Corporations are legal fictions, and recent ones at that. Growing out of royal and governmental “charters” in the eighteenth and nineteenth centuries, governments gave to individuals the right to create a legal body – a legal “person” – distinct from themselves but yet which they own and control. Over the past two centuries corporations have become so ubiquitous that we hardly pause to consider how truly weird and brilliant they are as well as the trade-offs that are inherent to them.
A recent New York Times article revealed that BlackRock, a giant investment firm, is considering telling corporations that they need to demonstrate more social responsibility in order to receive their support. Although unlikely to cause massive changes in corporate behavior, the move does have the potential to open up a wider conversation about the very nature of corporations and to what extent a nineteenth century legal fiction is suited for the twenty-first century.
Corporations are really one of the truly great human innovations. Legally separating the “company” from its owners – and thus, most importantly, limiting the legal risk of its owners – sparked a wave of business activity. Individuals who otherwise might have hesitated to form their own businesses did so, sparking a vast wave of economic growth and the formation of jobs. Over time, corporations of all types began to acquire additional benefits, such as preferential tax treatment and even a political voice.
Yet all of these benefits come at a societal cost. The cost of shielding corporate owners from liability claims is the potential for corporate malfeasance in an environment in which no actor can be held personally responsible to the law. The cost of providing tax benefits is the redirection of resources from public good into the hands of private owners. The cost of allowing corporations to make political donations is giving their owners another, less transparent, way of influencing public policy.
We, as the society that allows corporations to exist, have been willing to bear these costs because we have decided that the overall costs of supporting those who wish to increase their own wealth are outweighed by the general economic benefit they bring to us all. In the past, however, that benefit was not weighed entirely in economic terms. We made an implicit deal with corporations. We will allow this legal fiction of the corporation to exist and pay the societal costs of your own quest for wealth, but in return you must give back more than simply your legal share of taxes. You must provide some benefit for the larger society. This entails in large measure providing a fair and stable environment for your employees in which they not only produce profit for you but also can grown and thrive as individuals. You must also never forget that you have a responsibility – this is part of our bargain – to do no or minimal social harm. You can continue to make money at our expense in return, simply, for behaving decently. A corporation has a covenantal relationship with the society that allows it to exist.
There was no real “golden age” of corporate responsibility, of course. Yet since the 1970’s the terms of this covenant, such as they were and imagined, have been unraveling. Responsibility to society is being replaced by responsibility to shareholders; management’s primary responsibility is to deliver maximum profits to the owners. Employees are disposable tools for profit and corporate responsibility to their larger communities – say, to the environment – is defined as minimal compliance with the laws. And where those laws interfere overmuch with profits, corporations can aggressively pay to have them changed. When we take the legal fiction of the corporation for granted we risk forgetting that its very existence mandates a much more capacious sense of corporate responsibility.
BlackRock’s move is narrowly tailored within the discourse of current expectations: corporate responsibility is good because it maximizes profits. That may or may not be true, but it should encourage us to go much further in recognizing that the legal fiction of incorporation is one side of a deal. It is a deal in sore need of renegotiation.