By Arnold Kling
I would like to try to answer the question that I ducked at the Disputation on Friday evening. That question was whether corporations should have the same rights as people. One panelist, Lisa Graves, answered “no” emphatically (to loud applause, given the audience). She said the corporations are chartered by the government and the government can tell them what to do, without any limits. Another panelist, Dean Baker, said that it would be almost impossible to stop corporations for exercising the right to contribute to political causes. Then he said something weird which sounded as if he thought that limited liability enabled corporations to get away with criminal activity. Tim Carney, who was supposed to be on my side, said that he sometimes thinks that corporations should not exist.
I am not a student of corporations. I believe (perhaps wrongly) that the corporate form of organization originated as charters granted by kings, which gives it a dubious provenance. I believe (perhaps wrongly) that the corporate form of organization facilitated the accumulation of capital to build large industries, such as railroads.
I am not a legal scholar. I do not know where the corporation fits in with legal philosophy. That is why I ducked the question. But I am willing to put my personal views out for comment. I assume that somewhere in the world of legal scholarship, views like these have been discussed.
Basically, I think that every time the word “corporation” is used as if it were a person, the term should be viewed as short for “management, acting on behalf of shareholders.” So, instead of saying that a corporation lobbied for the government for favors, we should say that management, acting on behalf of shareholders, lobbied for government favors.
One of Tim Carney’s points was that the corporate form of organization could require a company to do something immoral if this would increase profits. That is because management is obligated to maximize shareholder value. But I disagree. Management acts on behalf of shareholders. If shareholders prefer to direct management to forego profits in order to behave morally, it seems to me that this is their prerogative. So, on the issue of “corporate responsibility,” it seems to me that if shareholders prefer corporate responsibility, so be it. I do not see how being a corporation forces management to maximize profits. I assume that most of the time that is what shareholders want. But should it be against the law for shareholders to want something else?
Should management, acting on behalf of shareholders, be allowed to pay for political advertising? To me, it makes sense that this should be allowed. As Dean Baker pointed out, if the “corporation” is prevented from paying for advertising, it is easy for the shareholders to get around this and to find other ways to pool funds for political advertising.
But I did not get what Baker was trying to say with his point about crime. For example, suppose that management, acting on behalf of shareholders, steals paintings, sells them, and distributes the proceeds as dividends. Then it would seem that at the very least the directors and officers of the corporation are liable for their criminal behavior.
I have a different concern with limited liability. If a bank has some of its debts guaranteed by the government and its shareholders have limited liability, then the moral hazard problem is severe. One approach to counter that is to make it a crime for government-guaranteed institution to engage in excessive risk-taking, so that directors and officers can be prosecuted for it. Hardly anyone else likes that approach, but I think it has merit. Of course, taking away government guarantees has merit as well, but we have gotten far away from that.
The bottom line is that when you ask me what rights a corporation should have, I would answer by rephrasing the question. What rights should management have, acting on behalf of shareholders? If the shareholders have a right to engage in activity X, then management has the right to engage in that activity on their behalf.
But can’t management act against the wishes of shareholders? Possibly, but I still see that as an issue between shareholders and management. While government courts may have a role in enforcing corporate agreements, I am skeptical that government legislators can fix problems of corporate governance.