Can Corporations Be Held to the Public Interest, or Even to the Law?

Abstract

This article addresses our failing ability to hold business corporations to the public interest, or even to bare legality. It defends, in brief compass, the reasonableness of the expectation that corporations provide public benefits as consideration for their public privileges. But as succeeding sections recount, the traditional instrument for holding corporations to the public interest has gradually been undermined; and our standard, punitive tools for holding them even to bare legality, suffer from inherent limitations and fail adequately to deter corporate misconduct. A more adequate approach would be to supplement the current punitive regime with reform of corporate governance in directions that would decrease the temptation of managers to engage in misconduct in the first place. Several possibilities are considered, with the most promise found in allowing corporations to be owned by Danish-style “industrial foundations.” Among its advantages, the reform is realizable and would reduce incentives to corporate misconduct without compromising on performance. Industrial foundations also customarily direct a portion of corporate profits to charity, in effect reinstating the norm that for-profit corporations provide public benefits.

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Notes

  1. 1.

    On the economic advantages of this latter triumvirate, see Hansmann et al. (2006) and Ciepley (2013).

  2. 2.

    Maitland (2003) and DuBois (1938), p 216; see also references in Harris (2000), p 138.

  3. 3.

    It may be countered that the government regularly provides “privileges” to persons, such as old age pensions (Social Security), without expecting a reciprocal public benefit from them. However, in this example, keeping the elderly off of the streets is itself the public benefit achieved, and furthermore, old age pensions are universal in their application, whereas incorporation, although in principle available to all qualified applicants, in practice applies only to those operating under this specific business form (as opposed to other business forms, or not operating a business at all).

  4. 4.

    Anonymous Case (No. 935), 88 Eng. Rep. 1518, 1518 (K.B. 1701); State v. Great Works Milling & Manufacturing Corp., 20 Me. 41, 44 (1841).

  5. 5.

    First Nat’l Bank of Carlisle v. Graham, 100 U.S. 699, 702 (1879).

  6. 6.

    See New York Central Hudson River Railroad v. United States (1909). For discussion, Hager (19881989), pp 585–611, Laufer (2006), pp 3–43 and Alshuler (2009), pp 1363–1364.

  7. 7.

    Coffee also points out that high authorized penalties encourage meritless, extortionary lawsuits against corporations (Coffee 1981, pp 402–405). For example, it would be rational for a corporation slapped with a $20 million lawsuit, albeit with only a 5% chance of success, to settle for up to $1 million; and it may need to settle simply to maintain its access to the credit markets, which shy away from companies with big lawsuits hanging over their heads.

  8. 8.

    Coffee cites studies documenting that top executives are seldom penalized by their boards for illegal conduct (Coffee 1981, pp 408–409). The relative dearth of managerial dismissals for the financial scandals of the Great Recession suggests this remains true. Derivative suits by stockholders also face significant obstacles. This means that, as things stand, there is little internal sanction to constrain executive misconduct when external sanctions fail.

  9. 9.

    An order may also be issued that leads to an unintentional tort. It is obviously difficult to deter something that was unintentional. I therefore focus on the case of intentional torts and crimes.

  10. 10.

    Other, more creative punishment proposals exist, from “equity fines” to corporate community service, that might further increase deterrence; but all have their limitations and their critics (Schlegel 1990, pp 30–38).

  11. 11.

    It will be noted that this is a wholly instrumental, and not a substantive, conception of rationality.

  12. 12.

    For critique of the myth that the board is authorized by its stockholders, see Ciepley (2013).

  13. 13.

    It could perhaps be described as a hybrid: a charter-constrained, degenerate, state-and-group agent. But such a conceptual monster is best shot, and buried in a footnote.

  14. 14.

    How the penalties are to be distributed is a difficult detail the authors leave to one side, although it would be important to the issue of deterrence.

  15. 15.

    List and Pettit expressly set to the side the practical question of the best sanctions to impose upon group agents so as to regulate their conduct. But they argue that imposing sanctions can be justified and effective (p 157, pp 165–169).

  16. 16.

    One oddity of this approach is that it would appear to make the autonomy of the group agent depend upon the perspicuity of the analyst.

  17. 17.

    At best, the members could embark on a long and unhappy period of more or less blind trial and error, hoping to strike upon a patterning of inputs that leads to better outcomes. This is an aspiration to rationality, but it is not reasoning, and any improvement in performance would not be from reasoned self-correction.

  18. 18.

    Keating (2016), citing a study by Aswath Damodaran, Stern School of Business.

  19. 19.

    But other pressures, unreasonably applied, can have the same result. In the case of VW, a new CEO wanted to increase sales (a more pro-worker objective than maximizing profits) to become the Number One auto manufacturer in the world, and to this end pushed engineers to meet U.S. emissions standards (McElrath 2015).

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Correspondence to David Ciepley.

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Ciepley, D. Can Corporations Be Held to the Public Interest, or Even to the Law?. J Bus Ethics 154, 1003–1018 (2019). https://doi.org/10.1007/s10551-018-3894-2

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Keywords

  • Corporation
  • Punishment
  • Governance