort. But for the moment at least, they should be harnessed to contribute maximally to the global effort needed – not dismembered prematurely. Getting our money’s worth out of limited liability, making it conditional and enforcing those conditions, will return corporations to their roots – social entities for social purposes. Or perhaps, an ingenious device for obtaining social ends plus some fair individual profit.
There’s a scene at the climax of David Fincher’s great Fight Club in which Brad Pitt, who’s been tormenting meek and mild Edward Norton throughout the film with flamboyant, high-risk behavior, is brandishing a gun and threatening yet worse mayhem. Edward doesn’t know how to stop him. Except – it comes to him all at once that Brad is his own dark side, his Mr. Hyde. “I am you, and you are me.” And that means that the gun in Brad’s hand…is also in Edward’s hand. Which Edward then uses to rid himself of his tormentor, by shooting himself in the head. (It’s a pardonable movie conceit that the head shot kills Brad but only wounds Edward.)
That’s where we are with corporations. We made them – or those representing the Americans of their day did – and we allow them every day, every minute to continue in their current form and operate as they do by leaving corporate law as it is. We can do with them as we like; in theory, we can change the law tomorrow. And we don’t have to shoot ourselves in the head to do so. Though you might want to check your pension fund’s equity exposure.
[1] The law apparently can’t stand a vacuum, so germinal corporate law posited a ‘fictional person’ in whose name a corporation conducts business, and who is liable for its debts. This may have been the origin of the Supreme Court’s perversion in deciding that corporations have legal personhood and thus enjoy the same rights as people, now extending to blatant political bribes in the guise of free speech. See Jason Mays, “Constraining Corporate Purpose Shouldn't be the Corporation's Decision,” https://www.commondreams.org/opinion/constraining-corporate-purpose.
[2] Nathan Newman, https://www.commondreams.org/views/2020/01/28/elizabeth-warrens-radical-critique-corporate-bankruptcy-and-how-it-shapes-what-kind. Newman goes on to note that state authority over corporate creation “leads to a ‘race to the bottom’ as states compete to make their local laws more corporate-friendly.” Parenthetically, the US Congress may charter a corporation, and has done so throughout US history; but these tend to be non-profit or, if profit-making, for specific public purposes, like the Tennessee Vallee Authority. See Kevin R. Kosar, Congressional or Federal Charters: Overview and Enduring Issues (Congressional Research Service, 2013).
[3] Gautam Mukunda, "The Price of Wall Street’s Power," Harvard Business Review, June 2014. With thanks to John Stanton for bringing this article and passage to my attention in his http://smirkingchimp.com/thread/john-stanton/89441/us-national-security-strategy-is-meant-to-protect-wall-street-congress-the-white-house-and-the-pentago.