Corporate Irresponsibility: America's Newest Export

Co pyrigh t © 200 1 by Yale U n iversity. All rights reserved. This book lIIay not be reproduced , in wh ole or in part, includin g illustrations, in any form (b eyond th at copying permitted hy Sections 107 and 108 of th e U.S. Co pyrigh t Law and exce p t by reviewers fo r th e public press) , with out written permission from th e pu blish e rs. Set in New Baskerville type by Keystone Types etting, In c. Printed in th e Un ited States of Am eri ca by R. R. Donn elley & So ns. Lib rar y of Co ngress Ca talogi ng-i n-Publicatio n Data Mitchell, Lawren ce E. Co rpora te irresponsibility: Am eri ca's newest expo r t / Lawrence E. Mitch ell .

p. cm. Includes bibliogra ph ica l referenc es an d index. ISB N I .

0-300-09023-4 (acid- free)

Social respon sibility of bu sin ess- Un ited Sta tes. 2. Corporatio ns -

Corrupt practices - Uni te d States. 3. Corpora tions - Moral an d eth ical aspects - Un ite d States. I. Titl e. lID60. 5.u 5 M585 200 1 658-4'0 8 '0 97 3 -dC21

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A ca talog ue record for this book is available fro m th e Briti sh Librar y. The pap er in thi s book meets th e guidel ines fo r perm an ence and du rability of th e Co m mittee on Production Guidel ines for Book Longevity of th e Co un cil on Librar y Resources. 10

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CONTENTS

Introduction

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PART I . GROUNDWORK: THE PHILOSO PHY OF THE AM ERICAN CORPORATION

American Liberalism and the Fundamental FlawThe Foundation of th e Corp orate Problem 19 2 . The Perfect Externalizing Machin e 49 3. Corporate Psychology 1 0 1 , or All the Corporate World 's a Stage : Th e Constrain ts of Role Integrity 66 4. Is Wealth a Value ? 84 1.

PART II. STRUCTURAL TRAPS IN TH E NAME OF TH E LAW

5. 6. 7. 8. 9.

Corporate Managers: Dr.Jekyll or Mr. Hyde? 97 Traditional Sto ckholders: Th e Night of th e Living Dead 135 The New Sto ckholder: Kin g Kon g with a Quotron 165 Abandoning th e Stockholders 185 Th e Dilb ert Societ y? Am eri ca's Corp ora te Work ers 208 PART III . AMERICANS ABROAD

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Ca pitalism, Socialism , an d Democr acy 253 America Right and Wro ng: Growing U.S. Econ om ic Im perialism 262 Con clusion 27 6 Notes 279 In d ex 299

ACKNOWLEDGMENTS

A book of this typ e can n eve r su cce ed with out th e h elp of oth ers. A number offriends an d colleagues h ave h elped m e alo ng th e way. I pa r ticularly wan t to th an k Bill Bratton , T h eresa Gabaldo n , Ke n t Green fie ld, Andre w Mitch ell , Marl een O 'Con no r, H ar old Poro soff, Lauren Porosoff Mitch ell , Pe ter Raven-Hansen, an d Tam ar Fr ankel for th eir insightful com men ts, an d J oe Sin ger fo r h is ea rly e nc o urage me n t. At Yale U niversity Press, H enning Gut man n saw the p otential in my p ro p osal, an d Lar a H eim e rt h elpfull y saw it thro ugh to com p le tio n , whil e Lawren ce Kenn ey d id an artfuljob of ed iting my so me times prolix p ro se . Lesliedian a J ones of the J acob Burns Law Lib rary at T h e George Wash in gt on Un iversity Law Sch ool was of immeasurabl e h elp in id entifyin g an d asse mbling so urces. LaTonya Brook s-jam es h elped m e with th e m anuscrip t an d en d less co m p ut er h ead ach es and was always th e re to p rovid e enco urage me n t. Mariya Talib ,Jennifer Hu,J osh Levy, an d Elizabe th Leise provid ed resear ch h el p . I wo uld also like to th an k th e Alfr ed P. Sloan Found atio n an d the Ford Foundatio n (a nd esp ecially Ga il Pesyna and Lan ce Lin dblom , resp ectively, of those organ izatio ns), whose fu n ding of rel ated proj ects reinforced my ab ilit y to com p le te an d refin e th is one.

INTRODUCTION

T he modern American business corporation h as be en a subject of won de r and horror for mu ch of th e p ast ce ntu ry. Wonder for the lim ited liability an d liquid shares that h ave given en t re p re n eurs and professional managers the power to concentrate and use capital for in novative and risky proj ects tha t create tec h nolog ica l miracles an d h uman comforts. Wonder for th e co r po ra tio n 's sp ecialized structu re, which encourages milli ons of people to invest the ir m oney and go abo ut th eir dai lylives, leavin g to skilled managers and workers th e res ponsibility for the businesses they h ave financed. Wonder for the fab u lous wealth that th is pro tected ca p ita l h as produ ced , freeing so many people to pursue oth er dreams and lead lives of greate r meaning than m erely making a livin g. Won der, because in these ways modern America n b usiness corporations h ave cr eated material wellbeing that allows so many people to live th e eigh tee n th-cen tury liberal id eal on which Ame rica was fou nded, an ideal of in dividual fr eedom, au ton omy, an d ch oice . But the business corporation has also been a subject of ho r ro r. H orror fo r the way its limi ted liability p ermits it to dump th e costs of production onto those who ar e pow erl ess to affect th e co rp o ration's conduct: victims of environme n tal p oll ution , consume rs of dan gerous and p oorly mad e p roducts, an d workers whose wag es hav e stagnated and, in real terms, dropped. Horror as co ntinuing massive layoffs treat wor kers at all levels as littl e m ore than disposab le ch atte l, d estroying th eir economic futures an d personal satisfaction sim p ly to in cr ease stock price by a few points. H o rro r as pl an t closin gs devastate enti re co m m unities that h ave grown up

around th em. Horror as co rp o rate political pressure distorts d emocratic processes, as corporate welfare in the form of tax breaks and subsidies deforms th e course of th e eco no my. Horror as th e fabulous wealth produced by business co rp o ratio n s ever more exaggerates th e difference between the haves and the have nots, not only in Am eri ca but in th e world beyond our shores. And all of this is justified by one very simple goal: to get sto ck prices to rise ever higher.' Am eri can corpora tio n s an d Am eri can ca p ita l have extra o rd inary power. The New York Times recently identified twenty-two Am erican corporations whi ch had market cap italization s" gr eater th an th e gro ss domesti c products of twenty-two individual co u ntries, including Spain, Kuwait, Argentina, Poland, and Thailand." Public p erception an d reported facts tell us th at Am eri can ca p ita l is overwhelming traditional and culturally diverse ways of th in king about, organizing, and conducting business throughout th e world." Surprising as it mi ght be to Am eri cans, not every cu ltu re - not even every Western culture - puts the acquisition of wealth at the top of its list of valu es. It m ay even be true, as analyses from Max Web er's study of Protestantism to more re cent research suggest, that cul tural differences can account for disparities in a socie ty's wealth , th at th ere are cu ltures whos e tr aditi on s of family, co mmunity, and hierarchy deter th eir people from making individual wealth th eir priority- an d th at th ey're happy with this ordering of valu es. Before we export our own m ethods and ou r own valu es, we need to consider whether it is our right to do so , for through th e power of our cor pora te form an d ca p ita l markets we are in fact doing so. And we are doing so for the glo rio us goal of making American stockholders richer. Tri ckle-down answers don't work. Am eri can dominan ce do esn 't benefit these nations; in fact , our in creased wealth is often at their ex pe nse . A study by the U n ite d Nations Development Program in 1999 reports th at Am eri can ec on o m ic and cultu ra l world dominance has accelerated the widening wealth divide be tween ri ch and "The mark et capitalizatio n o f a given co rpo ra tion is its stoc k pri ce tim es th e number of its o u tstand ing shares . 2

INTR ODUCTION

poor nati ons." I will h elp ex p lain at least p art of th e reason for American hegemony, the reasons it is causing th is problem, and the reasons why, if we co ntin ue on our curre n t cou rse , we ar e likely to self-destruc t - but not before we ca u se a lot more pain . And I will explain why the pain is felt at home as well as abroad, for the same fact ors th at allow America n co rpora tio ns to domin at e th e glo be hav e h elped to mak e Am eri ca itself, at least in econ o m ic terms, th e most unequal country in th e world." The argume n t is fairly st ra igh tfo r war d; th e ex p lanatio ns are far more complex. Simply put, I will ar gue th at th e main problem with Am eri can co rp orations - th e m ain ca use of th eir irresp onsibilityis th ei r d rive to maximi ze short-term stoc k p ri ces, a res ult th at n o thoughtful person really wants. The roo t of th e problem is the co r po ra te str uc tu re itself: th e co rpora tio n's legal str uc tu re enco urages managers to aim for ex actly this short-ter m re sult, and it doe s so by constraining th eir freedom to act responsibly and morally: th e result is immoral beh avior. Suc h beh avior is in nobody's best interest and has especially pernicious effects on groups outside the tr ad itional legal co r po ra te structure, th at is, everyo ne but th e stoc kholders an d managers. Co m p o u n d ing th e problems cause d by th e sh ort-termism built into the corporate structure is the fac t that for almost all legal purposes we treat th e corpora tio n as if it were a natural person, gran ting it th e freedoms of a natural person to in cr ease stock price h owever it likes, but without th e moral an d soc ial co nsc ie nce th at lead s real p eople to care ab out h ow th ey d o business. A long-term focus, whi ch includes not only in vestin g for th e fu ture but caring th at profits are mad e resp onsibly an d morally, is good not o n ly for soc ie ty, but also for busin ess. The way to achieve this result is, paradoxically, to free managers from th e structural pressu res of stoc kholde rs an d ca p ita l markets, to loo sen th e legal and cultu ral constrain ts upon them so that they can act as we expect th em to - as natural human beings wh o work to in cr ea se co rp o rate pro fit th e way people with human m oral an d soc ial values act - not in the ar tificial and dangerous way we have co nstr uc ted them to act. The best way to ach ieve this res ult is throu gh changes in cu ltural and business norms. I will make th e argumen t for the n ecessary changes but will also suggest a number of other more in trusive INTR ODUCTI ON

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p ossib ilities within our ex isting legal fram ework th at co uld be used if persuasion fai ls to work. These range from creating self-perpetuatin g boards to ch anging finan cial reportin g practi ces to cre at ing tax in centives through capital ga ins reform.

THE NEED FOR REFLECTIONTHE PURPOSE OF THIS BOOK

Th e ex traord inary co n te m p orary success of th e Am eri can co rporation, th e cor p orat io n that appears to bring great prosperity at home an d h as co me to d ominat e econom ies abroad, is ba sed on a false premise. That p re mise is that it is th e purpose of th e co rporation to maximize shareholder valu e or, in more common parlance, stoc k price . This is n ot a legal requirement. It is n ot even a n orm that has gove r ne d corpor ate practi ce for m ost of our history. It is, however, the watchword by which we live today. And it is an e thic th at will d estroy us in th e long term. The observation that the e thi c ofsto ck price maximization is both n ew an d destructive isn 't novel. My ex planatio n for it is. Th e ex p lan ation lies in th e st r uc ture an d legal rules with whi ch we have cr eat ed th e corporation , an d the markets in which it operat es. I will show why, under curren t law, we sho uld ex pect th e corpo ra tio n an d its managers to care only about sto ck price maximization . And I will show th at eve n in its pursuit of this goa l we sho uld not ex pect th e Am e rican co rporation to behave res ponsib ly. Indeed we h ave every reason to expect it to behave irresponsibly. You need not be lieve in a b ro ad notion of resp onsibility to acce pt my arg u me n t; you on ly n eed b eli eve th at co rporatio ns, like othe r people, sho u ld b e accoun table for th eir actions. We have d esigned corp o ratio ns so that they ar e un accountabl e for th eir ac tio ns, irresp onsibl e in th eir beh avior.

MAXIMIZE S TOCKHOLDER PROFI T

Maximize sto ckholder profit. This is the wat chw ord of our corp ora te faith. It is a di ctate that arises fro m th e legal st ruc ture of th e Am eri can corporat ion an d the rules of co rp o rate law. Bu t it is an imperative th at is as d estructive as it is sim p le. It is a m essa ge th at 4

INTR ODUC TI ON

keeps managers' and sto ckhold ers' focus on th e short term." And short-term management is ir responsible management: it leads to layoffs, p lant closings, alienated workers, unsafe products, and a polluted e nviro n me n t, all in th e n am e of today's profit; it leads to u nderinvestment in worker training and research and deve lopm ent; it h as dan gerously in cr eased sto ck ma rk et volatilit y an d turned our cap ital markets into unstable casin os of unimaginable proportions which threate n the lo ng-ter m economic well-being of our so ciet y. As players in th ese casinos, sh or t-te r m sto ckhold ers h ave abandoned the idea of individual corporations in favor of an invisibl e and faceless m arket."We no lo nger invest in cor po ratio n s, but in analysts' proj ecti ons offuture stoc k p rices. And we sh ift th ose investme nts the moment th e reality doesn 't appear to meet projections or as so on as proj ections change, just as bettors at th e racetrack adj u st their bets as the odds at the trac k are con tin ually shifted until post time. This stat e of affairs is not th e fau lt of co rp o ra te man agers, at least not of managers alone. Whi le equity markets have always had a quality of ga m bling abo u t th em , th e d egr ee to whi ch lo ng-te r m investing h as given way to pure specu lation h as r ea ch ed alarming proportions n o t see n since the 19 20S. O n average , stockholdi ng pe riods h ave go ne fro m two yea rs in 1990 to eigh t months in 1999 , and the period in NASDAQ stocks is five months. Even mutual fund holding periods hav e go ne from eleven yea rs in 1990 to four years o r less." It m ay be th at m arkets hav e go tte n mo re efficien t so th at stock prices re flect fair value more quickly tha n they used to . If th is is true, th en wh at ap pears sim p ly to be speculatio n refl ect ed in th e eigh tfold in cr ease of th e NASDAQ turnover rate rea lly is investin g. Bu t th e increased instability of stock prices makes this exp lanatio n

"Th e largest and, in go ver na nce terms, th e mos t ac tive, public pe ns ion fund in th e Unite d Stat es, the Califo rn ia Public Em ployees Retirement System, d iscovered thi s truth afte r e mba rking o n a study of co r po rate gove rnance . A~ se t forth in th eir U .S. Corporate Governance Princip les: " Compan y man agers want to ado pt lo ng-ter m stra teg ies and visio ns , but ofte n do not feci th at th eir shareowners are pati ent e no ugh ." http:/ /www.calp ersgo vernance.org/ princip les/ d omestic / us/ pageo 2.asp. IN TR ODUCTI ON

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seem in cr edibl e, as do es th e fact that investors who trade more heavily tend to show lower-than-average profits." The long-te r m consequence of this coll ective pursuit of shortterm sto ck pri ce maximization is to risk Am eri ca 's prosperity an d that of the rest of the world as well by making corporate directors an d managers more than ever slaves to th e sto ck market instead of professionals in search of better products and better ways of serving th eir constituencies. Followed to its logical conclusion, it may well lead to th e ruin of our eco n omy. Maximize sto ckholder profit is a message that is believed to embody the purpose ofAmerican corporations. But it is as in compatible historically, socially, ec o no m ically, and politically with a sustainabl e an d responsibl e ec o n o my as we once claimed socialism and communism to be . Looked at in th e long run , it is even in consistent with th e goal of m aximizin g sto ckholder profit itself." My th esis is, on one leve l, unremarkable : responsible corporate m an agement and sustained prosperity require long-term m an agement and long-term investment. We must allow corporate manage rs to turn th eir atte n tio n to running busin esses rath er th an m anipulating sto ck pri ces. What is remarkable is to note how th e legal an d fin ancial structures of the tradi tional American corporation create sign ifican t disadv antages for long-term management and strong competitive advantages for short-term management. These structures converge on th e com man d to maximize sto ckholder profit. Ifwe expect resp onsible co rp o ra te behavior and susta inab le prosperity, we must re think th ese legal and financial structures and th eir em p hasis on sto ckholder profit. In order to do th at , we must understand how deeply they are em b ed d ed in American law and American economic policy. Maximize sto ckholder profit. To m ake this our co rp orate goa l ignores the undeniable fact that the modern corporation is a social an d political institution as well as an ec o no m ic institution - an institution in whi ch peopl e go to work not only to mak e a living but to help find meaning and friendship in the process ; an institution that by th e products it produces, th e services it offers , an d th e m ethods by whi ch it markets them has an enormous effe ct on the way we think abo u t our lives and the go als we pursue ; an institution th a t (j INTRODUCTION

involves itself in th e m echanisms of govern men t to h elp d et ermine th e ways our laws are m ad e and th e way our wea lt h is dis tributed. To make this our corporate goal igno res th e power and th e corresponding responsibilit y of th e co rp ora tion. It 's also bad for business. As research increasingly shows, h ealthy busin ess and a h e althy ec on o my d epend up o n a rich un de rstan ding of the corporation's ro le in modern so ciety and its responsib ilities as well as its righ ts. A truly sus tai nable prosperity depends upon a lo n g-ter m view because a co nsta n t short-run fo cus skimps o n researc h and development in favo r of adve rtising and marketin g, worker train ing, in telli ge n t use of reso urces, and im p o r tan t conside ratio ns of so cia l h ealt h . As Fortune magazin e 's list of th e 10 0 Bes t Places to Work shows, co m panies that realize th e importance of th e lo ng term p erform better than those th at don't. '? In th e meantime, corporate managers p lunge thoughtlessly ahead, leaving a trail and creating a fu ture of economic and social dis location. Maximize sto ckhold er profit. It 's a se lf-d efeating maxim . But that h asn 't sto pped us from exporti ng it ab road. American id eas about busin ess and American styles of management ap pe ar to b e taking over the world. I I American (now global) co nsu ltin g, accoun ting, law, and financial fir ms are selling their stockholdervalu e se r vice s to com pan ies in th e Europe an so cial d emocracies, including countries like Germany, where the co ncept is so foreign that th e lan guage h as no word for "stockh olde r value', in emer ging capita list m arkets, an d throughout Asia and th e rest of th e d eve lope d worl d. American business and legal consultants h ave written en tire co rp o rate code s for e merg ing ca pita list ec on o m ies with littl e app reciation of the distin ct legal , cultural, and so cia l environments in which they operate - sometim es, as in the case of Ru ssia , with dis astrous results .' ? Am eri can co rp o ra tio ns are m erging with or otherwise joining forces wit h businesses throughout the globe . And th ey are doing so on th e basis of a single m essage : maximize stockhold er profit. European an d Japanese m an agers appear to be b uying this m essag e, largely be cause of pressure from American capita l. Institutional investo rs in Germany and Japan, most of whom are American.!" want these and ot her n ation s to abandon their systems of IN TRODUC TION

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corp orate gover nance. '! T h ese in vesto rs believe that "c om p an ies everywhere sho uld foll ow the Br itish-Am erican model of pl acin g share hold er value above th e in terests of ot h er 'stake h olde rs' like e m ployee s and suppliers, or co nside ra tions like th e h ealth of th e e nviron me nt. " If European an d J apanese co rporatio ns aban do n th eir systems of corp ora te governance an d ad op t th e Am erican system, the y too will be caug h t up in the whi rlwind of short-te rm m an agement an d fo r th e same re aso ns we are. T hey will also be come en meshed in a particularly Am erican view of law and responsibility, a view whic h I argue is one th at eve n Ame ricans fin d unsat isfying. It is a co ns eq u enc e th ey will ultimately regr et. Desp ite its relative n ovelt y as an op erating eth ic and its grip on co nte m pora ry Am eri can cu ltu re , the id ea that th e co rporatio n exists solely o r even primari ly to maximiz e its sto ck pri ce does arise from some fundam ental tr uths about Am erican socia l though t and p oli cy. As I shall ex p lain, it is p art an d p ar cel of the extre me an d distorted versio n of En lightenment lib eralism th at curre n tly domin ates o ur culture, the rad ical in d ividualism and rampant selfish ness th at h ave been ga in ing steam sin ce at least th e lat e 1970s, an in d ividualism and selfishness that ca n b e seen everywhere from th e elimi natio n of affir mative actio n in Texas an d Ca lifor nia sta te unive rsities to welfar e " reform " in th e 1990 S to atte m pts to elim inate the estate tax an d institute othe r tax cuts to benefit th e wea lthy. It ca n be see n in th e gra bbing behavio r of society's win n ers , who want even m ore for th emselves in a U. S. socie ty describ ed by th e ec o nomi st Rob ert Fran k as "win n er take all." It is p ar t of th e same phenomenon th at prod u ced th e you ng investm ent ban ke r we 'll m eet in ch ap ter 9, who d emanded that his firm provide free m eals, free cloth es, an d a nurse 's roo m for restin g- an d go t th em. It is p ar t of th e sam e p h e nomenon th at h as create d th e CEO we 'll m eet in th e same chapter, whose co ncer n for the value of hi s sto ck optio ns no t only lead s him to check hi s com p any 's sto ck pri ce ten tim es d aily but also to post it three tim es a day in th e lobby of co rp o ra te h eadquar ters. It is p art of the same phen omen on that h as led average CEO salaries to boom to 47 5 times th at of th e average worker, with avera ge ra ises well in to double digits, wh ile work ers' wages, for the lucky few, bare ly keep p ace with infl ation. It is p art of the same 8

IN T RO DUC TION

ph enomenon that has left most Am eri can workers with stagnant or declining wages so that executives can keep stock prices up by exportingjobs abroad. It is part of th e same ph enomenon that h as led even th e labor union pension funds we ' ll see in chap te r 7 to d emand that corporations prod uce higher stock prices in the short term even at th e cost ofj eopardizing th eir m embers' jobs. It is part of the drive ofAmerican investment bankers and institutional investors we' ll also see in chapter 7, ever o n the loo kou t for greener pastures, to d em and so-called reforms in oth er cou n t ries th at th r eaten traditional cultures of co m munity and stability, cu ltures of hi gh em p loyme n t and d eep social welfare - all to provide even more inv estm ent vehicl es with whi ch to in cr ease th eir already substa ntial wealth . It is from this eth ic of sto ck price m aximization specifica lly an d ex cessive individualism ge n er ally that many of our major corp orate proble ms derive. I d o n ot mean to claim that stockholder wea lth maximization is th e only ca use of our co rpo ra te problems. But I argue that this singular focus explai ns a great deal and fits n eatly with oth er aspects of Am erican so ciet y th at com bine to suggest th at this narrow corporate purpose may be the taproot of the problem. My purpose in th is book is to explai n why th is is so and to offer so me ways of re th in king th e co rpora tio n so th at we can ret ain its o bvio us be nefits and at the same time ameliorate its problems. I want to be very clear, before beg innin g, that wh ile I do n't find greed especially attra ctive, thi s book is not an exte n de d attack on greed. Neither is it an attack on capitalism as a broadly co nceived ec o nom ic system or on th e sim p le fact of globa lization, whi ch itself attra cts much fire, as the viole nt World Trade Organization d emonstrations in Seattle in 1999 and the recent spate of books on the subject sh ow. The book is, instead , a warning. It is a warning that if we don't restrain ours elves, if we don't restrain our driv e to accumulate even more wealth, if we don't rethink th e way we do corporate business, we may find that in the long run we h ave m uch less pro sperity than we do now, an d, in th e process oflosing for ourselves, we will harm m uch of th e world as well. It comes from a lesson we are all tau gh t as childre n and all teach our children, m uc h as I tell my fourteen-year-o ld IN TRODUC TI ON

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son to practi ce th e violin, from whi ch th e short-term rewards are negligible, before he plays video games, much as I tell him to layoff th e d elight of McDonald's in favor of th e asceti cism of fruit. It's a simple lesson abo u t d eferring gratification , about for egoing shortterm pleasures for long-term benefits. Bu t although it's a lesson we all know, we ea sily forget it. And we most ea sily forget it wh en we are acting alone but together, in the faceless, soulless, thoughtless markets of American corporate capitalist society. It 's a lesson that we rem ember only wh en we stop to ask a simple but elusive qu estion, the question that the reluctant revolutionary played by Woody Allen in th e movi e Antz dared to ask about a similar situation in whi ch everyone acte d alone but together: alone in th e sen se of acting without collective reflection , together in th e sense th at only in unreflective concert cou ld th ey acc om p lish th eir own self-de str uc tio n . The purpose of this book is to ask th at question - Wh y? - and to explore some of the answers. I'll do more than analyze th e probl em. After all, it 's easie r just to cri ticize , and I don't wan t to stand accused of taking the easy way out. I will also m ake several co nc re te poli cy recommendations whi ch flow dire ctly from the problems I id entify. While I hav e described the central problems as structural, many of my suggestions will not address co rporate str uc ture at all. There is much th at works well in the American corporation, and much of it lies in the ver y sam e structure th at ca uses us problems. Most of my sugg est ed refo rms, th e refore, are aimed at allowing us to ret ain wh at is, unarguably, an efficient structure , but to correct for the distortions th at str uc tu re produces. Some of these suggestions will look familiar: they hav e be en floating around in th e miasma of academic literature or are variations on proposals by politi cians like Sen ator Ted Kennedy, form er labor secretary Robert Reich, and public intellectuals like the Nob el laureate James Tobin. Some ar e en tire ly original. Some are unlikely to be adopted an ytim e soon, but I n everthel ess suggest th em because of the way they refocus our thinking, starting with the long term rather th an th e short term. O th ers are practi cal suggestions, and I will spend more time dis cussing these . Taken to gether, they represent a logical and coherent response to the problems I iden10 INTRODUCTION

tify -they provid e managerial fr eedom to manage without th e need to be obsessed with stock price. They give stockholders incentives to invest for th e lo ng term. They give us tim e and space to think about what individual co rp oration s ar e doing and d ecid e whether we are h ap py with their actio ns . T hey give corporations in centives to care about th e rest of us. Ultim ate ly, th ey h elp to resolve the co lle ctive action problem faced by an y single sto ckh old er or man ager whose desire is to ac hieve lo ng-term investment goals by tyin g us all to th e mast of th e lo ng te r m to prevent us from being destroyed on the rocky shoals toward which th e sirens' song of th e short term is leadi n g us. T h ey will not so lve all of o ur problems. But th ey will, I hope, h elp to reori ent th e way we think about the goals of our corporations and corporate law an d lead us in th e right direction.

CLEARING THE GROUNDSOME STARTING ASSUMPTIONS

Before I b egin my argu me n t, let m e mak e several important points on wh ich I want to be clearly understood for, despite my protest to the co ntrary, it may be easy for the reader to see this book as an othe r in th e seri es of recent attac ks on gree d an d glo balism. To see it th at way is to miss the point. First, my argument h as noth ing d irec tly to do wit h th e virtues or vices of capitalism , although I will h ave occasion to discuss th e n ature of capitalism itse lf, th e m u ltipli city of for ms it takes, and its relation to th e corp ora te form an d to d emocracy ge ne rally. For th e most part, I view cap italism as a good thing, although I think its mo dern Ame rica n for m is a perversion, much as Aristotle saw de mocracy as a p erversion of a polity, or govern me n t by th e many. Second, although I will be very critical of the modern corpora te eth ic of stock price maximization, I want to be clear about two things: first, profi: is esse n tial to co rp orate survival, and I begin with the assu m ption that co ntinued co rporate profitability is im portant for an y number of reasons; profit maximization, however, even in th e accoun tin g sense of maximizin g earnings per share, may not be an ideal ta rget. In fact, one point of this book is to argue that even if we IN TRODUC TION

11

want corporations to maxim ize profits, aiming directly at that goal is a less effective way to accom p lish it than foc using on othe r thi ngs, like the p roduction of goods an d services. " In a Tao-like way, n amin g profit maximization as th e goal will, in th e lo n g term, d efeat it. Cor;fJorate pro fit m aximi zation m ay, de pen di ng u pon th e way p ro fits are sliced up and distrib uted, be a good thing. I am foc using on what h as come to be accepted, in scholarly and popular circles alike, as the purpose of the corporatio n : stock price maximization. Maximizing corporate profits may in crease rea l wea lth . It may m ak e a bigger pie for everybody, leaving only th e serious qu estion of h ow to di stribute it. Maximizin g stock p rice may be on ly th e illusion of crea tin g real wealth .!" Nevertheless, as far as terminology goes, I will use th e p hrase "stockholde r p ro fit m aximization" in terch ange ably with "stoc k price maximization" beca use it is th e phrase used throughout th e literature. Simple financial theory, which I will disc uss later, m akes it clear that pro fit maximization in the accou ntin g sense an d sto ck price maximization ar e not n ecessari ly th e sam e th ing and in fact m ay rarely co rrespo nd except in the very long term. It is th e latt er wh ich is my focus. T hird, whi le I will h ave something to say about globalizat ion of the worl d 's ca pi ta l mar kets and, in p articul ar, th e do m inance both of Am eri can cap ita l marke ts and th e in cr easing infl uen ce of th e Ame rican co rporate fo r m in the world, this book is not anothe r attack on globalism. In fact, altho ug h the limi ts of globalizat io n are not yet known, it do es seem rather obvious that some forms of globalizatio n are h ere to stay, in prod u ct m arke ts (faci litated by th e m edia an d by elec tro n ic co m me rce ) as well as la bo r and ca pital markets. I am no t arguing that we should turn back the clock, eve n if we co uld. Rath er, what I shall be examin ing is what globalizatio n m eans in terms ofth e relations among markets , states, and cu ltu re s. I will be at pains to p oin t out the negative effec ts of globalization . Bu t what I will be cr itic izing is a p articul ar form of globalization, a relat ively unregulat ed fr ee-market form of globalizatio n in whi ch the p ower of ca pital overtakes the p ower of states and in which the power of th e prod uct overtakes th e will of cu lture an d tradition. And I will be cri tica l of the way in whic h sta tes and cultures h ave started to cave in to the exportation of American-style corporate 12

IN T RODUC TION

capita lism. Just as th e co rporation is n ot inherentl y evil, n either is glo balization. It's the way we deal with it and regul ate it that m atter. Co ntrolling globalizat io n is a far greater pro blem than sim p ly reining in th e all-embracing exuberance of any particular markets in a given country. Fo r eac h co u ntry h as its own sovere ig n authority, its own na tion al governme nt and politica l and ec o no m ic st r uctu res, through wh ich it ca n choose to limit the p en e tratio n of its borders by other systems and ot her cu ltures . Bu t whe n we seek to restrain - or to control or reform or direct or whatever you Iikeglobalism as a worl d effo rt, we lack th at sove reign . T here is no one world authority that can serve as a focal p oi n t for o ur choices abo ut glo baliza tion , that can act as a mediator among co m pe ting interests and allow fo r co m promise solut io ns. In th e absence of such a world authority, we h ave let th e markets rule. T hat is th e asp ect of glo balization I will criticize. Fo urth, I begin with th e assu m ptio n that m ost co rporate directors, officers, an d em p loyee s ar e, for th e most part, decent people , at least n o less decen t than the rest of us. Ge nerally they want to do th e rig ht thing as th ey perceive it through th eir own moral and et h ical constructs, at least as much as the rest of us . To my way of thi nking, th is is an assu mptio n that th ey do n o t always seek to maximize th eir self-interest , although self-interest is something the y pursue part of the time . I recognize that in th e p receding two se n te nces I have of co urse made a value statement: Fre e moral actors do not pursu e th eir self-interest all of th e tim e. This point may be controvers ia l in academic circles, but I suspect that the reader who lives in th e world of p eople rat h er than th e worl d of books will find it obvious. 17 The last assu m ptio n is highly im portant. With out it I am left: with two altern atives: either to assum e people ge nerally ar e selfish and uncaring o r to assu me nothing about peop les' mo tivatio ns. If I assume self-centeredn ess (wh ich I gen ui n ely b elieve no t to b e tr u e, although presentin g th e assumption as a b eli ef rath er than as an em p irically established fact may n ot satisfy so me read ers) , there would be no purpose in writing this book, sin ce my argument boils down to the simple point that we ought to free corporate actors to fo llow their best instincts. If I assume n oth in g abo ut human IN T RO DUC TION

13

motivati on s an d behavio r at all, th en I would h ave preciou s littl e to say about an ything, for how can one make an y predictions without some assu m ptions? My assumption th at p eople - an d in the p articul ar co n text of thi s book, co rporate actors - h ave good moti ves is decidedly not an assumption that they will act well all of th e tim e or eve n m ost of th e time, I sup pose. It is o n ly an assu m ptio n that m ost of th em want to act well most of th e time, an d this is all I n eed to su p p ort my arg u me nt. Finally, a word abo ut th e numbers. Th ere are a myriad of financial statistics, and new ones seem to appear ever y day. Often they are based o n different m ethodologies an d tim e p eri ods, an d some times tim e p eri od s for sim ilar types of sta tistics d on't match up perfectly. Using and com p aring th ese sta tistics is a tricky process an d must be d on e carefu lly. I h ave tri ed , as much as p ossibl e , to use th e same so urces for given categories of data , and wh ere thi s h as not b een possible h ave so indicated. Noneth eless, whi le th e precision of th e numbe rs an d th eir compariso ns may be o pe n to deb at e, th ey all point in the sam e dire ction, and th e conclusions I have drawn from th em are n ot in d oubt.

C U L T U R E MATTERS

One last point. Co ntrary to most economists, who mis takenly b eli eve th at th e same econ o m ic p oli cies, ap p lie d everywhe re, will p roduce th e same res u lts, I hol d that cu lture ma tt ers. It h as b een demonstrated, for example , that there is a definite relation be tween th e level of co rr u ptio n an d econom ic productivity in a society and its ro ots in Protestant-based individu ali stic cultu res in contrast to Cath olic an d oth er culture s, in whi ch com m u nity, loyalty, an d fa m ily ties are m ore hi ghl y prized. At th e same time th at democracy reduces corr up tio n, th ere is an interestin g case for the proposition th at loyalt y an d m arkets are " an tith etical" to one another, th e firs t p rivilegin g obligati on an d co m m un ity an d th e seco n d, individualism and merit. 18 Wh o is to say whi ch is better? Cu lture is critica l to p olitics an d to econom ics as well. As the p oli tical scie ntist Ronald In gleh art poin ts ou t, it is culture that shapes democracy, not the other way aro un d . And as an othe r co m14

INTR OD UCTI ON

m en tat or n otes, econom ic valu es are always in strumental , d esign ed to achieve a particular purpose. They are not intrinsic to a soc ie ty or to the way a cultu re defines itself. As such , ec o n om ic d evel opment can be shape d on ly by th e cultural values th at ex ist in a soc ie ty.!" Alan Greenspan, perhaps the de veloped world 's mos t famous econ omic gu ru, aban do ne d th e econom ists' gos pel th at econom ic p olicies are n ot cult urally dependent for th e co n clu sio n th at cap italism is a ma tt er of cu lture, no t of human nature . Cu lture m atte rs. As th e hi stori an David Landes puts it , " Culture Makes Almost All the Differen ce .v' " This view may be unpopular in poli tically co rrect circles wh en it lead s to th e observatio n th at some cultures are economica lly mo re "backwar d " than oth ers. Bu t as a simple observation about wealth crea tio n, it is unmistakably ri ght. T he re is n othing intrinsically wro ng with n oting th e importance of cultural differen ces in a vari et y of area s, fro m p oliti cs to soc ial organi zation to ec on om ics. And it seems undeniabl e th at ec o n omic growth an d p roductivity are gr eater in so m e cultures th an in others. The important question is what you do with th e con clusio n . Do yo u (futil ely, I susp ec t) try to mak e ot h er cultures like yours, in th e h ope th at th ey will d evel op ec o nomica lly lik e yours? Do you view the m as inferior in so me way an d the re fo re not to be b o th ered with or, to th e con trar y, to be colon ized, figuratively or literally? O r d o you understand th at cultural variat io ns might well reflect different valu es, that cultu re m atters a lot, an d th at th e kinds of ec o nom ic in stituti ons a culture devel op s re flec t more th an sim p ly its economic needs? I start from th e last point, and it is that poin t th at forms an important part of my fin al critiq u e of th e expor tation of Am eri can co rporate cap italism . In th e m ean tim e, th e thin g to note is that Am erica is very much a socie ty groun ded in Protestant values an d th at th e individualism born of Calvinism is very much intertwined with, and to so m e exten t is p art of, th e individualism born of lib eralism. Cu ltu re an d politics reinforce o n e another. But wh en th ese p articul ar aspects of o ur cu lture and politics are cu t loose from their ethi cal moorings, they can be a sh ipwrec k waiting to happen . We have done precisely th at, as our individualism and sp irit of acquisitiveness have drowned ou t an important underpinning to our individualism , a caring an d co mm unal INTR OD U CTI ON

15

impulse th at we 've all but dest ro yed but th at , carefu lly co ns idere d, shows itself as the very legitimation of our individualistic spirit. This book is organized in three p ar ts. Part 1 ex p lo res th e philoso ph ical an d soc ial e nviron me n t in whi ch th e m odern America n corp or ation is grounded and exp lains why, from a cu ltu ral perspective, we oug h t n ot to ex pect o ur co rporatio ns to beh ave res po ns ibly an d accou ntably. Part 2 exam ines th e legal str uc tu re of th e co rporatio n in fin er d etai l, d emonstratin g how ea ch aspe ct of that str u cture co n tributes to th e p ro blems I id entify an d suggesting ways in whi ch we might create an environmen t in whi ch managers, sto ckh olders, an d workers can use th e best aspects of th e str uc ture to more likely assure res ponsible, long-te rm ma nagement. Part 3 is a brief examination of th e nature of capit alism and its various forms an d an ex planatio n of th e way Ame rica n co rpora te an d cultu ra l m ores are ta king over th e glo be .

ilj INTR OD UCTI ON

I

GROUNDWORK THE PHILOSOPHY OF THE AMERICAN CORPORATION

AMERICAN LIB ERALISM AND THE FUNDAMENTAL FLAWTHE FOUNDATION OF THE CORPORATE PROBLEM

How widespread are our corporate problems? How severe is corporate irresponsibility? Sometimes we know it when we see it: Fire ston e mak es explod ing tires an d Ford knowingly allows th em to remain on SUVs; Hooker Chemical pollutes Love Canal; Union Carbide builds a substandard factory in Bhopal. Sometimes it's less easy to see : General Ele ctric lays off tens of thousands of workers and in the process destroys entire communities; MatteI's board of directors gra n ts itself obscenely valuable sto ck options so co m plex that their value is hidden from the stockholders, who vote to approve them ; some of Am erica's largest corporations abuse fed eral tax laws in order to pay almost nothing in tax es even as th eir profits soar. Pinning down th e problem is diffi cu lt; good statistical data are almost impossible to co m e by if for no other reason than that the notion of corporate irresponsibility is notoriously hard to define. Moreover, much of what I will dis cuss as cor po ra te irresponsibility is behavior that does not rise to a h igh ly visible level but results from a day-to-day way of thinking about and running large corporations. So you could, if yo u ch ose, decid e that th e problem is not terribly important and close this book right now. But that would be a serious mistake. For wh ether or not I can provide information that might pass as scientifically acceptable, it is clear that the vast majority of Americans be lieve that corporate misbehavior is a serious problem 19

- and this d espite our wid ely ce le b rate d unpre cedented prosperity. In September 2000, Business Week published the results of a poll whi ch found that fully thre e-quarters of Americans beli eved th at th eir lives were too dominated by busin ess (and that same number agreed with AI Gore 's aggressive stance against big busin ess). Among th e findin gs were th at 6 6 percent of Ameri cans believed that " large profits are more important to bi g companies than d eve loping safe , reliable , quality products for consumers. Adding to th e dis en ch antm ent is th e p erception that co m pan ies often buy their way into govern m e n t." The poll found a gen er al perception that busin ess had grown beyond th e ca pac ity of govern men t to co n t ro l it, creating a d ange rous power imbalance in Ameri can socie ty as we ll as in the res t of th e world , an imbalance in which American busin ess is perceived to overwhelm lo cal sovereignty an d culture for the sake of in creasin g profits. The poll 's findin gs were consistent across age and income groups an d are particularly no tabl e for th eir dis covery th at th e sentiments ex p re sse d were not so much antibusiness as anticorporate .' So perhaps I can't prove tha t co rp orate irresponsibility is a wid espre ad problem, altho ugh I'll try. But th e fact that th e overwhelming majority of Americans believe that it is provides a powerful incentive to try to find out why. Our corpora te p roblems, including th e eth ic of stoc k price m aximization, lar gely lie rooted in the structure of the American corporation . But th e co r po ra tio n also fun ctions in a more fundam ental soc ial, politi cal, an d eth ical id e ol ogy o f r adi cal individualism th at dominates American cu lture and reinforces and exacerbates th e problems arising from structure. This chap te r will esta blish th e gro u n dwo rk for analyzin g corp o rate r esponsibilit y by situatin g the issue in our cu ltural context.f In order to h ave a co n cr ete basis for understanding th e link betwe en co rp orate behavior an d cu ltu re, let's first look at several examples of what I consider to be corporate misbehavior, an d then se e how they fit in.

THINGS GO BETTER WITH COKE

In fiscal 1999, the Co ca-Cola Company, an icon of American business success, suffered an $8 13 million charge to earnings - that 20 PHILOSOPH Y O F TH E A M E R I CA N C ORPOR ATION

is, a loss - as a res ult of poo r overseas ope ra tio ns, prima rily in Ru ssia and Eastern Europe. Co ke suffe re d a sig nific an t decline in stoc k price during th e co urse of 1999 , with seve ra l peak s (including rebo u nds in ea rly 2000) b ut lap sin g to lower levels. Th e solu tio n for this corp oration (with its n ew chief executive ) de scribed by the New York Times as o ne " known for ge nerous benefits, j ob sec urity an d unflaggin g o pt imism about its future" was to lay off 20 percen t of its workfo rce (six tho usan d of its th ir ty tho usa n d em p loyees worl dwid e ) at a cost of $800 m illion. " While th e co m pany d efended th e move as a way of fo cusing on its cor e business, it appears th at dropping stoc k price was th e driving mo tivati on . Co u p led with th e layoff anno u ncemen t was th e disclosu re th at some of Co ke 's foreig n bottlers would reduce th eir levels of in ven tor y, with on e exp ert quoted as saying th at thi s implied Co ke h ad ove rstate d its ea rn ings growth for the preceding two yea rs and ex pressing co ncern th at it mi gh t contin ue to do so in th e futu re . Of co urse overs tating ea r n ings growth is a way of in creasin g stoc k p rice in th e short term. Altho ug h th ere is n o suggest ion that Co ke was behavin g fraudul ently, th e oversta te ment, co u ple d with th e layoffs, suggests (especially afte r a year in whi ch the stock price was beat en d own) th at cu r re nt stock price was at the forefront of m an agement's co n cer n . That's no surprise given th e sta te of American corporate law an d fin an cial markets . Does it justify terminatin g the employment of six thousan d p eople? Might Co ke h ave fo un d a different way to get th rough a di fficult time? Even if th e corporate decision mak ers d ecid ed that Coke employed to o many people, does the fa ct that th ey hired th em in th e first pl ace give Co ke's execu tives a mo ral obliga tio n to mak e layoffs th e last p ossibl e o pt io n? to m ak e the m as p ainless as po ssibl e? If you were th e owner of a small busin ess th at was h avin g a hard tim e and you worked every da y with loyal , longtime e m p loyees, how h ard would you t ry to find othe r alte rnatives before walking in to th ei r offices, looking into th ei r eyes, an d telling th em th ey were fired? Of course the Co ke board and CEO Douglas Daft didn't h ave to work with most (if any) of the fired e m ployees every day. T hey didn't p ersonally h ave to go and look them in th e eye an d te ll th em th ey were being fir ed. They had underlings to foll ow orders, to do LIBER ALI S M A N D THE F UND A MENT AL FL A W

2 1

th eir dirty work for th em. They had protection against th e expe rie nce of actually havin g to fire people . And they h ad th e protection of corporate law and th e demands and expe ctation s of capital markets to prevent th em fro m having to own up to th e co nseq ue nces of their decisio n ; after all, business is business, and busi ness is about m aximizin g profi ts. Sorry.

UNOCAL AND CORPORATE SLAVERY

Sometime around 1991, Unocal established the Yada na gas p ip el in e proj ect as a joint ven ture with the r uling Burmese junta (through a corp ora tion con tro lle d by th e junta) to e ngage in offshore drilling for natural gas and to tr ansp ort tha t gas to T haila n d through p ip elines running through th e Ten asserim region of Burma. It was well known at the time of this agr eement that the junta, whic h went by the ironic n am e of the State Law and Order Restorati on Co unc il (SLORC) , h ad engage d in ex te ns ive human rights abuses and violat io n s of in tern ation al law. No nethe less , SLORC allege dly ac te d as age n t for th e project , with financial supp ort from U nocal, "to clear forest, level gro un d , and provide lab or, materials an d security fo r the Yadana p ip eline proj ect."! In an opinion d en yin g Un ocal' s motion to dismiss th e co m plain t of farmers from the re gion , th e federal district court de scribed allegations n ot on ly ofrap e, in timidation, and forced r elocation , but SLO RC's use of slave labor for th e proj ect . As th e case ap p roac he d its resolution in federal district court in Ca lifornia, whe re Unocal is h ead q uartered , Nation al Public Radio 's progr am A ll Th ings Considered did a story on it." I will de liberately leave out th e potentia lly infla mmator y d et ails an d h or rifying sto ries of th e way th e slave la bor alleged ly came about and was conducted. I don't n eed those details for my purposes, because NPR reporter Daniel Zwerdlin g's in ter view with Unocal's vice chair man ,Jon Iml e , is e no ug h to m ake th e p oint: "T h e case was di sm issed o n jurisdi ction al gro unds in Augu st now on ap pea l.

22

PHIL OS OPH Y O F T HE A M E R I CA N C ORP OR A TI ON

20 00

and is

Mr. John Im le (Vice Ch air m an, U n ocal) : I don't beli eve those charges. I wouldn't call them lies . I - maybe co nfusion about what has been going on wh ere. I m ean , I'v e h eard stories th at - I just don 't beli eve those stories. Zwerdling: Iml e says whe n h e and his fellow executives decided to get into th e pipelin e project with Myanmar's govern me n t, their first goal was to make a profit. After all, h e says, they're a business. Mr. Imle: But right behind th at an d as a co n d itio n -always a condition of that investment, we will only invest in p laces wh ere we ca n improve th e lives of people. Zwe rdling: And Iml e says th e ga s pipelin e will improve lives across th e region . The project is pumping gas across Myanmar to a pow er p lant in sid e Thailand, an d th at 'll h elp bring ele ctricit y to people who still coo k with firewood and ligh t up their h om es with kerosene lan ter ns. Still, Iml e says, he and his co lleague s realized th at th ey ca u sed con tro versy wh en th ey formed a partnership with the mi litary r ul ers in Myanmar. They know th at everybody from U .S. presidents to human rights groups to United Nations officia ls, all these people have repeatedly denou nced Myanmar's dic tators as some of the most brutal o n th e plan et . And Im le says h e realized th at Myanmar 's government is infamous for using what some people call forced labo r or conscripted labo r . . . . Mr. Imle : I accept th at co nsc rip te d labo r is us ed broad ly in civil projects in th at country in Myan mar. Zwerdling: But Im le says h e was d et ermin ed to m ak e th eir pipelin e proje ct a model of the ethical way to do business. Maybe they 'd even nudge the dictators toward d emocracy. [Zwerdlin g th en d escribes th e structure of th e proj ect , including th e Myanmar army's intended ro le of providing security.] He [Im le] says com p any execu tives wouldn't to lerate it if th e mi litary force d villagers to work on th e project against th eir will. Mr. Iml e: We worked ver y h ard . . . to determine that we wou ld be able to con d uc t our business in an absolute ly eth ica l, honest, and moral manner.

L I BE R A L I S M A N D T HE F U N D A ME NT A L F L A W

23

Zwerdling: An d d o you feel , deep down in sid e , co nvince d th at the military did not abuse workers in an y way connected to the pipeline? Mr. Imle : I'm not in a p osition to kn ow that much abo u t th e internal con duct of th e mili tary on th e ground. Bu t I guess wh at I'm t rying to say is th ere was n o co n trac tua l rel ati onship with th e military. We were not in any way in co n trol. ... But the u se of conscripted labor in connec tion wit h th is proj ect was a n on-sta rt e r fro m th e beginning, an d eve ryo ne kn ew th at. Now what th e military mayor may not have done tha t n obody kn ows abo u t, I ca n' t ad d res s. But wh at ever h appened in the area of thi s pipeline, I d on't think th ose th ings h appened in th e area of this pipeline, I don't thin k th ese things h appened , in my h eart of h earts, I reall y don't ." Now I didn't hi ghlight anyth ing in th e conversation ,just to avoid any advance signaling of my own view. But I don 't think you can help notice Imle 's logic: Firs t, U n oc al' s goal was profi t; seco n d, d espite U nocal's in sistence o n eth ics, U nocal executives kn ew that th e Myanmar regim e was brutally repressive an d us ed slave lab or, an d th ey fr ankly h ad n o id ea wh at was going on in Myanmar ; th ird, U noca l h ad " no co n tractual re latio ns h ip " with th e junta , apparently implyin g that th e absen ce of a direct co n tract to provide slave labor reli eved Unocal of the responsibility for in vestigating an d asserting co ntrol. Le ave aside th e scary re sonan ces of early American political reacti on s to reports of th e atrocities Ge r mans were co m m itt ing ag ainstJ ews during World War II , as well as th e ec hoes of Presid ent Bill Clinton' s ext ra ordinary technical responses in the far more t rivial Lewin sky affair.J ust look at th e bare o utline of Iml e 's d efen se, taking what he said as entirely accurate : U n ocal wanted to make a profit, its executives kn ew all abo u t th e Myanmar gove r n men t, they evide n tly didn' t ask or in vestigat e at hi gh co rpora te levels wh at th e military was doing, th ey had no co n tract with the mili tary to provide slave lab or, they the re fo re h ad n o legal co ntrol over th e militar y's b eh avior in U nocal's name and for its b en efit, and Imle's d eep est in tui tions told him the story co uld n 't be true. Would we accep t this 24

PHIL OS OPH Y O F THE A M E R ICA N CO R PO RA T IO N

from a p olitician? from our frien ds or n eighbors? Would we acce pt it as an ex cuse from our ch ildre n? Wh y should we accep t it fro m Unocal? Was U n ocal's decision a legitimat e cor po ra te d ecision ? It sure is cheaper to for ce peopl e to re locate th an to pay for their lan d or to redirect th e pipeline in o rde r to permit them to co n tin ue their lives. It 's obvio us ly cheaper to us e slave labor th an to pay someone to work for you . And if U n ocal's executives were acting thr ou gh th ese age n ts in whose cou n try suc h activities we re legal (or at least let 's assu me th at th ey were, to make U noc al' s case easier) , why shouldn' t th ey do what is n ecessar y to m aximize stoc k prices? Posing th e question this way an d o n th ese facts pretty much answers it ." An d yet th e answer is n ot so clear as a matter of American corp orat e law.

EXPLOSIONS AT GENERAL MOTORS

On July 9, 1999 , a Ca lifo rn ia jury awarde d th e highest liability award in American hi story, $4 .8 billion, including $ 10 7 million of co m pensato ry dam ages an d th e remaining $4 .7 billi on in punitive damages, to Patricia Anderson, who, alo ng with h er ch ild re n an d a family fri end, were seriously burned wh en the fu el tan k of th eir 197 9 Chevrole t Malibu exp lode d in a rear-en d co llisio n . Th e pl ain tiffs offered to reduce the punitive damages by $4 billion if GM recall ed th e cars an d all those built on th e same fr am e, but th e company refuse d . Althoug h the punitive dam ages award was lat e r reduced to $ 1.0 9 billion, significant eviden ce was admitted regardin g a m emorandum di scovered by lawyers in th e ea rly 1980s (but for vari ous reason s n ever produced at trial) . Written by GM engine er Edw ard Ivey, th e m emo analyzed th e cost of making safer fu el tanks ($2 .40 p er car) agains t th e possibl e losses fro m d am ages GM would have to pay in the event of accidents and re sulting fire s. Obviously, GM d eclin ed to recall th e cars o r red esign th e fue l ta n ks. In reducin g th e punitive dam ages award , Judge Ernest Williams observed that th e p lacement of the fuel tan k was intended " to m aximize profits, to th e di sregard of public safe ty,"? Was Gen eral Mo tors' d ecision a reasonable co rp orate d ecision ? If the purpose of th e corporation is to maximize stock price, then a LIBER ALI SM A N D THE F U N D A M E N T A L F L A W

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cost-be nefit an alysis is p erfectly appropriate, and th e answ er is yes. Was the decision a human decision ? No . One way of getting at the answ er is to ask what Ivey would hav e done with his report had h e known his wife, ch ildre n , or oth er loved ones would b e driving Chevy Malibus. It's not th at we don't m ake cost-be nefit decisions all th e tim e. We do . Our resources are scarce . We have little ch oice but to make costbe nefit decisions . But there 's a difference between a human makin g those decisions and th e sam e d ecisions m ad e by a cor po ra tio n. T he difference between a natural person and a corporation is that we natural p ersons exper ien ce th e costs of our decisions as well as p ay th em. If we behave in a way th at h arms other people, we typ ically not only are aware of it but fee l th e pain of it as well. If, for exam p le , a co lleague from ano the r law school sends m e h er paper and asks me to com m en t on it, and I de cide that it 's more beneficial for me to ge t my own writi ng done, I may well decline to read it but I'll feel bad abo u t it an d will alm ost ce r tain ly feel th e n eed to apologize. Corp ora tion s m ay sometimes pay th e costs, but th ey don't expe rien ce them in the same way. GM and its exe cutives had no expe rie nce of explaining to its customers that their cars might explode an d, shor t of being h au led into co urt, n o ex pe rie nce of th e n eed to apologize. In other words, th ey didn' t fee l responsible because th ey didn't ex pe r ien ce th e co nse q ue nces of th eir decision to keep profits up at th e expense of human Iife .s H ow would GM 's execu tives react if th ey had to confront th e Andersons or any of their other cu stome rs face to face? We don 't know; th ey mi ght m ake th e sam e de cision . But they would make it with a more h u man understanding of its consequences, with a fu ll appreciation of its costs. How does th eir ability to avoid this co nfro n ta tion, to ex te rnalize costs and not feel responsible , affect our evaluation of the nature and purpose of th e Am erican corporation?

MISAPPROPRIATION-THAT 15 , THEFT-AT MARRIOTT

In De cember 1991 Marriott Corporation issued co nvertib le preferred stock. T he company also issued $400 mi llion of d ebt in ea rly 2(j PHILOSOPH Y O F TH E A M E R I CA N C ORPOR A TI ON

1992 . On O ctober 5 , 1992 , Marriott an no unced a restructuring of its business in whic h its highly profitable and fast-growi ng m anagem ent and services busin esses (producing more than h alf of Marriott's operating profit) were to be pla ced in a n ew subsidiary an d spun off to Marriott 's co mmon stockholders. Its far less profitable rea l esta te an d co ncessio n busin esses were to be left in Marriott, along with all of the debt and the preferred sto ck . T he new business was expected to be h ighly profitable; the remaining business (with whi ch th e d ebthold ers an d preferred sto ckhold ers were stu ck) would be h eavily leveraged and was expected to produce rath er m in imal cash flow aft er debt service. Why d id Marriott do th is? Well, th e n ew com pa ny, with all th e good assets an d no debt, wou ld be significantly mor e valuable to stockholders than a Mar riott burdened by d ebt. In oth er words, sto ck price would be maximized. Not so for th e debtholders. The market value of th is re la tively n ewly issued d eb t p lummeted, and, although the preferred stock price in cr eas ed , th e corp ora tio n into whi ch th e preferred sto ckhold ers could convert their stock was one that was largely de nuded of the assets th e preferred sto ckhold ers thought th ey were getting.!! Marriott put the costs of maximizing its sto ck price onto the debtholders and preferred stockholders. At the stockholders ' meeting called to approve th e deal , one se ns itive sh ar eholder said to Ch airman]. Willard Marriott, "Yo ur father would be ashamed of you ." Why wasn't]. Willard Marriott ashamed? Well, for on e th ing, h e didn 't (or so h e mi ght h ave thought) hav e to con fro n t th e people who were suffering from his decision . For another, h e undoubtedly saw his job as being to maximize co m m o n sto ck prices - afte r all, that's the job we to ld h im to do." While taki ng money from bondh old ers hardl y rises to th e level of to lerating slave lab o r or knowin gly installing faulty fu el tanks, it is in lin e with this beh avior in th at the two things that permit it to occur are the sa me : the mandate to maximiz e stock price, and th e separation of th e d ecision maker from th e con seq ue nces of th e decision.

hit also didn 't hurt th a t his fami ly owned a large block of co m mo n stock. L I BE R AL I S M A N D T HE F U N D A ME NT A L F L A W

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DEATH AND TAXES

Death an d taxes, as th e old saying go es, ar e th e o n ly things abo ut whi ch one can be certain . But death is no t inevitable for the artificial corporate p erson. Su re, it can di e after a fash io n - in bankruptcy co u rt or after b eing swallowed up in a m erger- but th ese are h ardly cer tain, an d even whe n corp oratio ns ex pe rie nce th eir own form of d eath th ere is always so m e sort of afterl ife fo r th e asse ts an d often for the busin ess as a going co ncer n . Bu t wh at ab out taxes? Corpora tio ns su re ly are su bject to taxes just like the rest of us, in th eir case at a flat ra te of 35 percent on all of th eir reported p ro fits. But there 's the rub: reported profits. Recent evid en ce sugge sts th at th e p ressures of making p rofi ts for sto ckholde rs h ave mad e even good co rporation s turn bad as th ey find ways to avoid rep orting profits to th e Internal Revenue Serv ice, in the process diminishing th eir tax burden s an d in creasin g profits to sto ckhold ers. On Februar y 2 0 , 2 0 0 0 , th e N ew York T imes r ep orted h ow wid ely co rporatio ns have begun to engage in th ese sche mes. For exam p le, Allie dSignal got slam me d by th e tax co urt afte r it sold an in vestm ent for $400 milli on and , in a sche me cooke d up by its inv estm ent banker, Me r rill Lyn ch , m oved th e p ro fits to a Dutch p artne rshi p. It th us n eatly avoide d a $ 140 million tax liability. Wh en it r eclaimed th e profits fro m th e p artnership , th e tax liability had di sappeared , an d AlliedS ignal reported a $4 m illio n ga in on th e par tn ersh ip investment itself! T h is is n ot an isolated case . According to th e Tim es th e situatio n h as b ecome so bad th at co rp o rate tax lawyers (di sch ar gin g th eir eth ica l obliga tions) h ave b een ra tting to the IRS on th eir own clie n ts. But IRS resources are limited so th at fewer th an 1 0 p ercent of corp or ate dodges ar e b eing pi cked up. The result is th a t whil e individual in com e tax revenue in cr eased 6 .2 p ercen t in 1999, co rp orate tax reve n u e fell by 2.5 pe rcent.'? Alli edSignal is o n ly one example . As th e Times reports (and the numbers suggest), m ore th an a few hi ghly resp ected corp o ra tio n s are en gaging in these an d other tax evasio n practices. Some of these may be legal, but many oth ers push the enve lo pe of legalit y an d fre que n tly come ou t on th e other side . Wh y would th ey d o thi s? 28

PHIL O S OPH Y O F THE A M E R I CA N CO R PO R A T IO N

The Timesgave an answer : pressure to in cr ease stoc kholder profits. One of th e major corporate expenses, taxes, is being pushed onto th e rest of us through co rp orate bilking of th e federal treasury. It leaves less money th an we are en title d to for our soc ial in frastructures. And it limits our ability to redistribute wealth th e way our tax system was design ed to d o. Wh y b eh ave in th ese ways? Wh y sh o uld co rp o ratio ns b e particu larl y su scep tib le to the kinds of b ehavior th at mos t individuals - even if th e th ought crossed th eir minds -would reject as un ethical to say th e least? What is it about the way we structure the corp oration an d th e n ature an d purpose we e nvision for it th at gives th e corporatio n a differen t mo ral co nstr uc t, or at least mak es a di fferen t moral outlook easier for them to adopt and easier for us to swallow?

THE FOUNDATIONS OF CORPORATE MISBEHAVIOR

In order to understand the problems underlying th e structure of Ame rica n co rpora te law it is essen tial to understand th e foundations of Am eri can law upon whi ch it is built. This in turn requires us to look at the political, social, and eth ical the ories underlying our laws, th e co nce p ts of en ligh te n me n t lib erali sm th at are impli cit in our Con stitu tion , and th e social and political philosophy that fr am es our public an d privat e rel ati onships with on e an other. It is th ese co nce p ts that fo rm what we mi ght see as th e tect onic pl at es undergirding our entire social structure . Like th e tecto nic p lates up on whi ch Ea rth's surface sits, th ese th eoreti cal pl at es so me times sh ift imperceptibly to shade our prevailing moods, giving us only th e faintest sh u dde r as they settle in to our co lle ctive consciousn ess. Sometimes, though , th ey clash violen tly, as th ey do in ea r th q ua kes, ch anging for a tim e or forever our social outlook. When we have looked at th ese d eep est levels of our co m m o n understanding, we will b egin to see th at th e fundam ental flaw of o ur corpo rate structure is the fundamental flaw ofliberalism itse lf, a flaw whi ch is hard to see in th e purest theore tical forms of lib eral phil osophy but whi ch b ecomes pronounced and even p athological when the sh ifting p lat es cr eat e distortions in those forms. L I B E RA L I S M A N D T H E F U N DA M E N T A L F L A W

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Th e m et aphor is useful. But it 's not p erfect. The probl em is th at the Earth 's sh ifting surface is a natural phenomenon. We can no more con tr ol it than we can co n tro l th e ro tation of th e plan ets aro u n d th e su n. Our philosophi cal pl at es are di fferent- th ey are entirely of our own making. They sometimes may not seem like it b ecau se th ey become so em be d de d in o u r soc ial n orms an d co llective subconsciousness th at th ey appear to b e in evitabl e . But th ey're n o t. Wh eth er in tentionally or no t, we ourselves hav e cr ea ted the m. Th at m ean s th at we o urselves also h ave th e pow er to change th em. Me taphor, no matter how useful , should not blind us to this reality. As we begin to exam ine liberalism an d its modern manifestations, we can id entify two th emes th at are illu strated by th e stories with whi ch I began . The first is an ethic of radical individualism whi ch , in th e limited m oral universe of th e co rpora tio n , results in an attitude of grab and get. Th e other is th e sup pr essio n of an y impulse to car e about the welfare of oth ers.

LIBERALISM'S BASIC PREMISE

Liberal philosophy itself, whi ch mi ght be con side re d to b e co mprised of the two main plates of liberty and equality, is familiar to m ost of u s an d re latively easy to id enti fy despite th e ridges an d valle ys, the different emphases given to different aspects of it by different thinkers. These vari ati ons on lib eralism are important beca use wrongly understood or tak en as caricatures, th ey become its pathologies. Nonetheless, th e core is common to most mainstream thinkers o n th e su bject. Th e m ain precept of lib eral philosophy b egin s with an id ea, made familiar to us by Thomas Hobbes 's description of th e state of n ature , an d th at is th e rough eq uality of all p ersons. This rough equality-whether resulting in Hobbes's war of all against all or giving rise to more p eaceful deliberations among eq ua ls as im agin ed by th e modern philosoph er J ohn Rawls-leads to th e co n clusion that all persons are equally autonomous, free and self-directed in pursuing th eir own e n ds. They are at th e same time eq ua lly vulnerable to in terferen ce by all oth ers in the pursuit of the ir own e n ds . Hobbes 's solutio n to th e in evitable war of all aga in st all is 30

PHIL OS OPH Y O F THE A M E R I CA N C ORP OR ATI ON

some govern me n tal authority that maintains eac h person 's ability to set and attempt to achieve goals while at the same time res tricting others from interfering with those pursuits. Rawls argues in favor of fundam ental principl es th at are to serve as referen ce points for our laws and economic distribution . In both cases, and indeed in liberal th eory ge ne ra lly, th ere is some hi gh er auth o rity to whi ch we ap peal in order to ensure the justice necessary to allow us to be free . What makes the theories Iiberal- what differentiates them from older id eas th at required us to su bm it to au th o rity - is th e fact that in each case it is the individual right of each person to choose to surrender some au ton o my to th e gover n men t, to ch oose th e principl es under whi ch th ey are to be go verned. And it is equally importan t in liberal th eor y to note that all of this is to a purpose: to ensure th at eac h of us has as much fr eedom as possibl e to pursu e goals of our own ch oosing. Finally, this freedom is ne cessarily limited by th e freedom of others to pursue their goals. These are the ideas embodied in our basic constitu tional structure based on eq ual rights an d equal liberties; in our government designed to protect our individual boundari es so th at our enj oyme n t of our liberties do es not unduly restrict the liberties of oth ers. Liberty is bounded by equality, and so we have equal liberty (or th at, at least, is th e goal). A sim p le exam p le will illustr at e thi s fun cti on of authority in th e service of freedom . You and I might wan t to drive our cars to the store at th e sam e tim e." Each of us is equally vulnerable to interference by th e other; that is, yo u might driv e you r car in a mann er that creates danger for me so that you keep me off th e stree t or divert my co urse . Lib erty would suggest th at we are fr ee to driv e however and wherever we want. But if we d o so, our independent goals might well b e frus trated. I might prefer to driv e on the righ t sid e of th e road an d yo u, co m ing from th e other direction , mi ght like to drive on the left. A head-on collision is all but inevitable. Or you might be in a hurry and attempt to beat m e th ro ugh an inter' Dr iving to th e store is h ardly th e kind of valu e toward whi ch lib eral philoso phy ultimatel y aims . But it is so me th ing we choose to d o, and th e exam ple works well en o ugh as an illu strati on , so I ask you to pardo n what might a p pea r to be a tri vializati on of a very importan t idea. LIBER ALISM A N D THE FUND AMENT AL FL A W

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section at whi ch we both must make turns but from opposite sid es. In each case, neither of us will realize our goals; we are more likely to wind up in th e hospital than make it to th e store. The simple solution is traffi c law, whi ch mandates that we drive on opposite sides of the road and th at we follow certain rules at intersections, typi cally regulated by traffic lights an d stop signs. We each h ave sacrifi ced a portion of our liberty to drive as we would ch oose. But th e benefit of that sacrifice is that we are equally free to drive to th e store - free of th e fear th at th e oth er will ch oo se to do so in a way that harms us. In a paradoxical but very real sense, this modest sacrifi ce ofliberty gives eac h of us gr eater lib erty. But lib eralism is abo ut mo re than m ere rest raint; it 's abo ut m o re th an what we can't do . For while Hobbes may have emphasized th e n eed for th ese restrictions primarily in terms of protecting us from each other, others have emphasized the affirmative side of liberalism, the right to self-determination; th at is, the right to choose our life co u rses, free from others telling us wh at to do. In this asp ect of liberalism, each of us is a naturally equal person, with the ability to d et ermin e for ourselves how we wish to live our lives, th e goals we want to pursue, an d the people with whom we want to pursue them . The historical background against which th is concept of liberalism d evel oped - th e world to whi ch it was reacting - is th e rel ative ri gidity of premodern society. It is a background exemplified by the strict limi tations of Athenian d emocracy, th e English feudal syste m , and, in m odern times, Am eri can slavery an d th e th eo cra cy th at is Iran. Each of th ese (and many other) social structures offers a unique ration ale for th e way it 's d esign ed, a different justification for the type of authority it legitimates, a different source of difference, but the central common fac t of each is that every member of th e so ciet y h as a pl ace th at is more or less d et ermin ed by th e position of her parents at her birth, whi ch itself is determined by the position of th eir p arents, and so regressing back into tim e . Th e lib eral solution - th e liberating solution -was to arg ue th at among the natural rights of humans is the right to self-determination , an id ea brought to its most fam ous articu latio n in th e moral philosophy of Immanuel Kant but earlier de scribed in both so cial an d economic terms by John Locke, David Hume , and Adam 32

PHILOSOPH Y OF THE A M E R I CA N C ORP OR ATION

Sm ith , and later in th e writings o n liber ty ofJohn Stuart Mill. The basic idea is that you, sim p ly because you are a person like every oth er p erson, are a self-governing being, and that gives you th e right to ch oose a life cou rse an d pursue it, regardless of yo u r p arents' occupatio ns or social stations. Indeed (and this is Kan t) one can n o t realize fu ll p ersonhood unless on e is fr ee to ma ke th ese ch oices. The flip side of this way of thi n king is the restraint on lib er ty that I m ention ed ea rlie r; nobody can tell you how to live your life. No body can im p ose th eir values or goals or desires upo n yo u. So we limi t th e n ec essary authority of soc ie ty. We see th e limi ts in our rights of free speech , assembly, and religion, we see th em p rotect ed in the First Ame n dme nt to our Co ns titutio n . And we also see in Am eri can law a stro ng, almost rabid fear of imposing affir mative ob liga tions on our citizen s. We have no legal obligation to h elp oth ers in distress, eve n if we can do it at n o risk or cost to ourselves. All we really n eed to do is p ay our tax es an d serve in th e mi litary if we 're d rafted (though even th e draft allows room fo r conscie ntio us obj ection) . So we also see our privacy rights protected (though by how much is th e subject of vigoro us d ebate) in th e Constitution's T h ir d , Fo urth , and Fifth Amendme n ts, and of course the Fourteenth Am endment p assed fo llowin g th e Civil War. T he right of self-deter minatio n transfo r ms in to th e idea of individ ua lism, th e id ea of th e se lf-made man , th e h ero , th e fr ee sp irit. I t is th e cu lt of Warren Bu ffett, th e ico n of Mich ael J o rdan , th e damnthe -world free do m of Mad o n n a. It is a fea ture of America n soc ia l tho ught an d mythology from th e log ca bin presid ency of Andrew Jackson through th e tales of H oratio Alge r and the success sto ries of so many sports h ero es an d Interne t mill ionaires. It is the idea that any Ame rica n has th e free do m to ac h ieve any level of wealth or politica l o r soc ia l or p rofessional success just by vir tu e of being a p erson; it is th e id ea that every Am erican is fr ee to say what sh e thinks, no matter how unpopular ; it is th e id ea that every Ame rica n is free to practice any religion or n o re ligion at all; it is the idea that every Ame rica n is fr ee to form intimat e relati onships with wh omever h e ch oose s; and it is th e idea that no Am eri can can be fo rced to fo llow a p ath of life chose n fo r h im by another or by the state . L I BE R AL I S M A N D THE F U ND A ME NT A L F L A W

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Equality an d freedom - equal freedom. T hese form th e central and adjacent tectonic pl a tes of Ame rican lib eral thought. Wh ile they so metimes break an d so metimes clas h, wh ile sometimes one is for ced to give ground to th e other, these ideals remain largely intact. T he clas h of these p lates can p ro duce malfo rmations, but th ey are malformations that, like mountain ranges, at least rise from the basic groundwork. T here are times in our h istory whe n lib erty has been e m ph asized at the expense of eq u ality. Examples are the Gilde d Age of th e late nin eteenth ce n tury an d th e Reagan era that began in th e 19 80s an d co ntin ues to the p resent. At other times equality h as b een dominant, as illu strated by th e civil rights struggles of the Recon stru ction era and th e ea rly 1960s an d the economic programs of th e New Deal. T h e desire fo r eq u ality can be seen in contemporary struggles for eq ual religious treatment and gay rights and in d eb ates over u niversal h ealth care and welfare reform. In ever y one of th ese and many other situations, both strains have been pr esent but on ly one h as been obvious. Usually th ey exist in an in t ricate co unterpoint, seek ing reso lution thro ug h politics and adjudication but n eve r quite getting there, like a fugue wit ho ut end or a co ntine n t n ever co m p lete d. T h is co n tinuous flu x is most likely to be th e perpetual fate of our democracy - it may in fact be th e saving grace of our d emocr acy. Desp ite th is co nstant search for ba lance, lib er ty h as for so me time bee n th e dominant strain in Am erican socia l and political tho ug ht. Of co urse liberty and eq ua lity are n ot entire ly unrel ated ; as I'v e noted , fr equently th e claim for libe rt y is a claim fo r eq ual liberty. Bu t Americans h ave become in cr easingly jealous of their lib erties and co r res pon dingly susp icio us of eq uality. Equality re quires interference with libe rt y: p eople are born eq ual in nature and in the eyes of God, but h ar dl y so in economic and soc ia l circu msta nces. To improve the eq uality of th e disad van taged req u ires th e state to interfere with th e lib e rt y of those more fortunate. Even so, we ca n for the mo st p ar t see equality as a na tural fact, with eq uality of con ditio n as an aspiration - in this way of thi nking, some m easure of equality always re mains. 34

PHI LOSO PHY O F T HE AM E RIC AN CO R PO RA TION

But lib erty is terribly fragile. Lib erty is at risk wh en ever p eople put th emselve s under a gover n m en t and laws, wh enever th ey sacrifice some m easure of their freed om to oth ers, no m atter h ow n ecessary th at sac rifice may be to preserve th e o pp o rt u n ity for all to enjoy mo st freedoms . Americans have become more se nsitive to thi s fragility of lib erty in recent decades, a fact as obvio us in th e soc ial as in th e ec o nom ic r ealm. Am eri can s of in cr easin gly diverse backgr ounds an d views are fe arful of losing their righ ts to pursu e th ei r e n ds to th e pressures of mo re dominant gro u ps. The strong emphasis on liberty is evident in co n te m p orary social life in the assertio ns by vario us r eligious gro ups of th eir rights, of h omo sexu als to m ar r y, th e rights of free speech an d p rivacy o n th e Internet, and th e righ t to die . It is manifest in what th e legal scholar Mar y An n Glendon calls rights talk , th e modern tenden cy of Ame ricans to assert every d esir e in terms of th eir righ ts. It is also refl ect ed in th e str ong assertions of economic lib erty over th e past severa l decades, whi ch fin d th eir mo st p opular exp re ssio ns in th e booming sto ck markets populated with sp ec u lators and day traders wh o have n o co nc ern for th e co m pa n ies in whi ch th ey invest but are intereste d on ly in th e m aximization of th eir wealth . It is refl ect ed in th e political r esistance to n ew an d exp an ding socia l program s, in th e defeat of affirmative actio n in public unive rsiti es in Texas an d Ca lifornia, and of co urse in the perennial opposition of so many Americans to in cr eases in th eir taxes, especially to su p p or t soc ial programs th at p romote eq uality. The problem is more th an simply political. It is also cu ltural, altho ug h I will h ave less to say abo ut thi s asp ect of th e probl em. Max Web er famously (if co n troversially) described th e effec t upon moder n capitalist economic development of an in gr ain ed Ca lvin ist co nce pt of th e ach ieve m en t of worldly suc cess as evide n ce of pred estination for salvation . More important, p erhaps, is what Weber saw as th e sp irit of modern ca pitalism, th e very ration ality of modern ca pitali sm , an d th at is th e id ea of acq uir ing wealth for its own sake, th e idea of acquisition itself as a valu e, as an end and n ot as a means. It is an e th ic th at h as co m e to fo rm the co re of Am erica n culture as waves of immigran t gr oups , so me of divergent cultu ral norms an d

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some com ing from cu ltu re s that in some way h ad norms that operated like Calvinist norms, assimilated and absorbed into American so ciety. Now look wh at happens wh en this eth ic of acquisition com b ine s with a strong disposition to regard liberty as th e dominant political valu e. You h ave cre ate d a so ciet y in whi ch p eople beli eve it is th eir right to get what they can and to keep what they get. You have cre ated a world in which self domina tes society, in which entitlem ent trumps responsibility. You h ave create d wh at I h ave elsewhere called the selfishness surplus, that is, the difference be tween what th e winn ers have today and what th ey would h ave if we cared more about equ ita ble distribution an d econom ic justice for others th an we do , if we cared about equality th e way we care about liberty; in short, if we care d abo ut othe rs besid es ourselves. The se lfish ne ss surplus can be cap tured in a simple formula, SS = AS - CS, where SS equals selfishness surplus, AS equals au to n o my socie ty (or th e so ciet y of rampant individualism) , an d CS eq ua ls caring societ y, based on principles of economic and social justice. 11 Th e selfishness surplus is easy to illustrat e. Im agin e two bo ys playin g ball in th e schoolyard . One is tall, th e other is short. Th e taller bo y ge ts the ball an d decides he is tired of playing. The shorter boy wants to pl ay with th e ball. The tall er boy- an d most of you h ave seen some version of this - holds the ball as hi gh as he can and says to th e shorter one something like, "Yo u wan t it, ta ke it." The sh o r te r boy jumps an d jumps, but h e 'll n eve r reach th e b all an d will eventu ally give up . The difference between th e height of the ball and th e hi gh est th at th e sh orte r bo y can jump is th e selfish ne ss surplus. For those of yo u who prefer reality to metaphor, it is easy en o ug h to put th e selfishness surplus in concrete economic terms. In 1998 th e average household in come in Scarsdale , New York, was $280,049 , with a median of $159,447 and a per capita average income of $89,483 . The co rresp o n d ing numbers in Co m p to n, California, were $41 >4 71, $30, 546, and $9 ,970. The selfishness surplus is something short of the differences between th ese figures , something th at would refl ect a fairer ec onom ic distribution in whi ch we re cognized that it is only our so cial structure that permits gr eat

3()

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wealth (and great poverty) an d th at th e on e sho uld be adj uste d to account for the other. Some of yo u will o bject. We deserve wh at we've ea rne d . We p ay o ur taxes an d th at sh o u ld b e enoug h. I'v e answere d th e first arg ument elsewhere . De servedness has very little to do with an ything. As to your taxes: Well , co up le d with th e fact th at th e U n ite d Sta tes h as th e lowest tax rates of an y industrializ ed Western nati on , pa yin g yo ur taxes is a fairly minimal obligation if that's all yo u've go t to do . An d it p retty much is. How do the stories with whi ch I be gan this ch ap ter relate to th e selfish ness sur plus? It' s pretty easy to see in th e Marriott case. The law (or ra ther Marri ott's manipulati on of th e law) gave th e corporation a permanent advantage over its creditors and allowed it to hold th e ball so hi gh th at th e preferred stoc kholders an d debtholders had n o ch ance to play-in fact it was th eir b all tha t Marriott 's stockholders were ta king. It 's what Co ke was doing wh en it laid off work ers (who h ave almost n o legal righ ts to th eir jobs) in orde r to save money to raise its stock price . Cer tain ly AlliedSignal , while it go t caug h t, was sim ply st re tc h ing the selfishness surplus to see h ow far it would go . And U nocal's Imle, in tr yin g to distan ce th e co mpany from its responsibility for shutting its eyes to the u se of slave lab or, resorte d to th e law of co n trac ts to protect himsel f. We didn't have a co ntract with SLORC, he said , and so we couldn't co n tro l th em. We had no legal right an d thus n o legal obligati on . But of co urse thi s ign o res th e fact th at, as betwee n U nocal an d SLO RC, U n ocal had all the money-it had something SLORC wanted . It ign ores th e fac t th at Unocal co u ld h old th e ball as hi gh as it wanted an d that SLORC kn ew it. It ign ores th e fact that, lik e th e tall er b oy in our metaphor, SLORC could ge t what it wanted only if Un ocal ch ose to give it to th em , an d U nocal would ch oose to do so only if SLORC did what it wanted . The U nocal case is ex treme . But it 's only an ex am p le of th e way th e se lfish ness surplus works. There 's another side to America n social an d political culture to American ch aracter. It is this side - or rather the lack of it- that is illu strat ed by th e sto ries of Gen eral Motors' Malibu an d U nocal's slave labor. Th at is th e caring impulse, co m mon to all p eople . Bu t in

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con te m porary Am erica th at ca ring impulse is subme rge d by th e American obsession with liberty.

OUR CARING IMPULSETHE FLIP SIDE OF PATHOLOGICAL L IBERALISM

Th ere is an other asp ect to th e Am eri can ch aracte r that is e m b odied in our po litic al and social thought as well, an aspect that go es beyond th e self-ce n te re d ness th at is th e pathological m anifestati on of individual liberty. It is th e impulse th at leads us to care about th e equality side of th e eq uation, to provide th e social programs th at we d o , to give mon ey to charities , to volu n teer o ur time, an d in co u n tless other ways to join with other human beings to better our communities an d h elp those in n eed. It is especially important to spe n d some time discu ssin g this impulse be cause modern American socie ty has all but buried it, and, as we will see in the n ex t ch apter, this interment exacerbates th e co rp o ra te problem. T he caring impulse undeniably exis ts. The soc ial programs I allude d to e m body it; o ur redistributive system of progr essive taxation, flawed though it is, r efle cts it . Th e caring impulse is th e motivating factor b ehind laws like the Am ericans with Disabilities Act, th e fu n d ing of H ead Start, th e ap peal of th e call to put p eopl e first. It is the reason George W. Bush felt it necessary to modify "co nservatism" with " com p assio n ate." It is th e reason that so m any Am eri ca ns give m oney to charities an d th ei r time to causes like H abitat for Humanity and Big Brothers and the local soup kit chen. This caring impulse ex ists in all people, for it d eriv es from a sim p le truth - th at all of us are human, and as humans each of us ca n see th e humanity in others. It is the m echanism described by Hume , whereby our com mon humanity lead s us to id entify with oth ers who are despite all of our differences - more like us than not, and that causes us to "feel th eir p ain ." And in fe eling th eir pain , it ca uses us to want to h elp. The way th is motivational me chanism works is obvious if yo u take a moment to refl ect up on it. How m an y times h ave you flin ch ed in fron t of your te levisio n wh en another sensationalist n ews story shows th e victim s of disaster -or even wh en watching a vio lent 38

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mov ie? Wh y is it a natural tenden cy to loo k away wh en we see a severely ha n dicapp ed person - even as we wan t to h elp ? Why do we stop to make sure that someone who has fallen on th e street is okay or to h elp a lost ch ild find its parents? T he reason is that we ca n im agi n e ourselves in that same situation, in th e sam e kind of pain. We know, at least at some deep intuitive leve l, that vulnerabilit y is as much a co n d itio n of h um an existence as independe nce, tha t no n e of us is immune to tragedy or pain, that a fin e lin e divid es us in our cur re n t well-being from those whom we see suffering. It is this in tu itio n of vu lne rability, combined with th e recogn itio n of h uman ity in each of us, that leads us to want to h elp others. In a broad er social sen se, it is this understanding of the universality of vulnerability th at leads us to create in stitu tional and legal structures to h elp others, an d th en to support those structures. But there is a problem with our caring impulse, one that applies even more strongly in th e cor po ra te con te xt th an in th e broad er social context. That is the proble m of separation and distance . Hume noted this even as h e d eveloped th e moral psychology that explains why we care, and it also is intuitive. We tend to identify most readily with th o se who are close to us. Notice tha t in the paragraph above th e ex am p les I gave envisio n face-to-face (or at least virtual face-to-face) encoun te rs with ot her people. It is in these circumstances that we most easily id en tify with oth ers - in short, th at we most easily see th em as p eople like ourselves. Most of us care about our fa mi lies m or e th an we care about our n eigh bors and fri ends, and we ca re abo u t our n eighbors an d fri ends more th an we care about those whom we don't know. And we tend to care more about those most like us - in re ligion, in class, in race - th an we do abo u t those who are different. In a large and diverse society like that of America, mo st of us are o n ly dimly awar e of th e ex iste n ce as jleajlle of those outs id e our circles. We may see th eir fa ces in th e workplace or pass th em in th e street. We might learn so mething about so me few of them on te levision or in n ewspapers. But mostly we don't think about th em at all. Because of this separation, our appreciation of their vulnerabilit y, and our correspondent abi lity to care, becomes tenuous. T hat's why L I BE R AL I S M A N D T HE F U N D A ME NT A L F L A W

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it tak es much mo re dram ati c mi sfortun es to m ake us think abo ut th em and care about th e m in th e first place . We se n d m on ey to aid the vic tims of n atural di sasters like flo ods an d ea rthq ua kes n ot beca use we care abou t the m m o re b u t because th e d ram ati zati on of their plight makes it see m more human - an d th ere fo re more re al - to us. We m ourn with the victims of cr ime wh om we see o n tel evisio n, we share th ei r o utrage , b ecau se we can attach th e eve nt to an individual fac e , an individual id entity. Mo st of u s d on't share the same fee lings of p ain an d o utrage for th e victims of inn er city p overty or bad sch ools - we don't see th em every day, th ey are a nameless, face less othe r. An d wh ile anyo ne can experie nce a n atural d isaste r o r fall victim to crime, if you 're a re lative ly well-to-do American you don't expe ct to wind up homeless or impoveri shed in th e Sou th Bron x, an d so th e p articul ar vulne ra bilities an d tragedi es of th e lives of th ose wh o do rarely reach o ur individu al rad ar scree ns, r ar ely p en etrate o ur caring m echanisms. T he point sho u ld be clear. Space an d tim e se parate u s fro m others. They in terfere with our caring me chanisms and allo w us to foc us on ly o n th ose closest at h and - an d that m ean s o urse lves an d o u r loved o nes. That 's why it is so easy fo r U nocal's Imle to disr ega rd - or choose to di sbeli eve - stories of at ro cities co m m itted on beh alf of h is company in Myan m ar. H e doesn 't see the people; h e doesn 't see the pain. It's why h e can fall back on the legal me chani sm of co n tract to di sclaim co n tro l an d r esp onsibility. For an unfortunate effect of o ne of th e most impo rt ant soc ial mechan isms we use to prote ct our libertie s - o ur laws - is to keep us a disinterested di stance fro m othe r peopl e , to limit o ur feelings of resp onsibility fo r th em. So th e co ntract Iml e says U nocal didn't h ave with SLORC m ean s, at least to him , th at U nocal h ad n o co ntro l; it h ad n ei th er a cogn izab le re latio ns h ip with SLO RC n o r any res pons ib ility for SLORC's actions. The effec t of distan ce also ex plains why Ge nera l Motors' execu tives can with seeming callo us ness sell cars th ey kn ow are unsafe. The cars ar e to be driven by nameless, facele ss oth ers wh o , except in the ra re case of litigation , remai n name less an d face less eve n in trage dies of GM's m aking. We would thin k of th ese executives as

40 PHIL O S OPH Y O F THE AM E R ICA N CO R PO RA T IO N

monsters if th ey willin gly let th eir loved on es driv e cars th ey kn ew to be unsafe. Distance is also why it is so relativ ely easy for Co ke 's Daft to fir e six thousand people . H e do esn 't know th em. H e do esn 't h ave to personally ex perie nce the pain of look in g them in the face and firing th em. H e do esn't h ave to h ear th e stories of th e h ardsh ips he 's caused , or see the faces of the ir spouses and ch ild re n when they 're to ld they have to go witho ut, or experience the u prooting and separation from fri ends and fami ly th at may accompany th e search fo r n ew work . T h e problem is, as I'v e de scr ib ed it, not un iq u e to corporations. It is a problem th at com m o n ly arises in a geog raph ically vast an d enor mously diverse mo d ern liberal soc iety. It is what mi ght be calle d th e lib eral perversion - th e d estruction of one tect o n ic plat e by another, cr eating a malformation at the surface: th e towering do mi nance of selfish individ ualism over caring. T hat is why I said that this problem offers on ly a foundation for th e co rp o ra te problem , alt ho ug h even in this for m - and before I describe the corporate problem in more detai l -you can see how it becomes espe cially pronoun ced in the corp o rate con text. But it also he lps to exaggerate the pro bl em in the corporate context, fo r if our caring im p u lse is so easily buri ed by flesh -and-blood humans en me shed in th e individualism of modern life, if it is so eas ily abetted by th e laws of liber ty that cr eate th e selfishness surplus, h ow m uc h more so is it buri ed wh en we interpose an art ificial p erson, that is, a co rpo ratio n ? T hat is the subject of th e n ext chapter.

THE LIBERAL CORPORATIONTHE AMERICAN CORPORATION

T he bottom lin e is that the p recepts of liberalism , as distorted as th ey are in modern Am erican life , sim p ly cannot be ap p lied to th e modern business corp oratio n . Yet we hav e applied th em injust th is way. As a brief preview of the argu me nt to co me (and a bit of a summary of what I'v e said so far) , th e story go es like this: The modern American corporation was born into the lib e ral environ-

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m ent an d has in many ways been at th e forefront of ou r co n te m porary emphasis on liberty. Naturally enough, and given its largely econom ic n ature, it h as also b een at the fo refro n t of th e lib eral p erv ersion: the id ea th at we are res pons ible o nly for ourselves, th at we ar e to get what we can and to keep it from others. The co ns equen ce of thi s for modern corpo ra te behavio r an d, to be fair, for o u r ex pecta tio ns of m odern co rp o ra te behavior as well is irresp onsib ility, by wh ich I m ean the failure of responsibili ty, an d unacco un ta bility. This situatio n ulti m at ely p ermits th e co r po ra tio n to externalize many of th e costs of its profit maximization on gr oup s wh o are affec te d by th e co rpo ra tio n but p owerl ess to change its b eh avior. The corporation has always be en acknowledged to be , in th e words of Ch ief Justice J ohn Marsh all , "an artificial being, in visibl e, intangibl e, and existing only in co n te m p latio n of law." But despite th is ar tificiality, despite th e inhuman legal construct th at it is, the law t reats it as a p erson , en d owed with vir tually all of th e legal an d constitu tional righ ts p osse ssed by real people. To be sure, th is is an od d ap plicatio n of rights provid ed by a co nstitu tio n that was d esig ne d for a n ation th at perceived th ose rights to "life, lib erty, an d the pursui t of h appiness" to h ave b een b estowed by th e Creator upon n atural p ersons. But th e o bvio us fact th at th e cor po ration is not a natural person didn't stop the U .S. Supreme Court from holdin g in 1886, with out any discussion of the m atter at all, that co r po ratio ns we re indeed p ersons as co n tem p late d by th e Fourteenth Amendment. And it is that FourteenthAmendment that has proved to be th e wellspring of so m an y of o ur individual rights, making co rporatio ns p erson s lik e an y other for all practical purposes. Yet th e assu m p tions th at underlie lib eralism an d gro un d our Co ns titu tion an d o ur laws can n ot se ns ibly be ap plied to th e co rporation . The cor porat ion is nothing more than a legal de vice ; in fact, it is n othing more than a pi ece of p ap er in a sta te sec re ta ry of sta te's offic e, wh e re th e cer tifica te of in corpo rati on is filed ." Thus th e dA mo re so ph istica te d state me n t wo uld be th at th e certifica te of in co rp o ratio n em bo di es all o f th e co rpo rate laws o f the sta te of in co rpo ra tio n . I'll d is-

cuss th ose in su bse q ue n t cha p ters - but all of th ose laws taken together d on't 42

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corporation as a wholly artifi cial being lacks th e motivational capacities of a real person as well as the ability, so fundamental to liberal theory, to choose and pursue e n ds for itself. It lacks th e moral fram ework of a natural p erson. In terms of th e regulation of its behavior, of the perceptions of guilt and shame that p hilosophers like Hume and Smith believed were strong motivators to moral (or at least so cially acceptable) behavior, it has, in the words of an Englishjurist, " n o soul to be damned, and no body to be kicked ." Wait a minute, you might obj ect . Whatever th e legal requiremen ts of incorporation are, whatever the structure of the en tity and th e laws th at govern it, it can b e mov ed only by those real p ersons wh o are responsible for its ope rations: th e board of directors, th e officers, and the employees. Of course you 'd be righ t. The problem is that wh en th ese people act within th e co rp o ratio n , th ey ar e acting as corporate people. O z behind the curtain is mighty O z. But when the curtain is pulled back, he 's just a littl e man. These corporate con stitue n ts, although real peopl e with real motivations and real souls, are straitjacketed by the legal structure of the corporation in th e goa ls th ey direct it to pursue an d th e m ann er in whi ch th ey pursue th em. When they are acting for the co rp o ratio n , the curtain remains closed. Corporatio ns are p eople. But as we 've already see n, th ey are special kinds of people; people created not by God but by law and humans. As such, and in contrast to th e Enlightenment vision of au ton om o us man, th ey h ave only th e en ds given to th em by th eir creators. And th e ends given to th e m by structure if not by doctrine ar e one: m aximize sto ck price. This is th e rul e by whi ch we hav e com e to expect co rp o ratio ns to live, their revealed truth, their moral compass, th eir reason for being. Maximizing stock price is cor pora te self-actualization . Maximizin g sto ck price is, for th e co rporation, the pursuit of the good which liberalism encourages. If th ere ever was any doubt that this is the truth of corp o ratio n s, in cr easingly deregul ated ca p ita l m arkets an d th e proliferation of specu lative investment strategies, not to men tion pressure from change th e esse n tial fact th at th e co rpo ratio n, altho ug h we tr eat it like a person , is art ificial. L I B E RA L I S M A N D T H E F U N DA M E N T A L F L A W

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institutional investors (whose own goal is to maximize profit) , hav e forced it to be so . Like Rabbi Judah Loew's Golem, a sta tue which came to life to protect th e J ewish p eople o nc e th e right words were ins erted into its ear, th e modern Am eri can co rp o ratio n knows only one thing. And, like the Golem, once loosed to pursue that end it ca n n ot be con trolle d - or at least we seem to have lost th e collec tive will to control it . So we h ave the paradox of h aving created an artificial creature with all of the rights of natural persons to for m ulate and pursue en ds that give its life m eaning, but without th e abi lity to choose and pursue those ends. Not so fast , you m ight say. What abo ut those people you m entioned b efore who an imate th e crea ture - th e directors, officers, and stockholders? Surely th ey are real live peop le who are capable of selecting goals and making p ersonal, moral, an d so cial co m m itments just as other natural people can, even as corporate actors. True . But the lim itin g conditio n of th e corporation is that wh ile th e directors, officers, an d em p loyee s mi ght well loo k an d sound like the natural peopl e of lib er alism 's ideal, th e reality is otherwise . In stead of an imating th e co rp o ratio n , th e co rp o ratio n animates them . It's like the so ld ie rs of Troy who piled into the Trojan h orse. Until they clim b ed aboard, they were soldiers with the responsibilities ofsoldi ers but also free an d independent people who cou ld do as they wished, tho ugh they migh t pay a price for disobeying orders. But once in side th e ho rse th ey co llectively too k on th e h o rse 's form and cou ld go only in th e direction th e horse was design ed to pursue. T he same is tr u e of corporate actors. Outside th e boardroo m or th e office th ey may be regular p eople, ch urchgoing, good parents, members of the co un try club, and respectable people in their co mmuni ty who ba lance th eir var ious ro les and obliga tions in life ag ainst one an other in ways th ey find both fu lfillin g an d con siste n t with th eir systems of values. Bu t once th ey act under co lo r of their offic es - o nc e th e magic words are p lac ed in th eir ear, once th ey climb in to th e horse - th ey take on a sin gle fun ction, a sin gle form : to cause the corporation to m aximi ze its profits. T hey are obligated to do so even if that pursuit leads th em to make d ecisions th ey wouldn't make in their quotidian lives, or if it means cutting corners on safety, or h arming the environment, or layin g off old Joe or 44

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th ousands of old J oes wh o h ave been with th e co m pany fo r th eir entire car ee rs but are sim p ly becoming too expensive to em p loy wh en cheaper labor is availab le in India or Thail and or Mexico . They are no longer p eople b ut so meth ing else: di rectors, officers, and employee s of a corp orat io n . And as su ch th ey forego th e capacity of p eople so prized by liberalism - th e capacity for self-de te r m in ati on. This might no t b e su ch a b ad th ing if we treated the corporation as th e artificial legal co ns tr uc t th at it is, if we unde rstood it to ex ist for a narrow purpose and that th e co nseq u enc e of that limitation was th at we care fu lly wat ch ed an d regulat ed wh at co rpora tio ns did , th at we carefu lly wat ch ed an d regul at ed the way th ei r di rect ors, officers, and employees b ehaved . Bu t we don't. Dire ctors, officers, an d em p loyees ac t in an ar tificial co rporate co n text whi ch tak es away the ir individual cap acities for self-de te r minatio n all th e whil e permitting the m to act on b ehalf of an entity th at retains all of the righ ts acc orde d to p eopl e who p ossess th at ca pacity - an d whi ch are accorded to th em only be cause th ey do possess it. I'll tak e up th is p roblem of ca bined au to nomy, of ro le moralit y, in more d et ail later. For th e momen t, there is anothe r important aspect of the lib eral problem th at b ecomes ex ace rbate d in the behavior of th e corporatio n . That is th e p ro blem of resp onsib ilit y o r accoun tability.It is th e problem of (dare I say it?) corporate morality.

THE MORAL ITY OF THE CORPORATE PERSON

We live in an age wh en peopl e b eli eve m oralit y is a mo re or less rel ative thing. Maybe so. But my ar gument d oesn 't d ep end on your acce pting an y p ar ticular moral system or code or any particular form of m oralit y. You m ay go vern your life in accorda nce with re vealed truth as you see it , or natural law, or a sim p le pre cept of n ot treatin g othe rs as en d s, or in pursuit of th e good life of co n te m p lation prized by Aristo tle. You may b eli eve th at mo rality lies in d oing the best yo u can for yo urself and your child ren and giving so m ething back to the co m m un ity wh e n you can, by d on ating your money or volu nteering yo ur time . You m ay think that morality is simply being responsible for yo ur actio ns, avoiding harm to oth ers L I B E R A L I S M A N D THE F U N D A M E N T A L F L A W

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wh en you ca n an d co m pe nsating th em fo r th eir pain wh en you can n ot. You may thin k that morality is sim p ly doing whatever produces th e greatest good for the gre atest num ber. You m ay, like certa in co n te m porary thinke rs, beli eve th at mo rali ty is n othing more tha n maximizing your wea lth. You may beli eve any of th ese things. But chanc es are pretty good th at you h ave so me form of moral co m p ass. You h ave so me b eli ef or syste m of b eli efs that direc ts you in your daily life an d in your contacts with others. Despite th e sometimes co n to r te d arg ume nts of th eorists, yo u have some limits to what yo u will do in pursuit of yo ur self-in te res t. You h ave some sense that so metimes, at least, th e e n ds d o n ot j us tify th e m ean s, an d that sometimes, at least, the e n ds thems elves are n o t worth pursuing. That is all I need to make my p oint. Fo r th e co r poratio n is differ ent. T he co rpo ra tio n has one e n d, an d th at is to m aximize its stoc k price. And th e direct ors an d office rs th at animate it do so with that e n d in mind . Aga in you might o bject. T h ere are peopl e, you say, for wh om making as much money as they can is th e pursuit of th e good . Perh ap s we di sagr ee with them. Bu t one of th e h allmarks of lib eral soc iety is that eac h p erson is fr ee to choose h er own en ds . So wh at ri ght h ave we to judge? Again , I agree . Bu t the difference b etween th e co rporatio n an d a n atural p erson is th at wh en a natural person makes a decision and acts on it , sh e is co n scio us of actually making that d ecision , of choosing between alte rnative en ds, an d of being co nsc io us b oth of that choice an d h e r own res ponsibility for makin g that ch oice . And if th e ch oice tu rns out to have bad co ns equen ces fo r h erself or oth ers, o ur n atural person kn ows th at sh e is accou ntable for th ose co nse q ue nces, either becau se of legal sanc tions or of soc ia l sanc tio ns or eve n the san ctio ns of conscience. Few of us always beh ave in ways th at we or oth ers co ns id er admirable . But wh en we fail we have so u ls to damn and bodies to kick . We have the capacity an d usu ally th e d esir e to r ep ent fo r, an d so m e tim es rectify, o ur mi stak es. Co rp or atio n s have no su ch me chanism . Quite the op posite. As I h ave p ointed o u t, the co rporatio n kn ows o ne thing an d th at is p rofi t maximization, regardl ess of th e fact that it requires human b eings to h elp it pursu e that goa l. The resu lt is th at corporatio ns ar e 4(j

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abl e to act without morality or accountability for th ey ar e form ed for a single purpose. As we will see in the next chapter, the device of limited liability com p o u n ds this by en co uraging th e co rp oration to exte rnalize many of th e costs of profit maximization upon p eople who have no power to protect themselves. Add to this th e rights of n atural persons in lib eral societ y, th e sam e rights that corp oratio ns have be en gran ted . What you ge t is a nonperson with all of the freedom of persons, an uncontrollable Golem th at ca n n ever be calle d back, a m achin e th at runs of its own logic, a logic not tha t of natural people. What you get is the modern corporation. Now add ba ck in th e modern Am eri can ob sessio n with lib erty, the modern perversion ofliberalism as th e pursuit ofself-interest. It is bad e n o ug h to e nc ou rage irresp onsibl e beh avior in real human beings - thinking, fe eling people who have to interact with oth ers and see th e impacts of th eir actions on others, people who know th ey will be h eld responsible for those action s - pe o p le who will rarely act only selfishly because they still feel their common humanity, even if th ey've tri ed to suppress it in pursuit of th eir ga in. Think about how much more severe are the co nseq ue nc es of setting a corporation, which has none of tho se quali ties , freely into the world with a single given mi ssion . And th en think abo u t a co r po ra tio n whi ch is structurally and le gall y organized in such a way th at it responds with ex tr aord inar y sensitivity to ever y possible pressure to con for m to th at mission . It 's a sca ry th ought. The result is a co rporation th at has not only th e right and the power but also th e incentive to push th e costs of its stoc k price maximizati on onto oth er people. So there you have it. A society predisposed to excessive individualism, but on e in whi ch peopl e at least ret ain th eir person al moral frameworks , models its corporations in its image without recognizin g that th e resulting structure lacks th eir moral fram ework. Indeed, it replaces th at moral structure with co ns train ts th at enc ou rage corporations and corporate actors to behave immorally. What you see is what you ge t. In a re cent, very bad movie, Th eIl eep Blu e Sea, scientists enhan ced the brains of sharks in order to use their biological material in the LIBER ALISM A N D THE FUND AMENT AL FL A W

47

treatment of human disease. T he sharks became far smarte r, far more skilled, far more cap ab le of reason in pursuing th e one goal they kn ew by n ature: to kill an d ea t. As any teen aged boy would h ave p redi cted fro m th e first sce ne, th e co nse q ue nce ofth is misguided, if well-intentioned, experiment is that the crew of scien tists th e mse lves were ea te n an d th e sharks ran amok th reate n ing anyo ne th at mi gh t come in th eir p ath (and undo ubtedly awaiting a sequel) . Modern Am erican corporations are th ose shar ks. And they th re a te n no tjust Am eri can soc ie ty but world soc iety. In th e res t of thi s book , I will explain why.

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THE PERFECT EXTERNALIZING MACHINE

I be gan chapter 1 with some examples of what mi ght gen er ally be co nsidered corporate mi sb ehavior: Coke 's disregard of its employees ' well-being, U n oc al's use of slave labor in Myanmar, GM's exploding Malibu , Marriott's theft of mo n ey from p referred stockhold ers and bondhold ers, and Allied Sign al's tax evasio n , all for th e purpose of jacking up stock prices. In a general way, we then saw h ow the kin d of th in kin g that led to the cava lier attitudes of these com p an ies can be found in some basi c truths about American cu lture, and how th e corporate context exaggera tes its effects. T he rest of part 1 will focus on the more specific ways in wh ich the laws governing th e Am erican corporation and th e socia l thinking from which th ey arise can lead us to expect no thing ot her th an co rporate irresponsibility. It will ex p lain why managers an d workers are trapped be h ind this very structure - why the y are O z forced to re main forever be hind the curtain .

GOOD BUSINESS, GOOD ACTORS; BAD BUSINESS, BAD ACTORS

Not all corporations are bad. An d eve n the bad o nes do n 't n ecessari ly m ean to be bad. The Financial Times recently reported a fact that we all in tu itively know: good be havior is good business. Fortun e Maga zin e n o ted that most of the one hundred best corporations to 49

work for in Ame rica are m ore profitabl e th an average, an d fu rth er r eported in the su m mer of 1999 th at companies tha t spend the mon ey to hire, train, and retain minorities outperform th e S&P 500. Vari ous stu d ies by organ izatio ns like H amilton, J o an d Statman, Lu ck and Pilotte , and Covenant Investment Management h ave sup por te d th ese findings. These co r po ra tio ns worry abo ut th e overall qualit y ofl ife of th eir workers, b ehave as resp onsible citizens in their communities, produce go od, safe products, and , in b ad tim es, try to m aintain th ese valu es. Wh en Levi St ra uss, a privat ely held com p any, re cently was forced to lay off thousands of workers, it did so in a humane an d care fu l fash io n , offering su bsta n tia l tran sitio nal h elp to its em ployees and thus p reser vin g e normous goodwill for the fu ture . In my own experience , th e law firm for which I worked not o n ly treat ed m e with resp ect but also was quite h elpful and supp ortive as I made th e transition from lawyer to tea ch er; th e result is that I en cou rage my best students to work th ere . Th ese sto ries show th e ben efits of go od behavio r, ben efits d emonstrated by recent managerial re search like The Loyalty Effect, by th e man agement co ns ulta n t Fre de rick Rei ch eld. Basin g hi s b ook o n research an d years of co n su lting ex pe rie nce , Reich eld describes h ow good and loyal treatme nt resu lts in good an d loyal tre a tme nt, wh eth er of emp loyees, stoc kholde rs, or m an agers. Psychologica l evidence, too , supports th e assertion that in corp orat e enviro n men ts, as in othe r types of o rgan izatio ns, p eop le wh o b eli eve that decision-making p ro cesses are fa ir an d th at they are tr usted accept the outcomes of th ose decisions more readily and b eh ave in m ore trustwo rthy ways th an p eople wh o d on't. I The evid en ce is also clear that trusting p eople are th emselves m ore likely to b e trustworth y than p eople who are suspicious or less tr u sting, implyin g th at environ me n ts in whi ch trust an d res pect are fostered are more likely to be healthy and productive than those in whi ch they are not." By con tr ast, th e structure an d rules of co rporate law (and th e major premises of co rporate legal th ought) are b ased on th e idea that corp orat e actors are n ot to be tr u sted. Su ch mis trust is evide n t in th e push toward h avin g in stitutional investors like large p en sion funds put pressure o n co rp o rate managers thro ug h incr eased monitoring, and goe s all the way b ack to tradition al m eth 50 PHIL OS OPH Y O F THE A M E R I CA N C ORP OR ATI ON

ods of shop floor production, p arodied in 1936 by Charlie Chaplin in Modern Tim es but based on the serious and widely accepted work of th e efficienc y expert Frederick Winslow Taylor. Whil e it is true that co rp o ratio ns are wid ely thought of as treating their employees be tter today, there is some evidence that the reality is otherwise. Th e co n su lta n ts Patri cia McLag an an d Ch risto Nel report in their book Th e Age of Participation that 7 0 percent of the Fortune 1 ,000 polled had a worker p articipation program , but only 13 percent of th eir e m ployee s were involv ed in it." I will h ave much more to say about this (as well as about all of th e issues raised in th e last paragraph) in chapter 9 . For now it's simply worth wondering wh eth er thi s app are n tly improved treatment is th e result of a tight employment market or reflects a truly enlightened manage rial style. I ce rta in ly hope it 's en ligh te ned management, but for reasons I'll dis cuss I suspe ct that as long as American corp orate law remains in its current posture th e reality is different." Billy Cr ystal 's Saturday Night L ive charac te r Fernando was fond of saying, "It is be tter to look good than to f eel good ." Bu t Adam Smith an d th e modern ec on om ist Rob ert Fr ank dis agr ee . In order to look good , they say, yo u have to be good . Good people attract others. Good people bege t loyalt y from others. And, if we must be materialistic abo u t it (Fr ank is) , good peopl e co llec t th e rewards. But as Smith and Frank poin t out, you can 't fake it . If you 're not good and pret end you are, you mi ght be abl e to ge t away with it for a whil e, but it won 't last ; p eople will even tually see th rough yo u. The simple fact is that most corporate managers are good people who very much want to be good . H arris Research polling sh ows this, as does a re cent stu dy by the Malcolm Baldridge Foundation and the empirical work of corporate scholars like Myles Mace an d Jay Lorsch . The proliferation of voluntary co rp o ra te co des of co n d uc t like the Sullivan Principles, the MacBride Principles, the CERES Principles, an d the Caux Prin cipl es ar e furth er evide nce of business lead ers ' d esir e to look good. And to look good , th ey hav e to b e good, especially in an age when we are sensitive to the problem of false co n sciou sne ss, of being m anipulat ed by th e appeara nce of others acting for our benefit. So why is it that so many of our corp orations b ehave so badly so much of the tim e? THE PERFECT E XTERN ALIZIN G M ACHINE

5 1

Th e sim p le answer is th at managers are trapped - or at th e very least, that it is easier for them to feel trapp ed and su ccumb to it tha n to gn aw th eir legs off to ge t th emselves free ." The trap is largely create d by th e fin an cial an d legal str uc tu res of th e co rporatio n , which themselves are grounded in th e legal and social ethic described in chapter 1. Th e Am eri can co rpora tio n is structured to m aximize its sh ort-te r m stoc k price an d to avoid long-term accou ntab ility, much as Am erican leg al an d social thought enc o urage the irresp onsibility of citize ns. As th e Fren ch execu tive an d writ e r Michel Albert describes it, American companies, in contrast to European cor po ra tio ns, are " m er e cash flow m achines," obsessed with short-term p rofit. " America n corporate law an d practi ce give th e short-term com p et itive ed ge to those who directly seek to maximize stoc kholde r profit, regardless of th e co nse q ue nces. Fro m Co ke to U nocal to Gen eral Motors, from U n io n Carbide 's Bh opal disast er to th e Exxon Valdez oil spill that almost destroyed the magnificent an d pristine Prin ce Willi am Soun d , fro m Bristol-Myers's Dalk on shield to Johns Manville 's asbestos and Nike 's treatment of its overseas workers, co r po ra tio ns more often than no t u se th ei r sp ec ial structure and privileges to in cr ease profits by placin g th eir costs of doing business on th ose who are vulnerable to corp orate power. An d th ey do so p roudly, in th e n am e of m aximizin g stoc kholder profit, the sacred watchword of modern American business fai th . Good behavior is good busin ess, but th e rewards of good beh avior lie largely in th e long run . An d who kn ows quite how long th at is? In th e short run (from whi ch we have more confidence we will p rofit) , bad or at least indifferent may be better. Th e st ruc ture of Am erican corporate law e nco urages mo st managers to focu s on the sh ort term." There are a number of r easons for this, a few of whi ch I will di scu ss h ere an d th e others in lat er chap ters in whi ch they become more relevant. Let's be gin with a fea ture that sets the "To be fai r, co r po rate man agers have readily succum bed to th e tr ap . Averag e exec u tive in come h as risen dram ati call y to abo u t 4 75 tim es th at of th e avera ge wo rker. It is terribly diff icult to d etermine anyth in g ca usally abo u t thi s, b ut it does seem th at th e in cr ea sin g e th ic of sto ck pri ce m aximi zat ion has unleash ed th e worst tendencies in o ur execu tives. 52

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trap by building an att itu de of ir resp onsibility directly into th e corporate str ucture: that is, the feature oflimited liability.

LIMITED LIABILITY, OR NOT IN MY CORPORATE BACKYARD

Just as evolutio n h as made th e sh ark a p erfect eating machine, the d evice of lim ited liability has allowed the cor p orat io n to perfec t its fun cti on , so much so th at in o ne ridiculo us bout of hyperbol e Nicholas Murray Butler, Colu m bia U niversity's towering twe n tiethce n tu ry presid ent, d escribed it as a m ore sign ifica n t in vention th an th e steam engine. The fu nc tio n perfect ed by lim ited liability is th at of permitting corp oratio ns to externalize th e costs of sto ck price maximizati on , th at is, to push th o se cos ts o n to othe rs. T he co rporation is th e p erfect ex te r nalizing machine . Defining limi ted liability is sim p le. It me ans that n o matter how much environ me n ta l dam age a co r poratio n ca uses, n o matte r h ow much debt it defaults on, no matter how many Malibus explode or tir es burst or workers an d co ns u me rs di e of asbes tos is, n o m atter h ow m an y p eople it puts o ut of work with out th eir p en sion b en efits or oth er protec tions; in short, n o ma tt er h ow much p ain it cau ses, th e corpora tio n is res ponsible for payin g d am ages (if at all) only in the amount of assets it has. When Johns Manville faced le gal claims fro m p eople harmed by asbes tos far greate r th an th e asse ts it h ad , it de clared ba n kr u ptcy. It co u ld n 't pay all of the claims, an d it didn 't have to . Bankruptcy law is be yond the scope of this book, but basically it p ro vid es th e ad de d advan tage of giving th e co r po ra tio n an escape h at ch , leavin g the cre dito rs to figh t it o ut. You can't go after th e stockh olde rs for any more than th ey've invested. You can' t go after th e m an agers o r emp loyees except in limited an d largely ir relevan t cases. No matter what kinds of harms the co rp oratio n cau ses, an d n o matter wha t kinds ofjudgm en ts a co urt may levy agains t it, it must p ay on ly wh at it h as. Limited liability in American co rpor ate life shouldn 't com e as a big surprise. In one sense, it is th e realizatio n of p ersonal au to nomy in the co rp oratio n , an importan t way of individuatin g the co rporation an d making it more like a p erson. In fact it may flow, at least in THE PER FE CT E XTERN ALIZIN G M A CHINE

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p art, as a conse q ue nce of our thinking of th e co rp o ra tio n as a person." For while you can thin k of flesh and blood people as having unlimited liability- that is, th ey are legally responsible to others for all th e h arms th ey cause up to th e full am ou n t of th eir p ersonal wealth (as well as their individual consciences) - in a real sense th eir liability is much like th at of th e co rp ora tion . You can 't ge t wh at someone do esn 't hav e, no matter what they've don e to yo u , whi ch is one major re ason we have in surance requirements for activities like driving cars. By itself limited liability doesn't appear terribly troubling. If the corp oration is indeed a p erson , albe it, as I shall keep rep eating, an artificial one , why sho u ld it b e liabl e for mo re th an it has an y m ore th an an y other individual? If you can't get blood from a stone (or from a judgm en t-proof person) , why sh o uld you be able to go afte r the stoc kh olders of cor p oratio n s tha t have be come judgment proof? To do so is to ignore the corporation's legal personhood, to ignore its individual integrity as a person . The answer lies, as the answer consistently lies , in the important divergences betw een a real-life p erson an d an artificial p erson. And while those differences may th emselves be enough to justify disparate treatment, the justification becomes all th e more powerful wh en you ad d to th e mix th e hi ghl y limited moral universe of th e corp or atio n : th e mandate to maximize stock price ." The com bination of limited liability and th e eth ic of sto ck price m aximization is th e ultimat e realizati on of individual auto n o my as understood in some prominent academic circles." That is, it is th e ultimat e realization of th e perversion of liberal au to nomy th at see s that ideal as satisfied by the pursuit of self-in terest. But it is a realization that is deeply immoral for the same reasons that th e th eory of radi cal au tono my I earlie r d escribed is immoral for individual human beings: it permits the corporation to behave as if other people didn't matter. But th ere is a differen ce b etw een real people an d cor po ratio ns. At least when we 're dealing with individuals, even if they act in the pursuit of self-interest , th ey are suffi ciently co m plex as to h ave "I' ll ex plore this moral universe in detail over th e next seve ra l chap te rs.

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other attach me n ts an d co ncer ns th at put limits on wh at most of them do. Even in the cr u d e and dehumanizin g economic terms in whi ch this id ea is sometimes described, you ta ke other p eople into acc o un t - th at is, you ac t as if you care - o nly as so meth ing whi ch serv es your self-interest. (The theory doesn 't actually require yo u to do thi s - you o n ly h ave to do it if you want to. ) But at least it 's th e re, an d m ost of us would tak e so me advan tage of it o r life would b e awfu lly lon ely. The situatio n in th e co r po ratio n is di fferent. On e important difference is natural. Suppose th at it is th eo re tically possible to get more fro m a n atural p erson than h e owns, by making him buy in su ran ce, for exam ple, as we d o for specifie d activities lik e d riving . Life would be com p licated if we made people take out insurance for eve ryth ing th ey d o. In stead , we rely up on th eir se nse of res po nsibility to othe rs to regulate m ost of th eir b ehavior. Limited liability for a p erson is n atural- wh en we d emand insurance we cr eat e a co ns t ra in t o n n ature . Limi ted liability fo r th e co rporatio n is n ot in the leas t natural- it is co nstr ucted from th e beginning. And , unlike a p erson , a co r po ra tio n has no se nse of resp on sibility o n whi ch we ca n rely. This co mb inatio n m ak es th e co rp o ra tio n potentially very dangerous.

SPARE THE ROD AND SPOIL THE C HI L D

Assu m e you ha ve a child wh om you h ave ra ised to b eli eve th at she can behave however she likes; sh e doesn 't have to clean up after h erself, she d oesn 't h ave to do h er h omework; she can stay up as lat e as she likes; and whatever th e co nse q uences of h er b ehavior might be, yo u will not punish h er or hold h er acco un ta ble. If she leaves a m ess, you o r so me o ne else will clean it up ; if she d am ages so me one's property, yo u will pay for it, and if sh e damage s her own property, you' ll replace it ; if she fa ils to d o h er h omework, you will pressu re h er teachers to exc use h er an d to gra de h e r as you d emand; if she sta ys up too la te, you will le t her sleep as la te as sh e likes, an d if she suffers at school or in h er activ ities you will so me how mak e it righ t for h er. Ifin the long run she d oesn 't succeed as sh e might, yo u will continue to su pp ort h er. You don' t n eed to be a THE PER FE CT E XTERN ALIZIN G M A CHINE

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beh avioral ex pe rt or ch ild psych ologist to realize th at you are likely to have raised an ext rao rdin arily irresponsibl e ch ild. Nor do yo u n eed to b e especia lly p erceptive to see that your ch ild will probably n eve r feel accou n ta ble for h er actio ns . You h ave, in a ver y real way, limited her responsibility and accountability by limiting her liability. The ch ild can act h owever she likes an d n ever have to p ay the price . An econom ist would say th at she n ever h as to in ternalize the costs she imposes o n othe rs or, conversely, that she h as exter nalized th e cos ts of h er be havio r on to others. Imagine now th at yo u behave like that ch ild . You drive re cklessly, are abus ive toward othe rs, refu se to h elp your cowor kers, push your way ahead in lin e at th e store, ta ke adva n tage of ot hers ' ge nerosity, ignore yo ur friends when th ey need yo ur help. You do all of th is, you say, n ot because you ar e a bad p erson , but becau se co ns ide rati on for othe rs tak es time, it ge ts in your way, and you ar e sim p ly trying to maximize your self-in te rest. Assu me th at m ost oth er p eopl e don't ac t th e way you do (all you need to do is sp e n d a da y watc hing people around your town to co nfirm th e valid ity of th is assu m ptio n). Peopl e are n' t go ing to like you. In fact , chances are you 'll b e sh u n ned an d treate d as a soc ial pariah. The reason of course is that normal people , that is, people wh o are n o rmally socialized , d on't act th is way. They d on't impose th e consequence s of pursuing their self-interest on ever yone else . They drive accord ing to th e traffic rules, repay othe rs' ge ne rosity, wait th eir turn in lin e at th e store, and treat th eir fr ien ds th e way th ei r frie n ds trea t them . When yo u behave the way I de scribed ab ove, yo u, like your spoile d ch ild , are ex te rnalizing cos ts. You are imposin g th e co nse quences of pursuing you r self-in te rest on to othe rs. Ge ne rally we consid er ex te r nalizatio n to be a b ad thing ; as a soc ial matter, we expe ct you to bear your own cos ts, at least unless you make oth er arrangements with those with whom you deal. If you fu lfill th ese expectatio ns, you are intern alizin g cos ts, wh ich is th e d esirabl e econom ic result. Eco nom ists from Art h ur Pigou in th e early twe ntieth centu ry, who ad vocated ta xa tion as a me ans of forc ing cor po ration s to internalize th ei r cos ts, to Ron ald Coase lat er in the twen tie th ce ntu ry, wh o argued that bargaining, under certain con ditio ns, would lead to th e most ec o nom ically efficie n t 56

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result beli eve th at you r cos ts sho u ld be internalized , th at you sh ould bear th em yourself. The d octrin e of limited liability reduces the likelihood th at th e corpora tio n will internali ze its cos ts. Fo r th e co nse q ue nce of limited liability is to permit, if not encourage , the co rpor atio n to ex tern alize th e cos ts of its p rofi t m aking up on oth e rs. Tak e th e following classic ex am ple drawn fr om Cease 's famous work." A railroad runs thr ough corn fie lds . Because of th e fric tion cr eate d by stee l wh eels on ste el rail s, th e train s p roduce sparks wh en they run . Periodically, th e sparks ignite th e fields and burn the far me rs' cro ps. The cro p burning is an ex te rnality create d by th e ra ilroad ; in the abse nce ofa legal d evice or other in centive to m ak e the railroad accountable to th e farmers th e railroad will have no in centive to prevent th e burning. It will h ave n o in centive to enco urage it to d evel op ways to prevent th e p roblem. It co u ld, for ex am p le, buy up righ ts-of-way from the far me rs for a su fficie n t distance fro m th e tracks to clea r th e fields or d evel op less in cendi ar y technologies like rubber whe els. The externality would exi st wh eth er or not the railroad is a limited liability co rporatio n. The fact th at it is o ne sim p ly m eans th at th e railroad 's fin ancial ex posure to th e farmers will b e limited , th at its stockholde rs will profit fr om the railroad 's ab ility to evade res po ns ibility or, to put it differently, from th e farm e rs ' losses. Or take a more contem p or ary example, like th e General Motors sto ry I d escribed ea rl ier. In th at case, th e cos t-be ne fit analysis th at res u lte d in GM's decision n ot to re design th e car an d recall cars already sold was a conscious ch oice to place th e costs of keeping corpo ra te profits an d stoc k prices hi gh o n to th e drivers of th e cars. Ce rtain ly as th e legal j udgment in th at case showed (and as tort law in th e farmers' case might sh ow) , we do h ave laws th at force some internalizati on of th e cos ts. People h arm ed can so m etim es sue an d re cover damage s. But those laws are in suffi cient and in comple te . Even in a regime in whi ch th e fa r m e rs co u ld successfu lly sue th e railro ad , th ey would in cur sign ifican t cos ts, including th e tim e valu e of th eir lost profit, in re covering their losses . And even th o ug h crash victims su ccessfu lly sued Ge neral Moto rs, n o amoun t of money co uld com pensate th em for the physical an d e m otio nal harms they suffe re d . Moreo ver, there are thousands of oth er people THE PERFE CT E XTERN ALIZIN G M A CHINE

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driving unsafe ca rs for whom th e cost of rep lacement is prohibitive or who, for one r eason or another, simply are unaware of th e problem . Eith er th ey live with the fear of exp losio n , wh ich clea rly is a cost, or th ey might actually suffer serious harm one day," T hese examples are troubling. And of co urse there are pl en ty of oth ers. J ust to stay with th e same cor po ra tio n , wh en GM clos ed its h uge Willow Ru n p lant in 1991, it left the town of Ypsilanti, Michiga n, devastated. Yp silan ti h ad grown to re ly upon the factory, so much so that it h ad n egotiated with GM to rebate ce rt ain tax burde ns in order to keep the p lant the re in th e first p lace and to provide jobs for its citizens . But GM h ad a better id ea : aft er sixteen years of accepting gen erous tax abatements and a vari ety of other tax adva ntages, and after thir ty-eigh t yea rs of operating Willow Run , years during whi ch th e town gre w d ep endent up o n th e p lant not o n ly for its economic base but for general community support, GM decided it was cheaper to make its cars elsewhere and closed up shop and mov ed . Th e ec o n om ic and socia l dis location this ca u sed was enor mous, and wh ile the town was victorious in a lawsu it in th e trial court, it lost on appeal becaus e th e court dec id ed that Ypsilanti's government was unreasonable in re lying upon GM 's promises to stay; that is, they were unreasonable in trusting GM, even ' O f co u rse I a m aware of th e argum ent that th ere is a social benefit in lower-pr iced cars. But th e cos t of m any safe ty improvements rel ativ e to the cos t of the car is fairl y minimal. For e xa m ple, Genera l Motors e stim a te d that relocat ing the fuel tank to make the 19 73 mo d e l safer wou ld have cost a m ere $8 .5 9 per ca r, a nd th ere was evide nce a t th e tria l that Ge ne ra l Motors refused to install safety features costing as littl e as $2.40 per ca r. Michael M. We inste in , "C os t o f Life Issu e in GM Suit Lo st o n Pri ce o f a Part," (Oklahoma City)j ourn al

Record, Au gust 13 , 1999. A study in 1999 showed that 9 5 percent of ch ild sa fe ty se ats in American cars a re in corre ctly installed, a problem th at ca n be fixed by a u to manufacturers fo r $ 10 per ca r by providing a Un ive rsa l Ch ild Att achm ent System. Ela in e Morgan , "Seat of Kn owledge ," Tampa Tribune, Fe bruary 13, 1999 . And even if a multip licity of safe ty d evices or a sing le d evice incre ase s co st to th e poin t that some co nsu mers m igh t not be able to afford a particular ca r, thi s d o es nothing to dimin ish th e mora l pri ority of human life to profit. I su sp ect that most people wou ld cho se life without a ca r than d eath in a car. 58

PHILOSOPHY O F T HE AM ERIC AN CO RPORA TION

wh en th ey h ad given th e co m pany su bstan tial fin an cial ben efit s." So th e re sult was that GM succ essfu lly externalized the costs of in cr easin g its stoc kh olders ' profit onto th e citize ns of Ypsilan ti. Limi ted liability m eans n ever h avin g to say you 're so rry - or at least feel th e pain of sor ro w. It me an s th e corporation can, in effe ct, draw in its wagons an d p ay atte n tio n o n ly to th ose p eople to wh om corp ora te law says it's responsible, n am ely, stoc kh olde rs. And th e resp onsibility it has to the stockh olde rs is to m aximize their stock prices. As long as th e co rporatio n, through its direct o rs, officers, and em p loyees, is performing this fun ction, it is doing everything th at we ex pect of it. An d b ecau se thi s is the limited resp onsibility of th e corporatio n, because we can 't chase after th ese p eopl e if they hurt us while doing th eir jobs, they are able to push off th e costs of maximizing stoc k prices o n all of th e rest of us; th at is (in econom ics talk) , th ey are abl e to ex te rnalize th e cos ts of stoc k price m aximization on the rest of us. No w thi s is p erfectly co ns iste n t with th e m odern econom ic views discussed in chapter 1 . In fact , many economists would say this so rt of behavior is ac tually econom ically efficie n t; an d in h on est mom en ts m ost of th em would say ec o nom ic efficie ncy is a go od thing. In a lib eral society in wh ich every p erson, including the corporat e pe rson , see ks to im prove his own self-in terest, we would ex pect th e cor p oration to maximize sto ck price th is way. This doesn't mean th at other p eople are unprotect ed ; th ey can, afte r all, en te r into co n tracts with th e co r poratio n in order to sh are th e cos ts or sh ift the costs back onto th e corporation . And it's even good to have th is potential probl em regul at ed by co n trac t becau se in a liberal soc iety co ntract is th e principal legal m eans through which p eople co me to gether to exp re ss the ir preferences and strike economic b argains th at m aximi ze th eir self-in terest. Some times laws sh ift costs, too , like the Superfund law, whi ch requires corp o ratio ns to pay for the cleanup of th e m esses th ey've mad e. But th ere 's a problem with thi s way of thinking : in order to strike an efficient bargain, you need to have th e bargaining power to do it. In order to p ass laws, you n eed specific p roblems of suffic ie n t size and effec t to for ce lawmakers to act. Many of those who deal with th e corporation, like th e town of Ypsilanti an d GM 's em p loyee s, THE PERFECT E XTERN ALIZIN G M ACHINE

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clearly do not have bargaining power equal to that of the corporations on whic h they re ly. Many of th e problems corporations cause are local and diffuse and don't le n d themselves to legislative so lutions. When such conditions prevail, the justification for lim ited liability fails. Peopl e can't bargain as autonomous equals with the corporation. Laws can't co ntrol it from the o uts id e because we've already created the corporation with a consciousness that will let it evade laws and legal detection - and allowe d it to acquire and use political power to prevent legislatio n when problems are too ob vious to ig nore. Limited liability h as cast the corporation in the im age of the spo iled ch ild.

LIMITED LIABILITY AND THE LIBERAL PERVERSIONLOOKING OUT FOR NUMBER ONE

T here 's another pr obl em , too . Even if corporate lim ited liab ility is, technically sp eaking, the same as lia bility for ordinary human persons (you ca n give up only what you have ) , does corporate limited liability en able corporations to escape responsibility in a way that is different from flesh and blood people? Does limi ted liability create what economists ca ll a m oral hazard , that is, an increase in the risk of bad behavior be cause th e costs of that be havior are shifted o nto someone else? Even to ask the question this way is to presume that the corporation is capable of the kind of moral actio n that, as we have already seen, law and corporate structure deny it. T he corporate scholar T he resa Gabaldon h as fra med an in teresting way of lookin g at th e issu e of lim ited liability, one whic h relat es directly back to the lib eral perversion I described in chapter 1 . As she poin ts out, "Lim ited liab ility is about im posing risks that so me on e else must bear. Liabi lity lim ita tio ns artificia lly distance individuals from the real life effects of the en ter p rise in whic h they inves t, thus decreasing th eir acknowledged p erso n al res ponsibility." I I Of course this is the broader po int that I am making about corporate law ge nerally, b ut the focal p oin t of limited liability h elps to pl ace it in a con cr ete context. Moreover, as Gabaldon perceptively observes, limited liability as a legal doctrine can produce a harm beyon d that sim p ly caused by corporate law. Because it exists, because Go

PHILOSOPHY O F T HE AM ERICAN CO RPORA TION

it ex p resses soc ial ap prova l of a certain kind of co n d uc t, it can h elp to sh ap e social values and realities. The particular harm it creates is pa ssivity an d irresponsibility, th e se nse th at you n eedn't ca re an d won't suffer any of th e co nse que nces if you d on't . It is n ot on ly in line with th e selfish ness su rp lu s an d th e su pp ressio n of our caring impulse , but h elps exagge ra te th e m. Limited liability is o ne of th e ways we let our co rporatio ns evade resp onsibility for their actio ns . For present purposes it is eno ug h to n ote with Ga ba ldo n th at limited liability goes a long way toward sep arat ing corp or at e de cision making from th e effe cts of th ose decisio ns an d th eir co nse q ue nces to others. Thus it h elps to replicat e th e co r poratio n as an asoc ial being, with its morality severely co nstrained by th e goal of maximizin g its own profitability. Like our amoral acto r (or th e afo re m en tio ne d shar k), it look s o ut on ly for itself an d gr abs wh atever it can ge t in th e p ro cess. Now of course th ere are arg u me n ts in favor of limited liab ility, an d I d on't m ean to igno re th em. O n e argu m en t says th at limited liability makes inve stm ents in cor p orat io ns rational, which in turn mak es th e ec on omy fu nc tio n by p ro viding ca pital. It d oes so by allowing stoc kholde rs to engage in the se nsible ac tivity of diversifyin g the ir sto ck p ortfoli os an d th us reducing the ri sks of their investm en ts. Wh y? Becau se limited liability le ts you ignore wh o th e oth er sto ckholders are . Sin ce nobody can co m e after yo u for corporate debts, it doesn 't m atter wh ether you are the rich est stoc kholde r th e d eepest pocket - or th e p oo rest. So you can in vest in a lot of cor p orat ions and not pay attention to any of them . The only risk you fac e is losing th e mon ey you invested. An d you lessen th e risks of that by diversificati on. The virtues of diversifica tion as a fin ancial matt er hardly n eed exte n de d di scu ssion in an e ra in whi ch th e sto ck m ark et is a majo r topic of soc ial co nversatio n . Bu t the idea is that o n e reduces the risk of in vestin g by h olding a reason abl y broad p ortfoli o of sec urities (he n ce th e rise of mutual fu n ds .) If limited liability didn't ex ist, pe ople would be afraid to diver sify be cause diversifying yo ur portfoli o also m ean s diversifyin g your att e n tion away fro m any p ar ticu lar corp oratio n . You'd h ave to put all yo ur eggs in one baske t an d , in the words of Mark Twain , "watch that ba sket" because th e risk of THE PER FE CT E XTERN ALI ZIN G MAC H I N E

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p ersonal liability beyond your investment would be too gre a t simply to le t it ride . You'd want to watch the managers, to look over their shoulders to be sure they weren't ta kin g too many risks . You'd want to find out who th e other sto ckholders were because if th e co rp oration came tumbling down and the creditors started chasing after yo u , yo u 'd want to know th at th ey were able to step up to th e pl at e for their sh are of the liabilities. Iflimited liability didn't exist, corp orate shares wouldn't be so freely tradeable because the risks of investing in any given co rp o ra tio n would d ep end very much on who else was investing in that corporation. This fact would complicate th e information availabl e in th e sec urities m arkets and make it much mo re diffi cult fo r stoc k to trade smooth ly, thus d est ro ying secondary market liquidity and hampering the market's ability to mov e ca pital to its hi gh est-valu e use. So limited liability se r ves a purpose. Bu t not so fast. For the argument I just laid out assumes th at diversifi cation is th e only ra tio nal stra tegy and th at in attention and passivity are legitimate and reasonable consequences for us to bear for th e privil eg e of having efficien t markets . Is this assu m pt io n n ecessarily co r rec t? What would th e world look like without limited liability? Well , for o ne thing, investo rs would learn a lot m o re abo ut th e com p anies in whose stock they were investing. They would want ca re fu lly to study th eir finan cial positions, to be sure, but th ey also would want to learn a lot mo re about th ei r m an agement, th ei r behavior, and the risks that th ey would incur liability be yond the stockholders' investments. Not only th at ; on ce you invest ed in th e sto ck yo u would carefu lly watch the way the co rp oration behaved and might even ta ke the tim e to re turn your proxy card or attend th e an n ual m eeting to try to influen ce th e co rp o ra tio n 's direction. You would demand more information, such as whether you r corporation was em p loyin g slave labor in Burma or ch eating on its ta xes or d estroyin g whol e co m m u n ities. You would care ab ou t th ese issues, at least in part be cause yo u would be concerned about yo ur own liability. But you would care abou t them for anothe r reason as well.

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PHILOSOPH Y OF THE A M E R I CA N C ORPOR ATION

THE PERSONAL TOUCH AND THE EXPERIENCE OF RESPONSIBILITY

The reason yo u would care is th at it is characteristic of us as human beings, as part of our moral an d psychological m ak eup , th at we come to id entify with those things and persons who are clos est to us, with whom we have re lationships. The justificatio n I gave for limited liability assume s th at yo u h ave no rel ationship at all with th e corporation other than to pay you r money and watch yo ur portfolio rise or fall. But imagin e if yo u were investing not in Microsoft but in a small software store th at you in co rp o rat ed and of whi ch you we re the sole stockholder. You probab ly don't want to do all of th e work yo urself, so le t's say yo u hire two people,Jeff and Sarah, to work for yo u .J eff is right out of co llege and doesn 't quite know what h e wants to do with the rest of his life, but you 've exp laine d to him th at you mi ght want to gro w the business into several stores and that he h as a future as a manager and mayb e even as a partn er. Sarah is th e divorced moth er of two small child re n who ne eds to tak e on ext ra work to supplement her chi ld support payments and th e in come from h er firs tjob; she is att rac te d by th e regul ar hours an d reasonab ly stressless nature of the work. Your cu stom ers com e from all walks oflife, but yo u have a sizab le compon ent of adolesc en t boys who regularly buy computer an d vid eo ga mes with hard- earn ed p ap er ro ute m on ey o r allowances. Let 's say busin ess is good for th e first severa l years. Although you often leave Jeff or Sarah in cha rg e of the store, yo u spend quite a bi t of time th er e yourself, and you become friends with both of th em. You h ave lun ch with th em an d sometimes invite th em to your home for dinner. You get to know Sarah's kids, both of whom are into vid eo gam es, and you sp end a lot of time ta lking with j eff about h is future in busin ess an d you r pl ans for ex p ansio n. You start a modest pension p lan and make co ntributions for your employees. They come to rely on you as a source of advice as well as a source of in come and future finan cial security. You also ge t to know yo u r yo un g customers pre tty well, since most of them come by regularly

T HE P ER F ECT E X TE R N A L I Z I N G M ACHINE

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to see what's n ew in stoc k an d to window-sh op , as well as to pl ay th e sam p le games you se t out and to buy new gam es. Bu t after a whil e bu sin ess goes bad. A recession occ urs, co up le d with a n ew interest in old-fash io ne d board ga mes. You 're h avin g a litt le trouble meeting your expenses, and your profits decline by 10 p ercent. You kn ow you co u ld eas ily reco u p th e p rofits by firing eithe rJ eff o r Sar ah an d working m ore at th e sto re yourself. You also kn ow that you could sta rt cu tting b ack on inventory an d sto p su pplying your sa m ple pl ay sta tio ns with n ew games, an d th at would save yo u money too. You figure yo u can ride ou t the re cession by cutting costs an d beli eve th at board ga mes are a fad an d th at vid eo ga mes will soo n b e bac k. Bu t you n eed to wat ch your cos ts. Do you do an y or all of th ese things? in what order do yo u do th e m? Or do you sim p ly swallow th e d ecr ease in profit an d keep your (temporarily) less-pro fitabl e busin ess running? If you d o make adj ustm ents, do you consu lt with Jeff an d Sarah to seek th eir advice an d coo pe ra tio n? o r do you sim ply decid e to keep your own p ro fits up? Well , ch an ces are yo u at least co n sider working with yo ur staff to ride o ut the probl em. Th e reason is th at you kn ow th em as people, yo u have relationships with them , an d you see th em as more th an simply a busin ess ex pe nse. As a result, yo u are unlikely sim p ly to fir e Sara h, wh o h as co me to d ep end on th e income, or to disappoint yo ur custom ers, whom yo u've com e to know and like (in addition to h avin g create d good will with th em that you d on 't wan t to destroy) . You 've come to ap preciate the human ele me n t in your busin ess. Sto ckholders in public corporations don't feel the same way. At least not all of th em do - so me d o , as evide nced by th e rise in socalle d soc ia l resp onsibility mutual fund s, which ca p tured appro xim at ely 2 to 3 percent of th e dollar value of th e mutual fund m arket in 1999 (I' ll discu ss th e limitati ons of th ese fu n ds in chap te r 7) .12 Public corporat ion stoc khold ers don't feel the sam e way b ecause the di sassociation fro m th e co rp oratio n whi ch limited liability m ak es possibl e allows th em to distan ce th emselves fro m th e human effe ct of th e corp orat io n' s behavior to the p oint of h aving to pay n o atte ntio n to it at all, a su bject I'll tak e up in m ore d epth in the n ext chap te r. In short, limited liability breed s irresp onsibility. And

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PHIL O S OPH Y O F THE A M E R ICA N CO R PO RA T IO N

th e de tachment fro m th e co nseq ue nces of co rpo ra te beh avior is equally true , although for differen t reasons, of corp orate boards of directors, a subject to whi ch I'll now tur n. "

dThe re is also a legitimat e question of th e practi cal co n seq ue nce of elimin at in g limited liability, at lea st for lar ge co rpo ratio n s. (We mig h t want to keep it at th e formative stages of bu sin ess to protect risk-takin g en tre pre ne ur s, altho ug h th ere are good argum ents against thi s as well. ) An exam p le will illu strat e my point. As I writ e thi s, Microsoft has 5,355,3 77 ,000 o u tsta nd ing sha res . Now let's assu me that Micro soft go es bankrupt and not o n ly loses all o f its curre n t valu e b ut is left with debts and liabilities of $5 billi on- a fairl y substa n tia l amo u n t, I'm sur e you ' ll ag ree. If we had no limit ed liability, and eac h sha re ho lder were liabl e o n ly fo r th ei r pro-ra ta share , th en eac h shareholder would owe o n ly o ne d ollar a share to Microsoft's cre d ito rs . Do ubl e th e amo un t to an asto un d ing $ 10 b illio n d e ficit and each wou ld owe two d ollar s a share . It 's at least worth asking wh ether this is too hi gh a price to pay for th e el im in atio n of limited liabilty if in fact th e resul t wou ld be more responsible , lon g-term co rpo rate beh avior.

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CORPORATE PSYCHOLOGY 101 , OR ALL THE CORPORATE WORLD 'S A STAGE : THE CONSTRAINTS OF ROLE INTEGRITY

Limited liability forms the backgrou nd structure of the proble m. Bu t the issue is no t just limi ted liab ility. There are other ways in whi ch we h ave bu ilt th e co rp oration to be irrespons ib le. T h e legal co nstraints we 've co nstr uc te d aro u n d modern Am erican co rpora tio ns are com p le te ly in co nsistent with p revaili n g psych ological understandings of free mo ral deve lop ment, wh eth er as described in the wor k ofJ ean Piaget an d Lawrence Kohlb erg or in the feminist revision of th ose th eori es made so influen tial by Carol Gilligan .' These co nstr ain ts tak e two r ela ted forms: one is the co m bin atio n of law an d structure th at narro wly co nstrains th e corpo ratio n in th e e n ds it is p er mi tt ed to pursu e, wh ich I' ve earlier described as th e mandate to maximize stockh olde r profit. The othe r is th e limited an d mora lly stun ted ro le that co rp orate acto rs (d irectors, officers , and stoc kholde rs) are req u ired to p lay in di recting the corpora tio n to ach ieve this goal. More directly, the str uctu re an d laws of the mod ern Am e rican cor poratio n im pel (if th ey d on't absolu tely require ) co rporate actors to mak e these go als th eir own . In so d oing, th ey h ave h elp ed to exagge rate th e lib eral p er version in th e corpora te co n text. Le t m e give an exam p le an d the n exp lain the effects of these con strain ts in turn. T h e Ca r Co rporat ion of Am eri ca (CCA) m an ufactures and sells au to mobiles . As p art of its o ngo ing study of automotive safe ty, the Natio nal Highway Traffic Safety Ad mi n istra (j(j

tion (NHTSA) begins to hold h earings on th e adv isabilit y ofrequirin g all car manufacturers to install airbags in their cars within five years at th e latest. CCA asks its engineering and sales d epartmen ts to study th e issu e, an d th ey report that add ing airbag s would increase the sales price of cars by 8 percent. Alt houg h the regu lation would ap p ly to all car manufacturers an d th e price in cr eases would thus occur across the board, CCA's sales experts conclude that the consequence of increasing prices, even for a safety feature, would lead people to keep th eir cars for two years lo n ger before trading them in . As a result, sales would decrease by more than th e in crease in reven u es. Car com pan ies, in clu di ng CCA, will lose mon ey as a result. At the sa me tim e, th e NHTSA staff has determined that mand atory airbags would dramati cally d ecr ease traffic deaths . CCA h as two alternatives. Ifi t is co nstrained by the cur re n t legal precept that the purpose of the corporation is to maximize stockholder p rofit, its bo ard of directors co uld legitimat ely fight th e regu lation . If, on the ot her hand, th e directors are free to act as mo r al h u m an beings, balan cing th e n eed for co rp o ra te profit against th e in cr ease in safety that airbags would provide, the board might de cide to accept the regulation or perhaps to work with the NHTSA in ac hievi ng some kind of co m p ro m ise. Certainly eac h di rector would be required to co nsult his or h er conscience in decidin g h ow to vote, and because of th e moral fr eedom enj oyed by th e board th ey would be acc o un ta ble for whatever decision th ey mak e ." T he example illustrates both kinds of co ns traints, whic h although relat ed in th at th ey produce th e sam e effec t are noneth eless different in operation . T he first is the legal co nstrain t imposed upon the corporation itself, the narrow moral universe that mandates th at th e corp ora tion m aximize its profit." Th e second is th e

"In fact th e American a u to in d ustr y fought airbag regulations for sixt e en yea rs . "No te that I say "maximize co rpo ra te profit. " T h e law h as never d emanded, excep t in o ne rare ci rc u m sta nce, th at th e co rpora tio n maximize stock

price. (In fact it is questionable wh ether th e law ha s actually ever d emanded tha t th e co rp oratio n maximi ze profi t.) That , however, is the way we 've co me to COR POR A T E PSYCHOLO GY

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constraint under wh ich corporate directors and officers operate, limiting if n o t obviating th eir broader moral selves in order to function within the ro les that the ethic of stock price maximization cre ates for th em. Now constraint in both cases is a problem: it in hibits the freedom of th e corporation and its directors to act in th e manner th ey think most consistent with the behavior of a full moral person by erecting walls around the scope of th eir considerations. By itse lf, this constraint wouldn't n ecessarily prevent th e co rp o ra tio n an d its directors from acting morally, even within limits. The reason is th e legal scope of directorial action, whi ch is governed by a legal doctrin e known as th e busin ess judgm ent rule (BJR) . Th e BJR, in its classic formu lation , is a legal presumption th at in making corporate decisions th e directors h ave acte d with due ca re, in good faith , and in the best interests of the corp oratio n . Because it is a presumption th at is difficult to rebu t, it gives the board a great deal of latitu de in d eciding how to pursue th e goa l of profit maximization. Thus one could argue that directors need not leave their moral compasses b ehind, th ey n eed not gu ide th e co rp o ra tio n to b eh ave irresponsibly, be cause the BJR permits them to bring issues of morality and responsibility into their decision-making process. In other words, o ne co u ld arg ue, th e e n ds are given but th e m eans are not. Look ed at this way, it 's not terribly different from th e natural law of St. Thomas Aquinas, whi ch sees th e en d (of return to God) as a given , with th e m eans to b e d et ermined by human reason in acc o rdance with that end; or Aristotle 's conception of th e end as being the good life, with th e m eans to ach ieving it also to be d et ermin ed by reason. But the answer is not that simple. In the first place, even if we take the position tha t the ends are given but the means are not (and thus that th e m eans can be morally d et ermin ed) , th e given en d is not the elevated one of a return to God or the contemplative life but rather th e less lofty one of stock price maximization. That is to say, even if th e m eans are undet ermined, we must still defend th e end itse lf. Now one could argue , I suppose , that stock price maximisee it, and, as I wiII discu ss in part structure. 68

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zation is as morally justifiable as redemption . But I don 't think it 's obvious on its face - it needs a defense. Second, th e moral judgment of directors acting under th e constraint of sto ck pri ce maximization (or co rp orate profit maximization) , even with the latitude provided by the BJR, is a contingent moralit y. That is, even if we assu me th at th e BJR gives th e bo ard th e freedom to make morally defensible de cisions, the moral freedom of th e board extends only so far as it is consistent with the end goal of th e corporation, th e en d of maximizin g sto ckholder profit. When moral, or, if you prefer, responsible, behavior conflicts with this e n d, responsibility must ta ke a back seat to profitability. A brief exam p le will show wh at I m ean. Pr esumabl y GM, in designing th e Malibu, built what its engineers considered to be a reasonably safe car. We would expect th em to do this if for no other reason than that they wouldn't be able to sell cars that were known to be dangerous. But we might also expect th em to feel some moral responsibility to th eir custome rs to build safe cars, even if this meant a slight reduction in profits, which it mayor may not have ca used . The com p any's d ecisions not to install an in exp ensive safety devi ce that would have prevented the Andersons' harms and not to recall the cars illustrate how corporate morality is a marginal moralit y. For th e co m p any decid ed th at th e co st of d oing eithe r of these things far exceeded the financial benefit, measured in terms of likely damages awards in litigation. On th e margin, profit maximization trumped morality. This is what I m ean by co n tingen t morality: moral behavior is contingent upon its financial rationality. The prestigious Am eri can Law In stitute g rap p led with th e issue of corp orate morality some yea rs ago in attempting to codify and, to some extent, expand the ability of directors to act responsibly. Bu t it fell woefully sh or t. Section 2 .01 of its Prin cipl es of Cor po rate Governance , which sets out the rules of proper corporate conduct, only went so far as to suggest that th e co rp o ratio n , even if corporate profit and sh areholder ga in are not en h anced as a result, (i) must act in accordance with law like a natural person; (ii) may devote " a reason abl e amo un t of resources " to charity; an d (iii) "may tak e into account e thi cal considerations that are reasonably re garded as appropriate to the responsible conduct of business." C ORPOR ATE PS YCH OLO GY

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Now if th ere 's going to be ro om for real moral ac tio n, it 's going to be in this last consideration . But note the limitations: while the institute's principle requires that cor po ratio ns co m p ly with law (th e minimum obligation of any citize n) , charita ble giving an d e th ica l behavior are not required but only permitted. And ethical behavior is p ermitted o n ly within th e bounds th at suc h co n d uc t be "ap pro priate to th e responsibl e co n d uc t of business," wh at ever that m eans. As far as the permissive rath er tha n mandatory n ature of this flexibility goes, on e first h as to co ns ider th e likely beh avior of a corp or atio n and its directors in an environment in whi ch profi t m aximizati on is th e norm. In thi s enviro n me n t, in whi ch co rp o rations are co m pe ting with o ne an othe r to survive, the corporatio n th at can best maximize profits will be the most likely survivor. The m arket will vote th e others " off th e island." H ow does th e co rp oratio n m aximize p rofits? Of co urse it co uld make a better mousetrap . Bu t another way is to reduce expense s. Eth ica l beh avior, res pons ible behavior, is costly. In fact , eth ica l an d responsible behavior is ethical and re sponsible pre cisel y because it is beh avior that we would n ot ordinarily undertak e if o u r own purp ose were to serve ourselves; it is b eh avior th at we would prefer not to undertak e . We would prefer no t to do so b ecause it is in so me way cos tly to us. Oth erwi se it wouldn't be e th ica l at all, but ra the r m erely a means of satisfyin g our own desires; we would do it simply be cause it ser ved our interests. Th e corporatio n th at be haves eth ically and res ponsibly is a corporation th at in curs greater costs tha n corp oratio n s tha t choose to co m ply on ly with th e minimal requirements oflaw. It is p ossibl e th at o u r eth ical co rporatio n will ge nerate gre ate r revenues b ecause its e th ica l reputation may garn er more good will for it an d thus a larger, m ore loyal custo m er base. But thi s last resu lt is h ardly o bviou s on its face , and in any event that cor p o ratio n' s costs would be hi gher an d would offset at least some of th e gre ater r even ues. C

CIt is no acc id en t th at one of th e mo st eth ically ad m ire d corp orations , Levi Strauss, is a pri vately held co m pa ny, o r th at th e publicly held Ben & J erry's, with its fam o us co m m itme nt s to sma ll local su ppliers and charities, felt th e need to sell o ut to a large public co ng lo mera te .

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Thus th e Am eri can Law In stitute 's gra n ting p ermission (whi ch doesn't go be yond the BJR) to corporations to b ehave ethically is no ch ange in curre n t law. It is unlikely to result in an outpouring of responsibl e corporate beh avior. Th e co m pe titive enviro n me n t in whi ch corporations can irresponsibly ex ternalize th eir costs (and thus ga in an advan tage ) with out being h eld accou n ta ble discourages good b eh avior. In order to see this, you don't n eed to go furth er th an the stories with which I began . Cons t ra in t is h armful in a broad e r se nse as well. Devel opmental psychology has something to tell us here . The theories I will be relyin g on, princip ally th ose of J ean Piaget an d Lawren ce Kohlberg," were developed by stu dying an d th eo rizin g abo u t individual human beings, and so they do not offer a perfect parallel with co r po ra te co ns tra in ts. Thus I am m ainly usin g th e st ruc ture of th eir ar gument more than its sp ecific co n te n t to evaluate th e moralit y of th e corp orat ion . Yet th ey ar e re levan t not only by structure and analogy but for two oth er reason s: both Piaget an d Kohlberg saw implications for social organization in th eir work, and corporate direct ors an d man agers are individual human b eings to wh om th ese th eories can directly apply. In any eve nt, the claim I want to make is no t overl y strong: it is simply that in an atmosphere of legal an d p racti cal co ns train t suc h as I just d escribed , n eith er th e corpo ration nor its dire ctors and managers can be expected to behave responsib ly an d accou n ta bly.They d on't h ave th e fr eedom to d o so, an d we don't h old the m accountabl e for failing to do so . THE MORAL JUDGMENT OF THE CORPORATION

The arg u m en t of d evel opmental p sych ology is an arg u m en t about the de velopment of moral au ton om y, that is to say, m oral .II reali ze th at Piaget an d Kohlberg have been accu sed o f gend e r bias in th eir stu d ies, see Caro l Gilliga n , In a DifJerent Voice (Ca mb ridge : H arvard University Press, 198 2). My critiq ue is e n tire ly co nso na n t with ce r ta in a p proaches to cu ltural feminism , so I am perfectly co mfortable rel yin g on th eir studies becau se my arg um en t will begin with th em (as d oes Gilligan) an d th en tak e th e m beyond th eir lim itatio ns in atte m p ting to understand th eir re levan ce to th e problem of co rporate responsibility. C ORP OR ATE P S YCH OL O G Y

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fr eedom. At this point, you might fairly ask why I am talking about moral autonomy when I began this book with a critique of liberal autonomy and grounded th e problem of corporate responsibility in that very critiq ue. Th e answ er is not diffi cult. It is that th e problem of autonomy with which I began is one of a radical perversion of th e Enlightenment conce pt of au to n o my, whi ch h as produced a so cial understanding of autonomy that holds that each individual ought to serve only themselves. One of the two major observations of the critiq ue I h ave developed h ere an d elsewhe re is th at this p erversion of autonomy denies caring and community. It is similar to, if broader than , th e cr itiq ue that Robert Kuttner in his book nv erythingfor Sale has leveled at modern Am eri can soc ie ty, namely,that this pe rversion tur n s everything we value into a market cornmodity.s It is not an arg ume n t th at auton omy in th e original Enlightenment sense is intrinsi cally bad, only that we have made a fe tish of individualism to th e point where it has suppressed th e intuitions that lead us to care abou t one an othe r an d our lar ger co m m u n ities.t That caring itselfis the result of a healthy moral development, and indeed that moral d evelopment is th e development of our maturation in a ca ring manner. Thus the argument I am making here is that corp o rate moral development, which me ans th e free moral development of corporate act ors as co rpora te acto rs, is a preconditi on to res ponsible, accountable corporate behavior. I recognize that in m aking this claim I am putting a p articular sp in on m oral d evelopment. On e co u ld , for ex am ple , argu e that moral developmen t means de ontological moral development, whi ch is th e morality of intentions regardl ess of th e co nse q ue nces. In this way of thinking, outcomes don't matter; what matters is that you mean to do the righ t thing. If I mean to help an elderly lady ac ro ss th e street but a bus blo cks my way an d she cro sses before I can ge t around it, I have behaved morally even though I did not achieve th e result I intended. This d eontological, or nonconsequenti alist, morality is th e morality of Immanuel Kant. It lies in the duty of each individual to act as his own moral rule giver. It is th e duty of every person to ac t in accordan ce with abs tract moral principles that require yo u to universalize yo ur decisions for the purpose of making yo ur actions 72

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internally consiste n t with a ge neral governing princip le, like Kant's categorical imperative. Consequences don't matt er ; you don't h ave to achi eve what you intend, as lo ng as your intentions ar e good and ar e bas ed on a princip le that everyone co uld follow. One of th e most im p or tan t princip les Kant identifies is that of treating each person not as a m eans to th e fu lfillm ent of one's own goals, but as an end in h e rself. To th in k in th is way is to strip mor al action of context and consequen ce and to m ake it a matter of pure intention. While I, along with ma ny others, rej ect the idea tha t consequences don't matter, my argument is not r eally in co n siste n t with a broader un derstan din g even of Kantian m orality b ecaus e it, like Kant's own th eories, winds up requir ing that corporations and corporate ac tors tr ea t others as e n ds an d not as m eans; th at is, it e n ds up arguing th at cor p orations and corp orate actors are not allowed to use others for their own gain. T his is somewhat the same argument I made earlier in th e co n te xt of limited liability, th at co rp o ra tio ns not be allowed to externalize th e costs of stockholder profit maximization onto others. And so I return to th e point I made in chap te r 1, th at th e specific moral theory one adheres to is not especia lly important as long as you u nderstand th at no mo ral development can ta ke p lace within th e co ns tra in ts imposed upon th e co rpora tio n. " It is th at structural point, and not th e particular content of morality, I want to e m ph asize . The opportunity to fr eely make moral decis ions is "It may be th at my ar gu me n t is inco nsisten t with a broad so cial moralit y based in uti litari anism . I have elsewh ere a rg ue d agains t uti litari anism as a n acce pta ble moral alternative and will not re hash those a rgu men ts he re . I sim ply o bse rve th at for uti litari anism to be a wo rka ble m oral fr amework it has to be wid espread within th e soc iety itself- it o nly rea lly works on an individual level in th e perverse form a rticulate d by th e neoclassical ec o no m ists as th e individual pursuit o f wealth maximizati on (alt ho ug h eve n that perversion is devel oped on a soci al scale) . It m ay be th at individual directors, corporatio ns, o r boards ac t to maximize th eir uti lit y; but in a regim e in whi ch co rpo ra te moral judgments a re mad e th e responsibility of th e particu lar corp o ra tio n a nd its board in co n tra st to th e cu r re n t Am eri can syste m, wh ich provides th e profit-ma ximizati on d efense , co rpo ra te decisions mad e to maximize co rpo rat e profit or uti lity need to be acc o u n te d for by th e board th a t m ak es th em . COR POR A T E PSYCHOLO GY

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what is req uired ; th e actual moral fram ework for making those decisions is, for th e m om e n t at least, unimp ortan t. As I h ave no ted elsewhere, "Constraint is th e enemy of moral dev elopment." I won't belabor th e argument (and so I tak e th e risk of oversim p lifying it, but I thin k the m aj or outlines are clear enough) . Psycholog ists believe that for a ch ild to d evelop as a fr ee moral actor, h e needs to be ab le to see himself as part of the process of rule making. Suc h understanding deve lops over time, with ch ild ren be gin n ing th eir moral d evelopm ent under th e severe co nstrain ts of parental r ul es and th e r ul es of games. Chi ld re n take th e r ul es as given and be hav e accordingly, first imi ta ting th e r u les alo n e in a form of codified b ehavior, th en coo pe rating with others in game s, co m p lying with th e rules in order to win, and finally participating in th e process of rule making. In fact Piaget obs erved boys in this latt er stage as arguing about th e rules and learnin g to reach agreement. He co n cluded th at this process is a ce ntral aspect of moral d evelopment. It is through this process that th e ch ild co me s to see hi mself as having a ro le in the creation an d d evel opm e n t of r ul es an d acq uir es a sense of his moral autonomy.' Note that this is an argument that a given process will produce a desirable outcome. In order for mo ral developme nt to occ ur, chi ld ren must be free to coope rate with on e another in th e deve lopm ent and m odificatio n of r ul es and th e resol u tio n of disputes over th e r u les. By th e way, th e fr eedom to cooperate is at least as im p o rtant in Gilligan's evalua tio n of girls' moral development b ecause

'G illiga n doesn 't tak e se rious issue wit h th is in her at tempt to co rrect fo r th e ge nder bias of thi s work. Rather, she sees th e "rules" by which girl s co me to th eir co m p lete moral d evelopment as co n te xtual and relational, more in th e nature of broad er pr in cip les whi ch are adapta ble to circ u msta nces and in whi ch rel ati on ships tak e priority over winning. Thejurisprudential di stin cti on betw een rules and pr inciples is an im po r ta n t one and is ce n tra l to the work of liberal th eorists like Ronald Dworkin, who cha lle nge th e perceived rigidity o f positivism , and J o h n Rawls's articu lation of princi ples ofjustice against whi ch spe cific co n te xtua l ru les are to be measured, as we ll as legal pr agm ati sts (or rea lists) like Karl Llewellyn , who saw almost all legal decision making in co ntext.

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that very d evelopment ori ginates in a coope rative, co nsu lta tive, and contextualized ideal of morality in contrast to boys ' more compe titive ultimate id eal (although of course that competition itself requires coo pe ration ).« Process itself can be constrained. In fact some kind of constraint is n ecessary for process to exist. Think for exam p le of th e process of a criminal trial whi ch, while designed on principles of procedural fairness, fo llows a formal, stylized approach. While th e procedures may h ave developed from a process of moral reasoning abou t what a fair trial requires, this won't do for moral development itself; tha t requires an unconstrained ability to ex pe r ien ce th e fr eedom that Kant assumed was a precondition of moral behavior and th at developmental psychologis ts see as essen tia l to moral maturity." So whil e one might argue that th e co r po ratio n has some process opportunities - to participate in the passing of corporate legislation, through the requirement of stockholder voting, through the compliance by directors and officers with co rp orate bylaws - this is really little process indeed (as I will argue in greater detail later) and in no way fr ees th e co rp oration to d et ermin e its ultimate en d . And that end of course constrains all corporate actors in their behavior through whatever governance processes are provided for the cor poration . This last observation requires me to repeat one point; th ere are perfectly resp ectable moral theories in which en d s are taken as given , from Aristotle 's ideal of th e good life to Aquinas 's goal of redemption to the utilitarian notion of the greatest good for the greatest number. In an important sense, though, eac h of th ese th eo -

gl want to be clear that I reject th e esse n tializatio n of ge nde r types that ha s been drawn from Gillig an 's work. Although sh e co n tra sts boys an d girls as a general matter in he r stu dy, it is clear th at boys are as ca pab le of " fe male" moral d evel opment as girls are of "ma le" moral development. I, for exa m ple, co nside r myself to have a m oral charac te r far m ore like th at of Gilliga n 's girls th an Piaget's boys , and my scholarl y work has refl ect ed this . So has th e work of man y cr itica l scho lars. "In fact , this very cr im inal process can itself be see n at lea st in part as th e outcome of moral d ecision making. CORPOR ATE PSYCHOLO GY

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ries begins with a prin cip le of morality th at justifies th e en d and works towa rd that e nd. And, as I n oted ea rlier, eac h of th ese ideals ultimately serves a p urpose that go es beyo nd n arrow egoism - it goe s b eyond m ere self-satisfa ction. Th e co r po rate en d of sto ck price maximizatio n does n ot do this. It is an ethic of pure selfinterest. Moral b eh avior -whatever your moral th eory -is d ifferent. It is be havior that by definition takes accoun t of the conc erns of others . It's also a precept of ever y m aj or re ligio n . Corporate constraints ret ard, if th ey don 't co m ple te ly block, th e developm ent of such atti tudes. As an end state of moral deve lopmen t, the cu r re nt state of affairs simply won't do .

THE PLAY'S THE THING

A seco nd level of con strain t relat ed to th e first is that imposed on corporate actors whe n the y are acting in the name of and on be half of th e cor pora tion . This brings us to th e problem of ro le morality. T he te rm " ro le morality" might not be readily recognized by all readers, but it is a con ce p t fami liar to all of us. Role morality simply m eans th e rules of b eh avior and so cial ex pecta tio ns we have of people who p erform specific fu nctions in the course of performing those fun ctions. One hotly d eb at ed ro le whi ch carries with it a particu lar kind of moralit y is that of a lawyer. In the American system ofjurisprudence , lawyers are sup posed to vigorously defend th eir clients to th e best of th eir ability an d with out co n su lting th eir own fee lin gs about th e clie nt's behavior or p urpose.' Recent examp les of th is in th e p ub lic eye include th e O . J. Simpson trial. T h e question of wh eth er or not Simpson actually murdered his wife, Nico le, and h er frie nd Ro n Go ld man was no t o ne whic h hi s lawyers add res sed; th eir ob ligation was to atte m p t to create a reasonab le 'T his is an oversim plificatio n . T he re is an ac tive d eb at e over whether and wh en a lawyer o ug h t to co ns ult her own feelings abo ut a m atter in representing a client, and th ere are of co urse rules of e th ics that lim it how far a lawyer ca n go in th at representati on - avoid ing fr aud, for exam ple . But th e sta tem ent is ge ne ra lly accep te d to be true , and the arg u me n ts are on th e mar gins of co nd uc t, not with th e ce n tral premise .

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doubt in th e jurors' minds abo u t wh ether Sim pso n actually did it and to use th e rules of evidence , procedure, and constitu tional protection to evade facts tending to show th at h e did . I was recen tly listening to two of Sim pso n's lawyers, Bar r y Sch eck and Pe ter Neufeld , talking about the trial with Terry Gross on National Public Radi o 's Fresh Air. Gross aske d th em directly wh ether th ey in fact b eli eved th at Simpson had not co m m itte d th e murders. Sch eck responded , with a tone of surpr ise, th at in effect they h ad n ever aske d Sim pson th e question ; h e sa id h e h adn't don e it an d as his lawyer s their job was not to verify his denial but to gain an acquitta l.' The qu estion of wh ether Simpson h ad actually murde red two peopl e wasn 't eve n on th e tabl e as far as th ey were co ncer n ed. T h is kind of co nve rsa tio n bothers m an y p eopl e. An d crim inal defen se lawyers hav e r eady an swers, including the ce n tral an swer that th eir job as lawyers is not to sit in judgment of the ir clients but to co nvince j uries to acq uit within th e pro cedural rules of th e legal system . After all , a verdict of not guilty doesn 't necessaril y mean that th e defendant didn 't d o th e ac t with whi ch h e was charged; it o n ly m eans th at th e prosecutors hav en't proved it beyond a reason abl e doub t. That is th e ro le our legal and social syste m s cr ea tes for cr im in al d efen se lawyers. While we m igh t n ot want to do th ei r j ob p recisely be cause we don't like havin g to be in the position of defendin g p eople we suspect mi ght h ave d one b ad things, an d whil e the very n eed for thi s ro le m igh t mak e us un comforta ble , we acce pt th e lawyers' defense of themselves as morally adequate because we have agreed to create th e rol e fo r a purpose th at , all things co ns ide re d, we b eli eve to be worthwhile. But it isn 't just about lawyers. There ar e lots of soci ally constr uc te d ro les, eac h of whi ch h as its ex pecte d n orms of beh avior. Because we have agreed to cr eate the roles, the norms of behavior th at go with th em provid e an ade quate m oral d efense for th ose wh o are ac ting within th em. So , fo r exam p le, d octors, clergy, p arents, policemen , spouses, and friends all have roles tha t car ry with them rules an d ex pectatio ns. O f co urse so do m afia bosses, drug kin gpins, prostitu tes, and terrorists. Th e difference b etween the first and second se t of ro les is th at we h ave co llec tively d ecided th at the C ORP OR ATE P S YCH OL O G Y

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first are so cia lly desirable and n eed th e set of rules that d efine th em in order to fu lfill their fu nction, whereas the second are socially undesirable and th erefore th e rules that define th em and co n strain th em are illegitimate (and ge nerally illegal) . This do esn 't n ecessarily mean, as the cri minal defense lawyer example makes clear, th at eac h of us as an individual ap p ro ves of wh at th e ro le requires in whi ch case we ea ch have the ch oice of refusing to take on the role in the first p lace . Nor does it me an that we don't argue ab o ut th e limits of wh at th e ro le requires - clearl y we do. But th e co re of th e role and the r ul es are things that we take as acceptable in order to m ak e our soc ie ty fun ction in th e way we d eem best. So let's look at th e rol e of th e co rporate director. In th e first p lace , it is important to remember (for reasons that will soon be come ap pa re n t) th at co rp ora te directors act on beh alf of an artificial person. Is the role of a person whose so le objective is to maximize stockholder wea lth a legitim ate ro le, especially if it means imposing substa n tial costs on oth er people an d societ y an d ge tt ing away with it? This is a question abou t whi ch reasonab le p eople mi ght disagree. So first le t's con trast it with the crim in al defense lawyer 's role an d several other socially accepted roles as well. Then, in the next chap te r, I'll look at th e legitimacy of stoc kholde r wealth m aximization as a moral construct in itself.

THE NATURE OF THE BEAST-TYPES OF ORGANIZATIONAL MORALITY AND THE CORPORATION

In order to make the appropriate co n trasts, let's be gin with the point I made just above - that corporate directors and other corporate actors hav e rol es th at ar e organizational, not individual. In order to analyze these organizational roles, in order to see whether th ey ar e morallyjustified , we first n eed to ex am ine ex actly what th e nature of th e corp ora te organization is to determine wh eth er we approve of it as a ro le-creating ins titution . Th ere are two basic types of organization . In one th e participants have a com m on goal. A symphony orchestra or string quartet is a good example: each member of the organization does some78

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thing individually, but th ei r co m mon goal is to pl ay music as beau tifull y as possible. A team of su rgeo ns and nurses is another: th eir go al is to m ak e a patient well. The poin t is th at wh ile eac h of th e m embers of th e o rgan izatio n h as a given ro le, that ro le is design ed to work in conc er t with those of the others to achieve a com m o n en d . In the oth er type of organ izatio n, p eople co me to gether to fulfill the ir individual goals but n eed the cooperation of ot hers to do so. A stoc k brokerage fir m is a good exam ple. Eac h stoc kbroker wants to make as much money as sh e can . Ea ch can accomplish this goal alo ne, buyin g a sea t on th e Ne w York Stoc k Exc hange or working over-the -cou n ter, perfor ming h er own resea rch , an d hi ring h er own office staff. But there are synergie s in stockbrokers working toge ther th at ben efit all of th em in th e pursuit of th eir individual go als. It is far cheape r for th e firm to hav e o ne m ember with an ex change seat, a com m on research dep artm ent, an d a common legal co m p liance staff an d back office. Eac h broker has h e r own clients, however, and th e work of one broker does n ot depend in any important way o n the work of th e other brokers. Whil e th ey work togethe r, th ey do n ot in any m eaningful se nse work as a team . It is clearly a very distinct kind of organiza tion from an orchestra or surgical team . The principles that bind these teams are also importantly differe nt. The legal philosopher Lon Full er described wh at h e calle d two prin cipl es of human assoc iation. " The first principl e is o ne of sh ared co m mitm ent an d binds the members of th e organization by th ei r co m mon goal. Organi zati on s of this type can be ex pecte d to share a st ro ng se nse of co m m un ity an d close relation ship , for eac h of the m embers n eeds the oth ers to ach ieve h er goa l. Thus religiou s in stituti ons, universities, eve n co un try clu bs ca n ex h ibit thi s princip le. In co n trast to these are organ izatio ns whi ch Fu lle r describes as bound by th e legal p rincipl e . T hese are organ izatio ns whi ch are held tog eth er by formal rules, rules whi ch set out th e ri ghts and duties of the m embers. T hese organ izations tend to be mo re fo rmalisti c an d procedural in operatio n and, whil e the m embers may sh are th e same goa ls, th ey ar e ch aracterized more by the individual C ORP OR ATE P S Y CH OL O G Y

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cla ims each has on th e other (and on th e organization) in th e pursuit of those goals than associations based on th e principle of shared commitment. So if o n e sto ckbroker decides to p lay go lf more frequently th an h e sp ends time in th e office, th e other sto ckbrokers are unlikely to get too upset, as long as the leisure-lovin g sto ckbroker is p aid acc o rd ing to his effo rt. Th ey may sn eer at his lazin ess, or they may be envious of his abi lit y to enj oy life, but the y are un like ly to fee l betrayed . If, however, the principal bassoonist fai ls to practi ce, th e e n tire orch estra will be em bar rassed in its p erfor mance of th e Rite of Sjning and will justifiably fee l she h as let th em all down. Whi le not exac tly parallel, it should be clear th at organ izations in whic h th e m emb ers share a goal are mor e likely to be organized along th e princip le of shared com m itme n t, and organizations in whi ch the goals of the members are more individual are more like ly to be organized arou n d th e legal prin cipl e. T he fo r ms of organization an d th eir organi zin g prin cip les ar e not pure - most human associations exhibit characteristics of both . Ye t as the examples of th e orch estra and th e brokerage firm I d escribed above exe m plify, there are im p ort a n t d ifferences) Perhaps the m ost important difference is in the ro les of th e m embers. In organizations th at are based on com mon goals, th e m embers are more likely to subordinate their individual interests to th e good of th e group in ac h ieving th eir goals. T h e bassoon ist may not feel like practi cin g - in fact sh e mi ght feel like p layin g gol f. But with a perfor mance co ming up, she fee ls an ob ligation to the entire organization th at lead s h er to forego h e r pleasure for th e ben efit of the gro up. In orga n izations like the brokerage h o u se that are based o n in divid u al goals, me mbers are less likely to worry abo ut interfer-

iFu ller recognized th e rea lity o f Ame rican soc ie ty th at th e legal princip le appears in almost all forms of h um an organizat ion and bemoan ed the fact th at o nce it to ok h old it h ad a co lon izing tenden cy, lead ing to th e grea te r formalization , proceduralization , and legalizatio n even of organizations based on th e principle of shared co m m itme n t. Whi le I j o in Fu ller in regr etting th is observation, it is only tan gential to th e purpose for whi ch I share hi s arg um ent. 80

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in g with co m mon goals th e organ izatio n m ay h ave to th e ex te n t that their own interests are impeded in so m e way. It's hard to imagin e a stockb ro ke r sacrificing so me of what she perceives to be h er fair share of pro fits in order to m ake th e ot her brokers better off. O r to forego pl aying golf in order to he lp everyone earn a few cents more in th e co m pany p rofit-sh aring pl an . Th e ex t raordinary m obility of brokers am o ng firms, with b roke rs regularl y leaving th eir firms for the hi ghest bidder, is evide nce of th is. (Regr ettab ly the same te n de ncy h as become quite pronoun ced in law fir ms, in whi ch the sense of com mo n goal seems largel y to have been supplanted by th at of individual goals. The same tendency is o bse rvable even in unive rsities, wh e re star scholars h op from ap po in tment to ap poin tmen t in searc h of th e best de al.) Now what kind of o rgan izatio n is th e co rpora tio n? Clea rly moder n Am eri can public corporatio ns, as legal cre atures, ar e organize d alo ng th e legal principle. Co rp o rate law goes to great len gths to establish th e rights an d obliga tio ns of th e m embers an d to defin e who is included and who is excluded from whatever community of interests the corporatio n is. In fact, as I h ave demonstrat ed at great length elsewhere , th e ten dency of co rpora te law ove r th e p ast ce ntu ry h as b een cons iste n tly an d marked ly to replace any se nse of common purpose with a very in d ivid ualized co nce p t of compe ting legal ri ghts and du ties . And th is tren d has been aided in re cent decades by n eocl assical econ o m ists who h ave arg ue d that th e co rporati on is really n othing mo re th an a co llec tio n of individuals pursuing th eir self-interest and bound to ge ther by a se t of loose, co n tractually based rul es - a free market within a sh ie ld of limited liability, if you will. But the corporation also exh ibits ch aracteristics of the other type of organ izatio n as well. Fo r th e m odern Ame rica n corp ora tio n has one go al, and it is the goal toward whi ch its members are bound to work; th at is th e m aximization of its stock price . In this resp ect it is like th e orc hestra. U n like th e orchestra, h oweve r, in whi ch th e members presumably also have individual interests whi ch th ey subo rdinate to th e co m mon good (golf or side gigs in wedding quartets, for ex am p le ) , corp orate law presumes that individu al interest can, if unrestrained, trump th at co m m o n interest, and so the legal C ORP OR ATE P S Y CH OL O G Y

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r u les ar e tigh tly con st ruc te d to attem pt to prevent this , to keep th e me mbers within their appropriate ro les.

THE LEGITIMACY OF THE ORGANIZATIONAL GOAL

With this in mind, let's focus again on th e legitimacy of th e corp orate goal and of the ro le it creates for corporate actors. The crimin al defense lawyer, as we n o ted , h as a narrow goal an d a broad goa l. Th e n arrow goa l is to defend h er client to th e best of h e r abi lity. T his n arr ow goal is individualistic: it is the respo nsibility of each cr im inal d efense lawyer to eac h of h er clients. But th is n arrow goal is in complete without th e broad goal. That broad go al is a societa l goal and transcends the goal of th e individual defe nse lawyer. In fact it ca n n ot be acc om p lished without th e e n tire co m m un ity of criminal defense lawyers and indeed th e en tire crimin al justice system . T hat goal is to e nsure thatjustice is achieved. Now you might obj ect th at this is also th e rol e of th e crim inal defense lawyer individually, to achieve j ustice for h er individual client, an d th ere are resp ectab le arg u me n ts to support th at view. Bu t it is a disputed view, and one th at may be at odds with the rules of pro fessional respo nsibility th at th e criminal defense lawyer is o bliga te d to follow. If you aske d crim inal defense lawyers (at least th ose who stay in business) , and especially if yo u asked their clie nts what th eir ro le is, I suspect th e answ er would be to ga in acq uittal for th e client within th e rules of th e syste m. In any even t, thi s is n ot a debate I choose to enter, no r is it necessary that I do so , for th e con t rast is clear en oug h . Nobody, I think, co u ld legitima tely arg ue that the goal of crim inal defense, as an in tegral part of the crimin al justice system, is to obtain acquittal for every defendant - th ere are, afte r all, p eople who ought to sp end tim e injail. Looked at as a rol e in an ove ra ll so cial syste m , it is instead to p rotect persons accused of crime s from th e unj u st use of stat e power, to act as part of a system geare d toward doing justice. That is why we h ave th e crim inal justice system and the practice of cri minal defense as an integral part of th at system. T h ere are other ro les in which th e in divid u al and soc ietal ro les are the same , or at least overlap . T he ro le of parents is to provide 82

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for, nurture, and rais e th eir ch ild re n. The ro le of tea ch ers is to educate. T he role of doctors is to cure th eir patients. Each of these ro les, like that of th e criminal defense lawyer, is designed to ach ieve a goal we d ecid e is valuable. Each of th ese goals, and th erefore eac h of th ese roles, see ms defe nsible on its face . T he persons who perform th ese ro les do so with an eye to th e good to be acc o m p lishe d . T he single ro le of the corporation as it is understood in modern Ame rica is to ma ke m oney for the stockholders. Like th e ro le of the crim in al defense lawye r, this ro le really can be p layed out only as part of a system, in this case as part of the market system whic h allows th e corporation to purchase in pu ts and produce o utp uts from suppliers an d for cu sto me rs. The systemically justified goal is to increase overall societal wealth. And as we h ave struc tured the cor poration, it also , like th e crim in al d efense lawyer, has an individua l ro le, namely, to increase th e wea lth of its stockholders, without regard to th e wealth of others (and protected in th is endeavor, as I discuss ed ea rlie r, by th e m antl e of limited liability) . Is th e cre atio n of stockholder wea lth a defe nsible role? In order to evaluate this, we n eed to know wh eth er th e pursuit of wealth itself is a legitima te goal.

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IS WEALTH A VALUE?

If our defense of th e role of the corporation and its directors and managers is to rest on our approval of th e purpose of that role, we must first determine wh eth er th e goa l of th e co rp o ra tio n is one of which we approve . That goal is stock price maximization. Put more directly, th e goal is to create wealth. So th e question is wh eth er th e pursuit of wealth is a legitimate goal. At firs t blush (especially in turn-of-the-century America) , th e answer appears obvio us ly to be a reso un ding yes. Wealth is good ; more wealth is better. Money makes the world go 'ro u n d , and with it we can do gre at things. Even to ask such a question seems to bla spheme o ur nati onal faith. And in th e co n te xt of the corporatio n it appears almost silly: Wh y do we have corporations if not to create wealth? But th e an swer is not so obvious. In th e first pla ce, co rp o ratio ns do important things like produce goods and services we need and create jobs for p eopl e, not on ly to allow th em to earn th e bread th ey need to live but to provide so m e sense of personal fulfillment (although obviously work is not th e only way in whi ch p eople find fu lfillme n t). But th ere 's more: Th e pursuit of wealth for its own sake , an activity we have directed the corporation to engage in , is an e m pty missi on . More wealth d oesn 't m ean a better society o r better lives. In order to give moral meaning to th e accumulation of wealth,

we n eed to understand why it is important. Wealth in itsel f has n o valu e. Bu t it is the value by whi ch the corp oratio n lives. The philosopher Ronald Dworkin provid es an in teresting analysis of wh ethe r weal th itself is a value. ' If it is, th en th e ro le we h ave given corporatio ns (and by extension co rpor at e actors) clearl y is a defen sibl e o n e, an d ou r on ly co ncern is over th e rul es that g uide th em toward this en d . If it is n ot , then th e d efense of co rpora te b ehavior is illegi tim a te, an d the role moralit y of cor p orate actors is in fac t a fo r m of immoralit y. So is wealth a valu e? Dworkin says no , and I agree. He be gins to answer thi s question by d escribing a view th at characte rizes an influential strain of mode rn economic thin king, that maxim izing soc ial wealth is a valu ab le thing to do . In re aching hi s co n clusio n, he goes th rough a series of arg ume n ts by wh ich one co uld reach th e o pp osite result. On e se t of argumen ts treats wealth as an en d in itself. Social wealth is part of socia l value , eithe r b ec au se it is soci al valu e o r becau se it is in itself jJart of soc ial value . A secon d se t of arguments tu r n s on th e effect: th at wealth is a tool of soc ial value , either becau se it causes oth er kinds of so cial improvements or becau se it may b e u sed to brin g abou t othe r impro vements. A th ird kind of argu ment is that weal th is "a su r rogate for so cial valu e " b ecause the maximizing of social wealth would produce other thi n gs we care about, like overall happiness, more effe ctively than if we aimed to in cr ease ove ra ll h appiness directly. The first set of argumen ts, th at wealth is a co m pone n t of soc ial value, must re st on th e valu e of wealth itself. This class of ar gumen t is different fr om in strumental arg ume n ts - it doesn 't claim th at wea lth will lead to othe r things; rather it arg ues only that a soc iety th at h as more wealth is be tt er than a soci e ty th at h as less wealth sim ply by vir tue of th e fact th at it has m o re wealth . H ere 's an ex am p le . Le t's say you would like to have my beat-up old Vol vo wagon becau se you th in k it is a classic. I would sell it to you for five th ousand d oll ars, an d you, wh o really must wan t it, would pay six th ousand. If th e govern m en t simply to ok the car from me , thus saving u s the cos ts of bargaining an d writing co n tracts, an d gave it to you , that would in cr ease wealth. It would move the car

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from a lowe r-valu ing user (m e) to a h igher-valuing user (you) . The car is worth six thousand dollars to you and only five thousand to m e . Thus overall so cia l wea lth wou ld be in cr eas ed. As a matter of in cr easing so cial wealth th ere would b e no point in for cin g yo u to pay me an ything because five thousand dollars of the value - th e five thousand yo u would p ay m e - wo ul d simply cancel out, an d th e remaining one thousand dollars rests with yo u be cause you valu e th e car more highly. Soci et y is wealthier by one thousand do llars . Of co urse I'm o u t five gra n d , but my own situa tio n isn 't important when we 're talking about the wealth of society as a whole . But is soc iety rea lly m ad e better off b ecause of this in cr ease in overall wealth ? Dworkin thinks n ot, an d I agree - for we hav e to ask what it is about society that is better. We can immediately see th at th ere is some th ing worse abou t it, an d th at is th e practi ce of co nfiscating property from som e p eople and giving it to others. Surely th is seems unjust in a society that values private property, at least without more justification . Is th at justification provided simply by th e increase in societal wea lth? Is the socie ty better as a result of this transaction simply because it is wea lthier?" Dworkin is care fu l to clear away th e possible answ er that the society is better off because overall utility is incre ased ; that is, be ca use you would deriv e greate r satisfac tio n from th e Volvo th an I do . We've said nothing about who derives more satisfaction from th e car, and because we h ave no way of m easuring satisfaction obj ectively we can 't. Th e question of utility, whi ch utilitari ani sm d efin es very broadly as satisfac tion , is not the same thing as th e question of wealth - th at is, mon ey. So we must answer th e qu estion ofwh eth er th e soc ie ty is b etter off only on th e ba sis of wh ether more money in itself makes th e society be tter. If you r answer is yes, th en yo u must exp lain why. Remember first that we are talking about the wea lth of a so ciety, not of its individual "Dwo rkin persuasively sho ws how rules th at require th at you co m pe nsate m e by assig ning one of u s th e rights to th e ca r are only in strumental to th e goal of in creasin g socie tal wealth - in othe r words, th e question of whether a socie ty th at has more wealth is better th an o ne with less wealth is a philosophical question independen t of how o ne ge t~ th ere.

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citize ns. So why does an overall in crease in wealth n ecessarily m ake the wh ole soc ie ty better off? Even if the in crease in soc ial wealth m ean s an in cr ease in th e wea lth of every o ne of its citize ns, d oes it mak e th e soc ie ty bette r off? If so, why? Is it b ecau se wealth lead s to greater happiness? Not ne ce ssaril y. Go rent Citizen Kane at your local video store an d wat ch it for proof to th e co ntra ry. If wealth in cr eases h appiness, it is only b ecause of wh at it can do for you . Every body kn ows that a ro om full of cash d oesn 't mak e you h appy sim ply becau se you p ossess it. But what about the second argumen t in this class : social wealth is o n ly one co m ponen t of soc ial value? That is, th ere are many things that mak e a soc iety better, and more wealth is o ne of th e m . This requires us to lo ok at all of the co m p o n ents of social valu e and ask whe the r it mak es se nse to think of trading off ce r ta in co m po nen ts of greate r value for m ore wealth. Dworkin uses th e exam p le of trading off so me m easure ofjustice for an increase in wea lth. If we think th at taking th e Volvo fro m m e an d giving it to you is unjust, is it justified by th e fact that it increases social wealth? Before go ing o n with this lin e of arg ume n t, let's look at wh at it implies. To say th at o ne can tra de off one soc ial value like j ust ice or fairness or equality or liberty for anothe r, like wea lth, implies that eac h of th ese social values is me re ly a preference, like th at ofa chi ld in the sch ool cafe teria who trades his Oreos for hi s friend 's pota to ch ips. To accept th e id ea that soc ial values are n othing m ore th an preferen ces-like potato chips over O reos-is to say, in effect, th at moralit y orjustice or liberty or wh atever is nothing more th an mere taste. Indeed , so me econom ists have said exactly thi s." But casual refl ection , I th in k, d emonstrat es the error of th is way of thinking . As I've noted , p eople behave in ways they co nsider to b e m oral becau se th ey think th ey sho u ld, n ot becau se th ey want to . It is part of the co nce pt of morality itself tha t wh en you d o so me thing for reasons of moralit y you d o it d espite the fac t th at d oing so me thing else would b etter satisfy your immediate d esires. O th erwise , behavin g morally would sim p ly be an oth er way of gr atifying your urges, an d we wouldn 't nee d no rms of m orality to direct your beh avior in circ u mst ances in whi ch you h ave co n flict ing selfish in terests. I S W E A L T H A VA L U E ?

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To com p le te th e arg u me n t, th en , th e id ea th at we can trad e other soc ial values for in creased wealth makes no se nse on an aggregate societal level because no individual would ra tionally agr ee to d o thi s (and if no individual would rationally do it, n either would society, whi ch , after all, is com p osed of individuals) . The reason you wouldn't do it is th at you wouldn't h ave any guara n tee th at an in cr ease in so cial wealth would in cr ease yo ur wealth - remember, we are talking ab out increases in social wealth without r eg ard to how th at wealth ge ts dist ributed . Mo reo ver, yo u would know th at yo u might well suffer by th e loss of whatever it was that we trad ed to in cr ease o the rs' wealth, just as I suffere d from th e co n fisca tio n of my Volvo to m ak e soc ie ty richer. If you wouldn't ratio nally do thi s, th ere is littl e reason to thin k that we would collectively choose for soc ie ty to d o it. So maximizing soc ial wealth is again off th e tabl e as a defensible valu e. Bu t th en there is th e second class of arguments, the ins trumental arg u me n ts: th at by in creasin g soc ial wealth , for exa m p le, by trading off some other component of so cial value , like justice , for greate r wealth, we in cr ease th ose other co m po ne n ts (like justice) . In other words, yo u mi ght think th at in cr easin g social wealth might so meh ow also increase the amou nt of justic e in soci ety. Bu t th is argume n t is intrinsically in cohe rent. Justice is an en d. Wealth , in this instrumental class of ar gument, is on ly a means to that end. It see ms in coherent to say th at yo u would trad e off more en ds for greater m ean s. Wh y would you diminish the e n ds for m o re m eans if it is ends toward which yo u are aiming? Dworkin ad d resses th e in strumental arg u me n ts - th at a soc ie ty that has m ore wealth can th ereb y achieve other goods - head-o n . He focuses on what he calls th e strong claim, th at increasing social wealth will improve oth er soc ial goa ls, like ach ieving justice or ame liorating poverty. But in order to make this ar gumen t, we first need to know what our other goals ar e, wh at goa ls it is th at in cr easing wealth will ach ieve. Simply in cr easin g wealth do esn 't answer thi s question . What does? One arg u me n t is th at a soc ie ty th at aims to in cr ease wealth breeds gre ate r resp ect for individual ri gh ts b ecaus e in order to m aximize wealth we n eed some initial assignment of rights, lik e the 88

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right to my Volvo . We do , afte r all, h ave to kn ow wh at so meone owns before we know what so m eo n e is willin g to pay to keep that property or wh at so me o ne else is willin g to pay to buy it. But a soc ie ty th at specifies righ ts is not a better soc ie ty by virt ue of th at alo ne. Antebellum American law provided th e right of one person to own another. A m ore efficien t assign me n t of individual rights d oes n ot by itself produce a b etter so ciet y without reference to wh at th ose rights are . Those wh o advocate maximizin g soc ial wealth would arg ue, h owever, th at ri ghts should be assigned in a way th at re sults in maximizin g wealth . This, as Dworkin points ou t, is circ u lar an d doesn 't answer anyth ing. It o n ly says th at you sho u ld h ave the rig h t to my Volvo without givin g an y reason other than tha t it maximizes wealth. We n eed so me indep endent reason to justify th e assign me n t of rights in th e fir st place ; maximizin g wealth sim p ly won 't do unless we can exp lain why we want more social wealth . Even wh en we assume an indep endent basis fo r rights- say, th e right to self-own ers h ip - th e idea of weal th maximization doesn 't provid e an independent valu e. Fo r, th e arg um e n t go es, once rights are in place we o ug h t to arran ge socie ty in a way th at th e subjects of th ose rights wind up in the h ands of their highest-valu e u ser. This, as I n oted ea rlie r, is measured by th e amoun t someone is willin g to pay for those rights- your willin gness to pay six thousand dollars for my five-thousand-doll ar Volvo . But, as Dworkin rightly points o ut, your willin gn ess to p ay depends on your ab ility to p ay. You might be willing to pay six th o usan d for my Volvo, but yo u might not h ave th e m on ey. Questi on s of wealth distribution are logically pri or to qu estions of soc ial valu e. Thus it is n ot at all clea r that pursuing weal th maximiza tion ser ves other important social valu es. Dwo rkin also ad dresses a well-known influential arg um e n t in American cu ltu re familiar to most of us as trickle-down theory. The th eory holds th at a soc ie ty that m aximizes wealth will enco u rage th e individual m embers of th at soc ie ty to maximi ze th eir own wealth , whi ch in tu r n will lead them to produce more for others. They d o thi s by virtue of th e m ech anisms of m arket exc hange, wh ereb y we assume that p eople engage in suc h exc h anges only wh en it increa ses the ir wealth. (They may also choose to give wealth IS W E A L T H A V A L U E?

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to th o se th ey care abo u t - altho ug h of co u rse th ey don't h ave to give an y of it away at all.) Thus, wealth maximization produces b en eficence, as free exc hange in pursui t of your own interest m ak es everybo dy b ette r off. No te th at if other p eopl e benefit fr om o ur maximized wealth, it is no t at all be cause we intend for th em to; th eir impro vemen t is a by-product of o u r own pursuit of wealth . Th us, assu m ing trickle-d own works at all, th e type of b en eficen ce su ch society cr eat es is no t a virtu e at all but rath er a happy accide n t. Dworkin also addresses th e argu me n t th at a soc ie ty of p eopl e who maximize their wealth has th e valu ab le result of achievin g a m ore eq u ita b le distribution of wealth . But nothing in th e th eory assures thi s. Nothing says th at we h ave to d istribute th at wealth in an ything re semblin g an equitable way, and recent eviden ce makes it clear th at in th ese terms m od ern Ame rica is just abo u t th e most unequal soc iety in th e world." More fundam en tal is th e question of wh at a j ust distribution of wealth is. This cannot be answere d sim p ly by re fer ring to th e value of m aximizin g wealth , but must in stead be independently de termined on th e basis of our ideas of what constitu tes a just distribution of wealth . We ca n reach this co n clusio n o n ly by referring b ack to other values. I th in k I' ve spent enou gh tim e on Dworkin's argu ment, but the answer to th e question sho u ld be clear eno ug h: Maximizin g wealth can be d efended as a valu e only by reference to other values. The arg ume n t th at wealth maximizati on is itself a good fa ils because th ere is n o pl au sibl e reaso n to think th at a soc ie ty th at maxim izes its wealth is, for that reason alone , a better society th an one th at chooses n ot to maximi ze its wealth , any more th an an individual would b e. And as a n on-wealth maximizin g law professor who gave up a wealthy life in th e tre n ches for a more modest ivory tower ex iste nce, I can assure you h e 's righ t! I think I' ve said eno ug h n ow to apply the analysis of wealth maximization to the role morality d efense of the modern Ame rica n co rporatio n.

WEALTH A S THE C O R P O R A T E TELOS

If weal th is n ot a value , th en th e argume n t th at the sole legi tim at e goa l of th e corp oratio n sho u ld b e to maximize its sto ckholdgo

PHIL O S OPH Y O F THE A M E R ICA N CO R PO RA T IO N

ers ' wea lth falls. Th e ga me is over, and we can co n tin ue on and th in k abo ut h ow to change th ings. Bu t in order to reach this conclusion, we m ust consid er a furth er argument. You mi ght say th at th e argument we just exa m ine d - even if it is rig h t with respect to individu al human beings and eve n if it is right with resp ect to an en tire so ciet y - doesn't work wh en yo u ap ply it to the corp oration . The co rp oration is, aft er all, on ly a tool in a b ro ader social syste m . It doesn 't h ave the mor al fra mework ofindividual human beings (whi ch of co urse is p art of my point), nor do es it represent society as a whole . Instead th e individual corporation, looked at in divid ually, is kind of like th e cr im inal d efense lawyer wh ose individual ro le is to mak e sure th at his client is acquitted . It is not like th e societal ro le of creating an e n tire syste m of cri minal justice. Th e ap pro p riate way to think abo ut th e co rp ora tion, th en , is not in thi s broad societal way, but only as part of a system, namely, the capita list m ar ke t system, in whic h each corpora tion is just one actor, like th e individual crim inal defense lawyer is one actor in a more co mplex system of justice. In th e more complex economic system, eac h corpora tio n m aximizes its profits in co m pe titio n with other corporations and other fo r ms of business enterprise, ea ch of whic h is seeking to m axim ize its own wealth. You m ight argue that co m pe titio n within th e syste m of free bar gaining checks th e individual co rporation 's abi lit y to ru n roughs hod over society, much in th e way that th e adversary system checks th e crim inal defen se lawyer in his zealo us effo rts to seek acquittal. You might con clu de th at, looked at syste matica lly, there is no th in g wro ng with th e corporation's p ursuit of maximum stock prices. Not bad. But not right. Before I answer this ar gument, let's tu rn to the syste mi c level to see if there 's a defense of th e corporate system th e re as well. I might respond to yo ur arg ume n t by sayin g th at even if th e individual cor p oratio n serves a legitim ate role that is kept in check by th e n eed to co m pe te an d coo perate in a vari et y of m arkets, th e co rporate system itselfis flawed b ecause, unlik e th e crimi nal j ustice syste m , th e goal of whic h is j ustice , the corporate system is d esign ed to maximize stockh old er wealt h . An d wealth is not a valu e. So its maximization can n ot be a legitim ate defense . Bu t agai n yo u h ave an answer. T he corporate system, you might IS W EA L T H A VA L U E ? 9 1

respond , itself is only a part of a broader so cial system. Th e rol e th e corporation plays in this society may be narrow and not in trinsically valuable but taken together with ever yth in g else serves an important fun ction . It 's h ard to disa gr ee with th e id ea that a so ciet y n eeds a certain level of wealth to survive. We have chosen the corporate system as th e prin cipal way to ge nera te th at wealth. Th ere are other systems, other so cial institutions, that pursue or facilitate our pursuit of values we hold to be truly important. Certainly the criminal justice system pursues su ch a valu e; our ed ucational system is designed to aid students in the pursuit of knowledge; our medical system is ge are d toward e nsu ring ad equate h ealth care; religious syste ms tak e care of th e spir itual n eeds of p eopl e; our syste m of taxation is designed not only to supply th e funds to protect all th ese oth ers systems but also to result in a mild d egr ee of in come redistribution. So what's wrong with having an institu tion like the corporation that pursues only one narrow goal? To borrow an idea of th e philosoph er Mich ael Walzer, th e co rpo ra tio n exists in its own sphere and should be evaluated on its own terms and in terms of th e way it fulfills its rol e in th e larger system. So now I have to answ er these very perceptive obje ctions. And th e an swer might be surprising - at least based on wh at I have said so far. The re is n othing especially wrong with viewin g th e corporation this way, as long as it is kejJt in its own sphere. Recall tha t the problem with which we started was th e problem of co rp ora te autono my, of th e pe rsonification of th e co rporation an d th e attributi on to it of essentially all of the rights and liberties our constitu tion guara n tees, all of th e basic lib erties design ed to fulfill th e goals of Enlightenment humans. And re call that the co rp o ratio n is an artificial person, constrained in ways that natural persons are not. By treating th e corp ora tion as if it were a natural person we allow it to run loose in society without the normal moral restraints individual human beings feel , without th e balance of valu es an d en ds th at human b eings ch oose to pursue . Instead, we h ave se t it after a nonvalue (at least when taken on its own) and given it the power of humans with whi ch to pursue it. We h ave thus fors ak en our pow er to re gulate th e corp oratio n , from within as well as without, much in th e way that Enlightenment theory leads us to reject the legitimacy 92

PHILOSOPH Y OF THE A M E R I CA N C ORPOR ATION

of regul ating human beings. But co rp o ratio ns ar e not human beings , and they do no t pursue h uman values. If we were to exe rcise our dormant pow er to regulat e th e corporation, to use th at pow er to com pe l it to internalize its exte rnalities, to cause it to behave respo nsibly and be accountable for its actions, to loosen th e constra in ts of th e co rp o ra te ro le an d th e ro les of corp orate actors, th en the foregoing defense might be enough . Let the corporation maximize stockholder wea lth and use other institutions to keep it in check. This mi ght not be practi cally possible because of the speed and fluidi ty of business. But sure ly it is th eo re tically possible. And th at th eoreti cal possibi lity gives us a defen se. Maybe. But n ot quite . The reason th e d efense is in complete is because it ignores a simple fac t about th e corporation that my re ification of th at institution in th e preceding dis cussion ignored: it is fundamentally a human institution. That poin t is obvious. Bu t it 's more th an the fac t th at th e corporation is a h u man institution th at destroys this arg u me n t. It is th e fact th at it is within th e frame wo rk of that institution that a vast proportion of our population spends a vast amo un t of th eir lives, an d it is within th e fram ework of th at institution that norms are form ed and shaped, values are deve loped, an d individual an d co llective goals are chosen and pursued.h And th at mak es all th e diffe ren ce . The argument is somewhat similar to Robert Dahl's observations in his important Preface to Economic Democracy:" There Dahl arg ue d th at th e modern Am eri can busin ess co r poratio n was hi ghly soc ialistic , a hierarchical institu tion that internally replicated a command an d co n t ro l ec on omy an d in whi ch th e opportunity to develop civic virtue was constrain ed to the detriment of our larger democracy and its values and processes. Now I know that some readers immedi at ely will note th at co rp o ra te m an agement structure h as changed in recent years, that team production and total quality managem ent and outsourcin g and co rp orate n etworks and workers' councils an d th e like hav e flatten ed th e hi erarch y and am eliorat ed th e problems Dahl observed. I will explain why this response is inadequate in chap te r 9 , even to an swer Dahl's arg u me n t. For now, I want "I' Il ex plo re this point in more d et ail in chapte r 9 . IS W EA L T H A VA L U E ?

93

to make a somewhat different argument that starts from th e same concern . Even if corporate management structures h ave changed sufficie n tly to address Dahl 's conce rn s about d emocr acy and civic virtue, the simple fact remains that the corporatio n is designed so lely for th e max imiz ation of sto ckhold er profit. T hat is its telos, its e n d , the goal toward whi ch it drives. Even if co rp orate employees and managers have greater par ticip ation in corporate gove r nance than th ey did wh en Dah l wro te in 1985, th e parti cip ation th ey hav e is to m ake the co rporation better at maxim izing stock price, and they do so sh ielded by th e doctrin e oflim ited liabili ty. We th us h ave cr eated a corp orate society in whi ch most people sp end most of th e tim e e ngaged in the m axim ization of wea lth . From the perspective of our ea rl ier dis cussion , it doesn't matter that th ey may h ave a greate r say in h ow the corporation maximizes wealth. T he re leva nt point is th at we h ave created a socie ty in wh ich m ost people spend mo st of th eir tim e in pursuit of som ething whi ch in itself is not a valu e. T his is the role of the corporation; this is the rol e of corpora te ac tors. The stru cture and laws governing th e co rpo ratio n cre ate a situation in whi ch the American citizenry lea rns to maxim ize profit, to make its decisions in reference to the maxim iza tio n of profit, and to hone its skills primari ly in th e pursuit of m aximizin g profit. How can we reason ably expect respo nsible, accountable, and mo ral be h avior from th e e n ter prise in wh ich th is tak es plac e? We h ave already structured and co n straine d its morality. T here is a broader point h ere as well. Even if we were willing to acce pt th e narrow goa l of wea lth maximization for th e cor po ra tio n, the fact that it h as be come the breeding ground for so much of our social o utlook ca n 't h elp but affect the way we be have in our daily lives. It can 't h elp but in culcate within us a sense that maximizing wea lth is a worthy goal. It ca n't help but affect the way in whic h we see oth ers , relat e to oth ers, situate oth ers within our lives. It can't h elp but exace rb ate th e radical autonomy and pursuit of self-interest that already characterize tur n-of-the-century America. T he corporate goal of sto ckhold er wealth maximization not only destroys the corporation, as I shall show; it also destroys our social fabric.

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PHILOSOPHY O F T HE A M E R I CA N CORPOR A TION

II

STRUCTURAL

TRAPS IN THE NAME OF THE LAW

CORPORATE MANAGERS: DR . JEKYLL OR MR. HYDE?

Corporate misbehavior is not espe cially the fault of corporate manage rs, stockholde rs, and em p loyees. As I have shown, it is the resu lt we should expect from th e legal structure an d r u les we esta blish to create the corporation . And the legal structure and rules we create for th e corporation derive importantly from Am eri ca's broader lega l and socia l culture of radical autonomy. T he corporatio n 's legal struc tu re an d r ul es result in the dictum to maximi ze stockholder profit within th e con fine s of lim ited liabi lity, a di ct um whi ch not o n ly gives m an agers, stockholde rs, an d workers the excuse to be h ave ba dly, but also e n courages th e m to do so. Hav ing made the point in ge ne ral terms, I turn in this part 2 to th e detai ls of th e laws and specific exam p les in order to flesh out the argu me nt. Recall Ro bert Lo uis Stevenson's story of Dr.Jekyli and Mr. Hyd e, a sin gle person with two n atu res, one mild and gen tle and the ot her the embodime nt of evil. This co m pariso n may sligh tly exaggerate th e reality of corp ora te manag ers, but this classi c story offers a useful m e taphor. Co ns ider a corporate di recto r,J ohn , asJ e kyli an d Hyde.Joh n is a person of good moral cha racte r who e nj oys a d istin guish ed reputatio n in his co m m u nity. H e has a fami ly an d is a good fat he r and h usband . He belongs to civic and re ligio us organizations. H e loves his mother. But when h e en ters the boardroom h e abandons the values of h is daily life and takes o n an e nti re ly n ew person ality, that 97

of th e corporation. As I hav e d escribed it, this person alit y or rol e of stockholder price maximizer to th e exclusion of all others is a role that we would con side r pathological if it d escribed a human personality. Yet this is th e personality th at Am eri can co r po rate law creates for John and other corporate directors, the role that the structure of th e modern corp ora tio n reinforces. Not on ly h ave we ch ose n to make our directors Mr. H yde, but we hav e protected th em in that role by absolving the m of responsibility and accountability for their ac tions. Even more, we h ave given Mr. Hyde a co m pe titive advantage over Dr. Jekyll. Absolving Mr. H yde of accountability permits him to reduce hi s corp o ratio n 's costs of production by shifting th em o u tside th e corpora tio n o n to th ose m ost vuln erabl e, th e workers, th e environment, the consumers, and the community. In this chap te r I will sh ow how th e rol e would d eriv e from co rp ora te structure, even if social and economic norms of stoc k pri ce maximization did not exist. Let's sta rt with th e real world . Co ns ide r th e story ofJack Welch of General Electric, widely considered to be America's best CEO (he was recently awarde d a seven-million-dollar advance byTimeWarn er Books for a book about business) . Although th ere is no question that GE 's stock price has climbed th ro ugh o ut his te n ure -in fact , it 's in creased 1 ,200 p erc entl-> h e h as laid off or displ aced th rough dives titure approximately 120,000 workers, many of whom had b een loyal GE em ployees for decades. And besid es its well-known dumping of p olychl orin at ed biphen yls (PCBs) into th e Hudson River and the widespread health problems caused by its Hanford, Washingt on , nuclear pl ant, GE tops th e fed eral govern me n t's Sup erfund list as " p ote n tially responsibl e " for fift y-on e toxic waste sites. Welch 's defense? Maximize stockholder profit. Th e fed eral go vern me n t found th at May Department Stores sold clothing made in California by Thai workers paid fift y cen ts an hour an d h eld to th eir work by threats of r ap e and murder. Wh at co uld b e th e d efense? Maximize stoc kh olde r profit. And as lon g as we give corp or atio ns this defense , we have no right to complain when th eir m an agers beh ave according ly. Corp or ate directors and managers (to whom I will refer to ge th er as managers) generally want to behave well. This is th e conclusion 98

STRUCTUR AL TR APS

of th e e m pirica l work done by sch olars like Myles Mace an d J ay Lorsch. But, as one board consultant I know put it , "Alm ost every director I talk to feels trapped." And th e tr ap they feel is th e imperative to maximi ze stoc kholde r profit, a logical ou tgro wth of th e legal str u ctur e and rules of co rp orate law.

THE STRUCTURE OF THE CORPORATIONTHE PUSH TO PROFIT

I th in k I' ve said enough about the way th e co nc ept of sto ck price m aximizati on creates a serio us co ns tra in t on th e moral b eh avior of corporatio ns an d th eir di rect o rs and officers. But even if we didn't have a norm of stock price maximization , we would still have the basic st ruc ture of Ame r ica n co rpora te law, whi ch by itself is sufficie n t to cre ate almost in surmountabl e in cen tives for corporate actors to look primarily, if not exclusively, to maximizin g stockhold er wealth in performing th eir func tio ns , an d to m ake any more balan ced concept of their roles extremely diffi cult to pursue. This sam e st r uc ture h as, I beli eve, led judges to assu m e somewh at unrefl ectively th at th e purpose of th e co rporatio n is to pursu e stoc kholde r wea lth, even in the abs ence of any clear legal rules or do ctrine to su p port th at id ea. The reaso n is th at th e str uc ture of American cor p orate law is geared dire ctly toward sto ckholder in terests. There are three su pports to thi s structure : voting, d eriv ative litiga tio n (which is th e rig h t to sue di rect o rs for breach of th ei r dutie s) , and sales of co ntr ol. Each one of th ese is th e province of the stoc kholders, an d th e sto ckholde rs alo n e.

THE CORPORATE FRANCHISE

Only stoc kh o ld ers can vote. That is the basi c premise of corp orat e d emo cr acy. As vir tu ally eve ry sta te co rp oratio n statute provid es, directors are to be ele cte d an n ually by th e stockh olde rs. Stockholders get to vote on some other things too, like amendm en ts to th e certificate of in corporati on , m ergers, sales of all of th e cor p oration's assets, and dissolution. This set of voting righ ts, whi ch leaves th e directors in control of every th ing else, is pre tt y lim ited . C ORP OR A TE M AN A GER S

99

But th e fac t th at stoc kholders ge t to choose th e di rect o rs is still a basic le gitimizin g premise of the corp oratio n by whi ch nonowner direct ors m an age on behalf of own er-st ockholders. As the hi ghly influential forme r Delaware chance llo r (n ow law pro fesso r ) William Allen wrote in one case, "It is clear that ... [sto ckholder voting] is cr itical to th e th eory that legitimat es the exercise of p ower by so me (direct ors an d offi cers) over vast aggregates of proper ty that they d o n ot own ."2,a So stoc kholder voting legitimizes th e en tire system. But it d oes more than that, as a brief analogy to political democracy sho uld m ak e clear. Poli tician s are resp onsive to their co ns tituen ts -an d, as Tip O 'Neill so famous ly unde rstood , th e more local , the m o re re sponsive. Cam p aign finan ce reform is a perennial issue , at le ast in p art becau se th ere is so me clear evide nce th at th e biggest d ono rs ge t the grease . MotherJones magazin e regul arl y publish es a list of th e biggest political donors, th e id entities of those to wh om they h ave given m on ey, an d th ei r busin ess in terests. Only an ost rich would ign ore th e power of voting (and the ability to influence votin g) on th e b eh avior of p olitician s. Only th at sam e ostrich would di sregard th e st r uc tu ra l importance of stoc kholde r vot ing to the locu s of in terest of corporate directors. "I am no t co nce rned here with th e effec tivene ss o f voting

ri gh t~ ,

abo ut

whi ch mu ch has be en wri tte n , It ce rtain ly is true th at at o ne point it co u ld be said with som e ce rt ain ty th at sto ckho ld ers p retty m uch ignored th eir p roxy cards, whi ch allowe d th e bo ard esse n tially to co n tro l el ec tions, T he re is probab ly still so me truth to th is, although th e rise o f in stitu tional stoc kho lders, who now co m pr ise over 50 percent of th e public eq uities market (a nd who I'll d iscuss in cha pte r 7), may be hel pin g to make exe rc ise of the co rpo ra te franch ise m ore effective. And it is also true th at in recent years - even lea vin g aside th e cha nges in corpo ra te co n tro l brought abo ut by hostile tak eoverssto ckho ld ers have bee n in creasin gly willing to th row o u t unde rpe rfo rming boards, and boards h ave been more willin g to fire u nder pe r fo r ming manage rs. But regardl ess o f th ese d evel op men ts, th e po in t is still cruc ially im po rtant becau se it creates a structu re th at forces a particul ar focus o n th e stoc khol d ers. Moreover, th e in ch oat e power of sto ckho lder voting, even if it re mai ns largely unex ercised, still gives d irectors a pow erful in centive to look to stoc kho lder in terests. 10 0

S T RU C TU RA L TR AP S

So th e fact that stoc kh olde rs vot e and hav e th e pow er to oust th e board of di rectors and corporate manageme nt is a very powerful in centive for directors and managers to fo cus th eir attention on sto ckholder h appiness, whi ch, for reasons I will discu ss b elow, m eans stockholder wealth.

DERIVATIVE LITIGATION AND STOCKHOLDER SUITS

Another asp ect of co rpora te structure th at create s powerful incentives for directors to keep stockholders h ap py is th e institution of th e d erivative suit. Simply put, directors and cor po ra te officers owe two p rincip al classes of duty to th e co r poratio n: th e duty of care and th e duty of loyalty. The first class of duty, th e duty of care, goes to th e issu e of wh ether directors have don e th eirj ob - in oth er words, whether th ey have both ered to make cor p orate de cisions on the basis of real information about the corporation and whether those d ecisions are rational. Whil e th e duty of care is a loose one and has bee n increasingly diluted over the years by a number of factors (starting with director an d officer liab ility insuran ce an d con tin uing to Widespread statutory provisions that allow co rp o rations to hold directors harmless for breaches of the duty of care) , it n onethel ess ex ists as so me th ing mo re th an a precat ory m essage to corporate directors and officers as to how to go about dischargin g th eir duties. Every on ce in a whi le it r esu lts in successful lawsu its aga ins t direct ors wh o fail to do their j ob . The du ty ofloyalty is a bi t more complex . It holds that directors, officers , an d e m ployees with ce r tain au th o rity are obligat ed to act in th e best interest of th e co rp oratio n. Broadly understood, th e duty of loyalty, also consid er ab ly di luted in recent years, is designed to prevent corp ora te actors from pursuing th eir own interests to th e detriment of the corporation. The duty of loyalty, simply put, is a series of con flict of interest rules. Now as I'v e described th ese duties, one thing sh o u ld be clear : they are owed by corp orate actors to the corporation. They are not, excep t in rar e case s involving m ergers an d co n tro lling stockholders, owed to the sto ckholders themselves. Yet the percep tive reader will note a problem. If the duties are owed to th e corporation , an d C ORP OR AT E M AN A GER S

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th e corpora tio n is run by th e p eople wh o owe th e duti es, h ow can the cor p oration ever su e to enfo rce those dutie s wh en they're breach ed? Wh at board of directors in its right mind would direct th e corporatio n to sue itsel f for breach es of duty? Well , th e an swer is probabl y none . And so co rp o rate law developed th e device of th e d erivative suit . Sim p lifie d as much as possibl e, th e d erivative suit is a two-ste p process in whi ch a stoc kholde r sues the corporation to bring actio n against the direc tors, an d wh en th at fails sta n ds in pl ace of th e direct ors to bring th e su it agains t th em on its b ehalf. That is why it's called a d erivative sui t-the stoc kholde r's right to sue is d eri ved from th at of th e co rporatio n . No w th e d erivative su it h as bee n an object of sus picio n ever since it was de veloped by co urts as a de vice to enforce managerial duties . T he reaso n for th e susp icio n isn 't h ard to divin e. You see , because th e stoc kholde r brings th e suit on b eh alf of th e co rporatio n, an y dam ages that the stockholde r win s are p aid to th e corpora tio n, not to th e stoc kholde r. So stoc kholders h ave littl e fin an cial in centive to spen d time an d m oney bringing these derivative su its, an d th ose th at d o are p robabl y substa n tial enoug h to have so me influen ce ove r th e b oard in the first place . So as a matt er of fin ancial incentive, it's h ard to im agine terribly many de rivative sui ts bei ng brought agai ns t di rect ors. But th ey are brought. So how do we en sure that th e duties of care and lo yalty are e nfo rce d? H ow d o we ens ure th at deriv ative su its are brought? The answer is that th e win ning stoc kholder ge ts to co llec t legal fees fro m th e losers. And so we 've creat ed a party with th e interest to bring th e litigati on: lawyers. The stoc kholde r pl aintiff in d eriv ative litigatio n is almost always a nominal plaintiff. The economic in centives are those of th e lawyer. No body likes lawye rs very much , especially lawye rs wh o have a strong finan cial in cen tive to win a case (or force the corporation in to se tt ling so th ey can co llec t legal fe es) . As a result, sign ifica nt res trictio ns have been pl aced o n stockholders' abilities to bring d erivative suits, including the requirements th at before filin g su it they m ake what is ca lle d a demand on the board to tak e corrective actio ns, p osting b onds to cove r the ex pe nses of litigation if the stockholder do esn 't own a sign ifica nt amo u nt of the stock, an d an 10 2

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en tire series of co m plex rules th at permit di recto rs to di smi ss th e suit if cer tain co n ditions are met." Even within these restriction s, h owever, th e sim p le fac t remain s th at d erivative litigati on is a p otent d evice for keeping corpo ra te management in ch ec k. Perhaps its mo st powerful asp ec t, in light of th e restri cti ons, is the th reat adva n tage a pl aintiff stoc kholder h as in challe nging th e co m pete nce or in tegrity of a co rpora te b oard in a public forum like a court. In order to avoid the n egative publicity th at suc h su its can engen de r, corporate boards are p ron e to se tt le them prior to trial. And whil e the statutes I m entioned earlier can exc u lpate th e board for breach es of th e duty of care, th ey ge nera lly do n ot p rotect th em in cases of breach of th e duty of loyalt y. In addition , typ ical dire ctor and officer liability insuran ce policies create excep tio ns for indemnifi cati on fo r willful acts like loyalt y brea ch es. Fin ally, regardless of financ ial indemnificati on , derivative su its can resul t in e m ba r rassing injunctions again st directors to preven t th em from viol ating th eir duti es. So th e d erivative su it remains an important incentive for dire ctors an d office rs to behave. Beh ave with respect to wh om? Wh y th e stoc kholde rs of co urse. For o ne rul e of d eri vative litigation is very clear: on ly stockholde rs "The re is also a sign ificant soc io logical d ime ns ion to th e restri ction s on deriv ative liti gati on . Most of th ese restricti ons were devel oped at a time wh e n co rpo rate d efendants were represented by what are referred to as "wh ite sho e " firms , tha t is, law fir ms pr imarily, if not exclusively, co m posed o f whi te lawyers of An glo-Saxon d escen t. T hese firm s refused to hire .Jews and other m in o rities, and the plain tiff' s bar co nsiste d largel y of th ose lawyers whom the whit e shoe firms refu sed to hire, th at is, .Jews and o ther min orities. T h e langu age of so me of th e leading cases refl ects a stro ng susp icio n of the motivations of plai nt iffs' lawyers, at th e same tim e that it im pli citly assu mes on ly good faith of th e defendants ' bar and th eir cor po ra te clie n ts. I won't develop th e argume n t he re , b ut it is plau sible , ifnot likely, th at mu ch of th e mo tivation fo r restri ctions o n d erivative litigati on was gro un de d in an ti-Se mitic an d an tim in o rity se nti m en t. Lat e r restriction s, such as th e ab ility of d irecto rs to di smiss deriv ative su its, were m ostly put in place in th e early 1980s and reflect a solicito usness of co rpo ra te m anageme n t by bu sin ess-friendlyj ur isd ictio ns like Delaware and New Yo rk for th e purpose o f retai ni ng th eir co r po rate franch ises. CO R PO RA T E MA NAG E RS

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hav e th e legal standing n ec essary to bring derivative suits." Now there are other directorial duties besides care and loyalty. Beginning in th e early 1980s, more than half of all Am erican states adopted some form of what is calle d a stak eholder statute or co n stitue ncy statute, usually as an amendment to that sec tion of their corporate statute whi ch lays out th e directors' b asic duty of care . These statutes typi call y were passed during a time of rampan t corp o rate takeovers, when hostile bidders bought out the stockholders at premium pri ces, oft en by using large amounts of debt to pa y th em off. In order to reduce the takeover debt, these takeover artists would sell off substantial portions of th e corporations th ey acquired, sometimes for good business reasons, or to reduce costs by layin g off large numbers of employees or simply by closing down factories. The result was th at not only many p eopl e in specifi c localiti es found themselves without work, but also en tire towns that had gro wn up around th e factories were deprived of their principal means of economic existe nce (r emember th e Willow Run case dis cuss ed in ch apter 2) . In order to protect th e ec o no m ic h ealth of th eir stat es, legisl ators added to directors' duties the ri ghts to co n sid er the interests of a variety of corporate constituencies th at were not within th e contempl ati on of corpo ra te law, whi ch , you will recall , ackn owledges only directors, officers, and stockholders. Among th ese constituencies are em p loyee s, cre dito rs, suppliers, customers, and even communities. So it might appear th at th e di rectors' in centives to look only to th e stockholders, on which th e en tire th esis of this chapter is b ased, has been severely diminish ed, and so th e problem I am addressing is more theoretical than real. If that's your idea, you 're wrong. The reason is that while these statutes m ay be on th e books, th ey have very littl e effec t. The reason they are ineffective is threefold . First, a significant number of the statutes apply only in th e circu mstan ces of a hostile ta ke over and so "T he Am eri can Law Institute in its Principl es of Corporat e Governance suggests th at co nvert ib le bondholders, wh o have at least an expecta ncy interes t in co rpo ra te stoc k, ought also to be allowed to bring derivative su its, This suggesti on has not received wide accep ta nc e . 104

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do not address problems of co rp o rate accountability in day-to-day ope rations. Bu t there are other fatal flaws. Second is th e fact that all but one of the statutes is permissive, not mandatory. Wh ile th e dir ectors may tak e th e oth er interests into account, th ey ar e not required to . And given the facts of stockholder vot ing and stoc khold er selling (as I will soon disc uss), th ere is very littl e inc entive for directors to ca re about these groups . T hird, and re lated to the perm issive natu re of the statu tes, n ot o ne of them gives th e other con stitue n t gro u ps th e right to su e directors for failin g to tak e th eir in te rests into account. O n ly stockholders h ave standi ng to sue the board. T hat remains the r ule. An d th ere is no r eason stockhold ers would h ave an y in centive to su e dir ectors for fai lin g to co nside r th e in terests of other groups tha t assert a claim on th e co rporation's assets, whi ch claim, if satisfi ed , would dim in ish th e wealth of th e stockholders. So there yo u are; a rig ht (sort of) without a remedy. Stockholde rs are th e o n ly group whose financ ial interests are affect ed by th e corp ora tio n that can hold th e directors acc o u n ta ble. So it 's o n ly n atural that di recto rs ' incentives (at least directors who don't want to b e su ed) are to keep th e sto ckhold ers - and on ly th e sto ckholders - h ap py. Now you m ight h ave two answers to th is. The first is one that stems from corp orate law. Rem e m be r the busin ess judgm ent rule I described in chapter 3, th e p resu mptio n th at di rectors are acting in the best in terests of th e corporation and are th us p rotected from liab ility in th e ab sence of a clear brea ch of th eir duti es (wh ich breaches are asserted in derivative suits)? Well, you could see sta kehold er legisla tion as reinforcin g wh at alr eady exists by virtu e of this rule - that is, that directors have wide d iscretion to run the co rp oratio n and the refore can ta ke th e in ter ests of these gro ups into acc o un t. Maybe so . But recall th at th ey can do so only against th e background of a particular p urpose: stockholder wea lth maximizatio n. And wh ile some of th e sta keholder statutes allow directors to consider th e interests of other stakehold ers on a par with sto ckh old er in terests, the fact re mai ns that on ly stockholde rs can sue . So wh ere 's th e in centive to care? T hat brings me to the second possible answer. T here is an incentive to care, you might say, p ro vid ed by the various m ar kets in whic h CO RPO R A T E M ANAG E RS

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th e corp oration interacts with th ese other stakehold ers . Aft er all, corporations need employees, th ey n eed suppliers and customers, and often th ey n eed th e support, at least in terms of services if not ta x ab ate men ts, industri al revenue bonds, an d th e like, of th e co mmuni ties in whic h they operate . Don 't th ey have a built-in incentive to keep su ch gro u ps h appy? Well, yes, as a gen e ral matter. But gen eral matters aren't especia lly interesting. T he interesting questions occ ur at the margin s, wh eth er in terms of in cr easin g m arginal profit in th e sh o r t te r m or the marginal benefits of externalizin g costs on th ese gro up s to benefit stockho lders in th e lo n g run . It see ms clear th at in order to m aintain profitable co rp oratio ns , direct ors have to m ak e sure th at eac h of th ese groups is kept happy. But the question is h ow h ap py? As th e busin ess sch olar C. K. Pr ah alab ad puts it , "Finance th eory says, in effect, that corp oratio ns should devote r esources to su ch stakeholders only to the point where the marginal dollar spent yie lds at least a dollar in ret urn to th e share h olde rs.:" In other words, j ust happy enough to co ntinue to do business with th e corp oration an d n o more. Just like th e con tingent morality we explored in chap te r 3 . T hi s last an swer assu m es of co urse that each of th ese groups h as so me choice in wh ether or not to deal with a p arti cul ar corpora tio n (leaving aside for th e mo m en t th e question of bargaining power). Sometim es th ey do . As a cu sto me r, for ex am ple, I can selec t from a number of b rands of breakfast cereal or auto mob iles or toothpaste. And I will be inclined to cho ose the one that no t on ly satisfies my preferences but th at I co ns ide r overa ll to be th e best. But wh at if th ere are on ly a few products available? MS-DOS, for ex am ple , as my computer 's operating system, made only by Microsoft. Or what if th e corp oration s com p rising an en tire industry, in order to remain co m p e titive with one another, give somewhat sh or t shrift to consume r interests an d as a resu lt there is very littl e ch oice - as th ere was no choice of cars with airbag s unti l th e mid-r qoos b ecause th e industry ba nded together to fig ht against the proposed regulation requiring th em? My interests are tak en into accoun t on ly to th e ex te nt th at th e board thin ks it's n ecessary to do so, remembering all

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th e whil e th at th ey owe th ei r an n ua l reelec tio n to th e stoc kholders, who are presumed to be wat ching th e stoc k price . Or what abo ut em p loyees? Wh at if they h ave no ch oice at all, like th e citize ns of a one-in d ustry town. I recall several years ago a student in my corp orations se minar said of a hypo thetical steelworke r, "Well, why sho uld th e co rporatio n's board care abo u t him? After all, h e chose to be a steelworke r." Afte r I rath er less than ge n tly pointed out that o ne d oesn 't ch oose to b e a stee lwor ke r in the same way th at o ne chooses to go to a p restigious law school an d accep t an obs cen ely paid position as an asso ciate at a prestigious firm (now star ting at aro un d $ 160,000 a yea r, including bonuses), the stu de n t at least recogn ized th at so me times choices of career, like choices of em p loyer, are limi ted. And when th e corporate board knows th at it h as a relatively ca p tive au dience , it d oesn 't n eed to be quite as interested in its welfare as wh en it is facin g reel ection by a mi raculously mobile capi tal m arket." So the str ucture of directors' du ties wh en co up led with th e rules gove rning de rivative litigati on cr ea tes every in centive for a fo cu s on sto ckholder wealth an d very little reason to care abo u t anyth ing else . SELLING THE FARM

The last aspect of corp orate str uctu re th at gives dire ctors and officers th e in centive to foc us th eir atte n tio n on maximizin g stoc kh older wea lth is th e fact th a t as th e nomin al own ers of th e co rp o ration - which in thi s con text really m eans the voting co nstituency stockholders h ave th e righ t to sell th e corporatio n o ut fro m unde r the management to th e hi ghest bidder. In light of the takeover "O f co urse I recognize th at workers can rel ocat e o r even retrain . But as to th e first point, we need to at least question whe ther we wan t to create a soc ie ty in wh ich co m m u n ities ar e even less stab le th an th ey are, with workers co mpell ed to leave co mm u nities in whi ch th eir families might have lived for generatio ns, simply to m ax im ize sto ckho ld er profit. A~ to th e seco nd, we need to co nsider th e pr acti caliti es of worker retrainin g in an e nviro n me n t of great wealth di sp ari ty, espe cia lly if th e co rpo ratio n does no t provid e and has littl e in centive to provid e tha t retrainin g.

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activity over th e past several d e cades , this right doesn 't require a lot of explanation. While corporations have always been saleable either by merger or sales of their assets, transactions which require stockholder approval but also board approval, th e d evice of th e tender offer allows bidders to circumvent the board and go directly to the stockholders. For whil e m ergers an d asset sales are transactions directly involving the co rp o ratio n and thus the board, tender offers are nothing more than public offers to the stockholders of th e co rp or atio n to buy th eir sto ck. Thus th e management ca n stand helpless while th e stockholders sell control to a person or corporation that is likely to promptly issu e a series of pink slips in the boardroom . This r eality has th e effec t of fo cusing th e dire ctorial mind rather sharply on th e issue of stockholder wealth . Th e legally sophisticated reader knows th at I'v e just overstated my case. In th e first place, she will argue, there are a number of judicially approved defenses that, at least when exercised within proper leg al limits, let th e board gain co n t ro l or at least influen ce the outcome of a takeover contest. Almost everyone has heard of poison pills an d an asso r te d vari ety of other co lo r fu l tak eover d efenses . There are also statutes, developed sin ce the mid-i qd os, which can be used to impede an d sometimes all but stop takeovers. So in fac t th e board h as a ro le, and my argu men t abo u t in centives goes too far . Not true. The board can have a role - but it's a role within limits and a rol e th at can be ove rco me. As to th e limits, tak eov er d efenses are measured by judicial tes ts that seek to determine whether th e board is ac ting in th e best interests of th e sto ckholders -yes, th e stockholders - or simply seeking to entren ch itself in offi ce . While th ese tests aren 't perfect, they do provide a measure of scrutiny as to th e board 's motives in resisting a tak eov er, an d some number of boards have been forced to remove these devices when the tests haven't been m et. In addition, if th e board is actively seeking to sell th e co m pany, it is co nstrained by a requirement th at it do so at th e best price available - that is, it cannot use defensive devices to keep out bidders who m ay fir e th em in favor of bidders who will treat th em more kindly, at least so long as the latter are not offering the

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hi gh est price. So whil e th ere 's so me truth to th e assertio n th at directors are not powerless, th eir power is not without its limits. The second arg u me nt is abo ut th e recently passed statutes that allow a board to bloc k certain tak eover offers. In th e first pl ace , these statu tes have their own limits and ne ver co m p let ely permit th e board to prevent tak eovers. In th e secon d pl ace , clever bidders h ave man aged to evade the statu tes , whi ch eithe r have to be o pte d into or o pte d out of by th e corporation, by coupling their te n de r offe rs with pro xy co n tests whi ch e nable th em to obta in co n trol of th e board , lift the restrictions of th e relevant statute (by opting out or revoking the o pt-in ), an d proceeding with th e tender offe r. An d as long as the price is right, that is, as long as th e stoc kholders want to tak e th e offer, they will coop erat e and unceremoniously oust th e board. So wh ile it m ay be true th at boards h ave m ore protective o p tio ns available to th em than th ey did, say, in th e ea rly 198 0s, it is n everthe less equally true th at bo ards h ave every in centive to ke ep the stoc k price up an d th e stoc kh olders h appy.

SPEAK I NG OF OP T IONS

In 1994, Co ngress ame n de d the Internal Revenue Co de to provide th at executive salaries in excess of $ 1 milli on were not d eductible by th e corp orat io n unless th ey were linked to performance ." On e result of th is was th e proliferati on of stoc k o p tio ns as th e m ost sig n ifica n t compo ne n t of executi ve co m pe nsatio n packages. Obvio usly this gives exe cu tives a sizab le personal stake in their corp or ations' stoc k prices. One co m me n ta to r re fe r re d to th e 1990Sas "the decade of executive stock o pt io ns ," n oting th at "enor mous o p tio n gra nts have rai sed exe cu tive pay to staggering n ew h eights, whil e inten sifyin g its se ns itivity to fir m stoc k pri ces."? According to a stu dy by the co m p en satio n co nsu lting firm Pearl Mayer & Partners, stock reserved for option co m pe n sat io n r epresented 13 .7 p ercent of o utsta n ding shares in 199 9, an amaz ing p roporti on of stoc k when you co n sider that institu tional in vest ors own just over a maj ority of th e shares. A number of co m me n ta to rs saw op tions as a wonderful way to align m an ageri al and stoc kholder interests. After all, if

CO R PO RA T E M AN A GER S

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a manager's pay was principally d ep endent upon how hi gh th e stock price rose, he would have every incentive to do his best to get the price as high as possible. Well, ifnothing else that I'v e said about th e legal in centives for managers to focus on short-term sto ck pri ces has persuaded you that I'm right, surely this one is obvious. As two com pensation ex per ts illustrated, "T he typi cal ch ief exec utive officer ... of a company under $500 million in revenues received $514,298 of cash compensation in 1995 compared with actual sto ck own ership valu ed at $3,084,275 . . .. The situation is even more striking at the larger company level (over $10 billion in revenues), wh ere cur re n t [1995] data reveals [sic] that th e m edian CEO 's actual sto ckholdings ar e over $7 .9 million, almost four tim es th e average cash compensation of $1,896,996. "6They note that for th e small er com pany director, " the ' me d ian' CEO is ext re me ly sensitive to ch anges in the com p any's sto ck price . Considering only actual holdings, a 16.7 % decrease in the stock price would reflect a loss of $5 \ 5,000 to this CEO, effec tively ero d ing all of th e cash co m pe nsation received tha t year." And obviously the CEO of the larger corporation is also hi ghl y ex p osed to downward sto ck pri ce mov ements. Perhaps no exe cutive has more su ccessfully pursued this in centive than Charles Wang, ch airman an d CEO of Computer Associates Intern ati on al, In c. (CA) . In a pl an p roposed by th e co m pe n satio n committee ofCA's board and approved by its stockholders in 1995 , three executives were awarded sto ck options for whi ch th ey were to qualify ifth eyraised th e price ofCA's stockfrom $20 to $53 .33 . Only th ree years later th ey had succeeded. The result was th at the three executives were gra n te d more th an $\ billion in sto ck options, $655 million of it going to Wan g alone . The sto ckholders got what they wanted. But in order to cover th e cost of the op tions, CA had to write off $675 million ag ainst earnings. Following th e writ e-off, CA's sto ck price plummeted back into the $20S, although it later came back to th e mid-$50S (probably at least partly as a result of litigation whi ch resulted in an order that th e three executives return 9.5 million of the 20 .3 million shares they had been granted). 7.e In so doing, th ey explicitly con n ec t th e economic system of cap italism with p olitics, th us bringing it fro m th e private realm in whi ch modern econom ic th eory locat es it to th e political realm, in whi ch a more realistic view of the world would sug ges t that it , or cer tain ly corporate capitalism if n ot ca p ita lism simpliciter; bel on gs. In any eve nt, nobody reall y doubts that ca pitalism and p oli tics affect o ne another. Even Schumpet er, who saw modern d emocracy 254

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as a "product of th e cap italist process," beli eved th at d emocracy and socialism could coexist, and that th ere was no inevitable conn ection betw een capitalism and democracy." So th e question to be co nside re d wh en we, as Am eri cans, look at the rest of th e world is, Wh y do we care what th e rest of the world looks like? Obviously th ere is a deep an d important preliminar y question as to wheth er we hav e an y right to influen ce the rest of the world , but I th in k we 're he avily enough involved to allow th e assumption that, at least as far as we think o ur own in terests are concerned, the question is off the table. I also want to avoid th e important discu ssion of th e n ature of human rights an d o u r rol e in assuring th ey exist throughout th e world. There is, it seems to me , a perfectly legi timate question of wh ether eac h nation should be allowed to d et ermin e for itself wh at human rights appropriately co nsist of and what th e nature of its society should be . I hardly mean to suggest by this th at I 'm agnostic on th e nature of human rights. Torture, murder, ge n oc ide, misogyny, bigotry, oppression, and intolerance are not th ings th at I find especially att rac tive. But th ere are , I suppose, degr ees, an d if were honest with ourselves we will ad m it that there are even de grees in the United States. Certainly th er e are theocratic states like Iran and sta tes in whi ch th ere is an esta blished re ligio n, d e facto if n ot d e jure, in which much of what defines the rights and roles of people is determined by a coll ective beli ef in reveal ed truth. Un less we are prep ar ed to in sist th at all m embers of th at soc ie ty are pl agued by false consciousness, their belief in such tr uths leads to institutional, political, an d soc ial struc tures th at are distinctly divergent from those of m odern liberal soc iety. And, as I noted, the U n ited States contains subcultures which deny the premises of modern liberal society. Th e Ch ristian right, for exa m p le, would like its valu es to dominate socie ty, and Hasidic Jewry simply wants to separate from society to b e fr ee to practi ce its cu ltu ral and religious norms. Who 's to say wh eth er th ey are right or wrong? We won't know until th e final da y of reckoning. Meanwhile , liberalism requires tolerance , at least within limits, an d it see ms as though that tol eran ce ought to extend to the interna tional sph ere as well. As modern liberals, however, we believe th at one of the principal C APIT ALISM , SOCI ALISM , A N D DEMOCR AC Y

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ways basic human rights as we understand th em can best be p rote cted is through democratic syste ms of gover n m en t. And whil e d emocr acy, like ca pita lism , is vario usly d efined , among its salie n t an d, it seems to m e, invariant characteristics are th e eq ual righ ts of all citiz ens to p articipate in th e processes of selec ting a government an d the basic lib erties n ecessar y to for m o ne's id eas abo ut wh at co ns titu tes go od gove rn me n t. It 's diffi cult to op p ress p eople wh en they are e m powere d to ch oose their own go ver n me nt, an d when th e govern me n t is answerable to th e m . It 's too easy, th ough, to con n ate democracy and cap italism . Liste n ing to public an d p oli tical discourse in the Un ite d Sta tes with regard both to domestic an d to worl d affairs, o ne mi ght be p ard oned for believin g tha t o ur economic su ccess (if we leave aside our di stributional probl ems) is o ur very reaso n for being. " It's th e econo my, stu pid, " mi gh t well b e ta ke n as the sign al Am eri can watchw ord of faith. An d even if we are cap abl e of th eoreti call y an d intell ectu ally se parating th e two realms, o ur politics are , as a p racti cal matter, so bound up with our system of corp orat e cap italism th at to separate th em would ap pear to p ose th e same challe nge as undoing an ome let. Wealth is n o t a value. We ten d to forget that o ur lives are n o t lived for th e sake of money, an d even if th ere are th ose wh o , co nsis te n t with the liberal tradition of self-determination , cho ose to beli eve that it is, it is hardly eithe r an att ractive or a co nstruc tive goal fo r o ur soc ie ty. Robe rt Dahl writes, "De mocracy requires n eithe r o pulence nor th e material standards th at to d ay prevail in ad van ced industrial co u n t ries. It requires in stead a wid espread sense of re lative economic well-b eing, fairness, an d op portu n ity, a co n d itio n d eriv ed no t from ab solu te sta n da rd s but from p erceptions of rel ative adva n tage an d d ep rivati on .?" We are indeed a ca p ita list soc ie ty. Cap italism, h owever, provide s no t the en ds but th e means for our lib eral d emo cr acy. As we h ave seen fro m o ur foray thus fa r into America n corporate ca p italism, those very d emocrati c values of fairness , opportu nity, and relative equality remarked upon by Dahl are seve re ly j eopardized by the m ean s as th ey threat e n to swallow the en ds, ifnot to mak e th eir attain me nt impossibl e. While Dahl r eferred broadly to ad van ced industri al co untries, it 2S(j A M E R I CA NS A B ROA D

is n ot th e case th at all advanced indust ri al co un tries treat m at eri al wealth as th e end , at least in an ywhere near the de gree that Americans do." The Ge r man co nstitutio n, to ta ke just one exam p le, sta tes th at " p ro p ert y imposes duties. It s use shou ld also serve th e publi c weal.'?' While I will, in th e following pages, have occa sion to descr ibe h ow ca pital m arkets an d particul arl y th e effec t of Am e rica n cap ita l ar e p erverting this asp iratio n, it is clearl y th e case th at German corporations an d corp orate actors h ave long b eli eved that th eir prin cip al purpose is to produce goods an d se r vices th at better soc ie ty and that soc ial welfare and worker welfare are fundamental justifications for co r po ra te wealth.jap an ese co rpora tio ns, altho ug h unde r the same kinds of co n tem porary pressu res, h ave understood one of their primary purposes as being to provide employment for J ap an 's p eople. Needless to say, th ese func tio ns are very different fro m m aximizin g stoc k price, an d whil e co rpor atio ns in all co u ntri es re co gnize th e ne ed to profit in order to fulfill th eir goals, th e very differen ces in goa ls imply a much mo re co ns tra ined view of means, even given the importance of profi t. Mich el Albe rt divid es th e co r porate world into th e Rhin e m odel , in whi ch h e includes J ap an ese co rpora tio n s as well as co n tinen tal corporations, an d the n eo-Am erican model. One of the ways h e distin gui sh es th em is by suggesting th at " the n eo-Am eri can model is based on individual su ccess and short-term finan cial gain ; the Rhin e model . . . e m phasizes collective success, co nse ns us, an d long-term co ncerns.'" Foll owin g thi s, one mi ght think it ap propri"It is also no t the case th at all mat e riall y wealthy co un t ries treat de mo cra cy as a goal. Gre ide r notes th at Singapo re's p er ca pita in come exce eds th at of Great Britain 's, yet that co un t r y is gove rned by a hi ghly re pressive regim e . A~ h e puts th e issue , "Th e id eol ogical co nfusio n with in ca p ita lism poses a cr ucial question abo ut th e nature of globa l co nve rgence: Will nati ons grav ita te toward civil d em ocracy someth ing like Ame rica 's or will th ey decid e in stead th at success in th e marketplace requires th e productive efficien cy of a regim e more like Sing apo re 's?" Gr eider, On e World, 3()-37. Wh ile th e foll owin g pages q uestion Gr eider 's assu mp tio n th at so me form of co nverg ence seems in evitable , at least with respect to th e n ature of co rpo rate ca p italism , his point is well taken an d reminds us th at , afte r all, th ere we re producti ve efficiencies in Nazi Ge r ma ny as well. CA P I TA L IS M , SOC IA L IS M , A N D DEM O CR AC Y

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ate to understand Ame rica n ca pitalism as individual ca p ita lism, an d European and Asian capitalism as collective cap italism . Of co urse th is would b e an oversimplifica tion , as Euro peans an d Asians (as well as Latin America ns an d Afr ica ns) h ave an inte rest in th ei r own su ccess and well-b eing, but the over simplification cou ld be ex cused as a m atter of em p hasis. But it's n ot j ust ove rsim plifica tio n . For whil e Am eri can cu lture an d Am erican cap ita l m arkets are, for all the r easons I 've discuss ed , wildl y individualistic, th e Ame rica n corporate cu lture is aggregative. It is th e most powerful fo cal point for wealth and work in the world . As a conse q ue nce, on e might think of th e Ame rica n co rpora te ca pitali st syste m as b eing in one se nse intrinsically co llec tive. After all, th e La tin origin of th e word "corp orate" is "to make in to a body." One might arg ue, th erefore , th at th e co rpora tio n is intrinsically co llec tive, intrinsically co m m u nal. Well, if yo u' ve staye d with m e to th is point yo u know th at , alth ough th e re is truth to thi s agg regatio n with resp ect to th e co rpo ration's position in th e broader world , it is also tr u e that what goes on within the co rpo ra te st ruc ture beli es that co m m unality. But th ere 's more. You see , by in corporating an d thus creating an individual out of m any, we h ave e n dowed o ur corp orate actors with all of th e p ower an d rig h ts with wh ich we en do w ou r citize ns , th e very people whom Smi th contemplated as being at the core of a more individualistic co rp ora te syste m, an individualistic syste m th at worked p recisely b ecau se th e actors are peopl e an d are en dowed with all of th e moral autonomy I' ve ar gued has be en stripped from th e co r po ra tio n . T he co rpora tio n is indeed a co llec tive. But as Bowles and Gintis put it, "T he mo st p owerful form of co llec tive organization in contemporary capi talism - th e modern busin ess corpora tio n - is st rip pe d of its co m m unal sta tus in lib eral th eory. It is ignored in neoclassical economics, treated as a quasi-individual in law, an d co ns ide re d ' p rivate ' in public di scourse. Its sta tus as a form of soc ial powe r is th e reb y obsc ured an d its reality as th e ter rain of class con flict is systematically slighted.?" Not quite. In fac t co n te m porary n eocl assical econom ics, by d econ str ucting the co rp oration in to a system of marke ts organized within the shie ld of limited liability, has to so me ex te nt attem p te d 258

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to cor rect for thi s by restoring individual actio n within th e corpo ration . But it is a fiction and fails to describe the reality be cause it adopts for its maxim th e same goa l of wea lth maximization th at we h ave attrib ute d to th e co rporatio n . In so doing, it re ifies econ o m ic actors, that is, people , in exactly th e way I have claimed th at we have reifi ed th e co rporatio n. It thus d enies th e co m plex humanity of people, as it does th e co m p lex soc ial an d political aspects of th e corporation. Bec au se the corp oration itself is artificia l an d b ecause we h ave given it privileges, it will n aturally tend to o bsc ure thi s humanity unless we con scio usly understand it to be co m p osed of people an d there fo re to co llectivize all of th e m otivati ons an d interests of peopl e, rather than to treat it as a thing th at e m bo d ies a sin gle human ch aracter. In o ther words, th e American corp orat io n, in stead of being m ad e in ou r im age , h as remade us in its im age. This inv ersion has important soc ial implicati ons. Th e difference in the corp orate models th at exist thro ugho ut th e rest of the d evelo ped an d d eveloping world is th at th ey sta rt with th e rec og n itio n that th e corp oration is a human affair with human actors, human aims, an d human en d s. They privilege, even within th e co rpora tio n, th e r elationships that we h ave stripped from th em by leavin g its conduct to th e capital m arke ts. America n corp orate capitalism is th e aggregatio n of collec tive eco nom ic power with out th e temperin g influen ce of collective human power. It is a cap italism that, as we h ave see n, left to its own d evices, ca n ou tpace u s as citizens in a demo cracy. And as we shape o ur in stituti ons, so they shap e us. Th e shape th at we have taken from our corp orat e capitalism is th e shape of rati onal eco n o m ic acto rs, each m aking th e maximizati on of wealth our go al. In stead of co n t ro lling it, we hav e allowed it to contro l us . And in so doing, in ta king away our pow er to direct th e cor poratio n to improve our socie ty, we h ave d evoted o u r soc iety to improving the corp oratio n , and that, as we have seen in America , m ean s in cr easin g our wealth. We h ave taken th e collec tivity, th e soc ie ty, an d mad e it monolithi c in a way th at oth er ca pitalist cu ltures h ave not. We have crea ted a risk that cap italism will thrive at th e exp en se of demo cr acy. In co ns id ering th e valu es we ex port to th e rest of th e world, we must co nsider wh eth er we ar e exp orting our corporate capitali st system for the sake of democracy or democCA P I TA L IS M , SO C IA L IS M , A N D DEM OCR AC Y

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racy for th e sake of ca p ita lism. If th e latte r, it see ms likely th at democracy will not long last. In a democracy, the stat e is, however imperfectly, u s. It refl ects our h opes an d dream s, is an agg regate of o ur individual attem p ts to live lives of valu e an d m eaning. In American cor p orat e cap italism, th e economy is the stoc k-p rice maximizin g corpo ra tio n . If we pe rmit o ur ca pitalism to dominat e o ur d em ocr acy, it is th ose lives of m eaning we are sac rificing. O th er capitalist countries understand th is. Vacl av H avel famously proclaim ed th at th e Czec h economy would be " capitalism with a human face ." The very fa ct that he felt the need to de scribe the brand of ca p ita lism to wh ich h e aspire d in that way suggests how inhum an the d ominant world ca pitalism -America n ca p ita lism has be come . No t surprisingly, when the Czec h Republic looked to reform its co r po ra te law in a ca p ita list tradition , it turned not to th e Am eri can model , but to th e Ge r man. Not surp risingly,wh en Am erican advisors p ersu ad ed Russi a to ad op t Ame rican-style corp o rate law, th e Ru ssian economy tanked.vj apan , bowin g to p ressures fro m Am erican capital, has loo sened the system of life time employment, whi ch h as resulted in maj o r soc ial dislocati on. An d West European d emocracies, also yie ld ing to the might of Am erican ca p ital, are ex pe rie n cing the introduction an d proliferation of d evices like the h ostile tak eove r, with all of its socia lly disto rti n g conse quences, th at are inimical to th e valu es of co m mu n ity that ch aracte rize these soc ieties. Th ere are a number of d an gers in our ex portatio n of America n corp or at e capitalism thro ugh th e power of our cap ita l marke ts. One is th at our p roteges mi ght best u s. In th eir fasc inating book Chaos and Governa nce in the M odern World System, Giovanni Arrighi an d Beverly J. Silver draw p arallels betw een th e seventeen th-ce ntury co llapse of Dutch co m mercial rul e to th e financ ial h egemony of En gland and th e twen tieth-ee n tury co llap se of En gland to the "O f co ur se there are co m p lex reasons fo r this, in cludin g a legal syste m and m arket syste m th at were in ad equat ely devel oped to rel y upon a law th at so heavily de pe nded upo n self-regu lating and tr an spar ent ma r ke ts. Bu t th e gross inse nsitivity to a cultu re of aut hority and collec tive d ep e nde nce led to the creatio n of a syste m th at was an tago nistic to co re Ru ssian valu es. 2(jO AM E R I CA NS A B ROA D

Am eri can ce n tury. On e of th e signal hallmarks that th e e n d was near for each of the economically dominant nations was the excess of investment capital with insufficient domesti c opportunities, leadin g to th e investment of that cap ital abroad, whi ch en able d th e next-dominant country to expand and overtake the former. 10 The recent dram ati c in cr ease in Am eri can investment abroad p arallels these earlier developments, and while Arrighi and Silver mi ght not have a complete explanation for ch anges in financial lead ersh ip , this factor h as som e real ex planato ry for ce . Th e more we instruct the rest of the world in our me thods through our capital, the more we compel th em to ado p t our system in order to hav e acc ess to our investments and th e more likely it is th at we will find our future prosperity becoming dependent upon a power that has not yet rea ch ed its asce n da nc y. There is another risk . The ch eeta h population is dyin g out and can be saved, ifat all, only through science.The reason is that cheetahs are, as a result of inbreeding, more or less ge netically uniform . If one cheetah becomes infected with a deadly disease th at it is un abl e to fight, th e chances are good th at all cheeta h s will dis ap pear. So it would be if th ere were a uniform world system. When J apan and th e res t of Asia suffered economic decline in the 1990s , th e Am eri can economy did not co llap se becau se o ur system differs from theirs. When th e Russian economy failed, we were able to sustain our own. In the even t that we reshape th e world in our own im age, we run th e risk of th e chee ta h: fin an cial collapse in on e region could well lead to th e downfall of others. Fin ally, th ere is a more human risk. Although travel an d co mmunication have tended to homogenize world cu ltu re , that is, make it like ours, one of th e glories of th e world still is the diversity of ap p roac hes to life from co un try to co u n try. We ben efit an d learn from such variety. It is precisely that diversity that led to the development of our federalist system of government and is th e rall yin g cry of con ser vative fed eralist s in th e U n ite d Stat es today. To th e extent that we destroy that diversity, to the extent that we homogeniz e ec ono m ic systems to th e sam e d egree th at we are homogenizin g culture, th e opportunity for each nation to learn and improve through experimentation is lost. That is a serious risk indeed. C APIT ALISM , SOCI ALISM , A N D DEMOCR AC Y

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AMERICA RIGHT AND WRONG :

GROWING U.S. ECONOMIC IMPERIALISM

The N ew York Tim es re cently reported at len gth on th e war of attrition bei ng waged agai nst European business by American takeover artists and oth er cowboy ca p italists. Operating in cu ltures in whi ch patient capital and responsible management lo ng have been th e rule, cultu re s in whi ch th e e th ic of au to n o my is b alan ced by notions of individual and so cial responsibility, these U .S. businessmen, according to the Tim es, aim " to cut cos ts, increase profits and then sell o u t." And why Europe? Because "yea rs of co rpo ra te downsizin g and ot her measures have mad e it hard er today to squeeze new savings out of alr eady-lean Am erican companies." Lean? - or an orexi c? Te lecom Itali a abandoned p lans to spin off its wireless division. An gry sto ckhold ers co m plaine d th at th eir rights were being violated. And who were these an gry sto ckholders? American ins titutions in th e main, demanding th at stock prices be maximized. The ch ief investment officer at our old fri end TIAA-CREF went so far as to write a le tt er to the Italian government complaining that mi nority stockhold ers were being tak en advantage of and threateningly predi cting th at th e cre d ib ility of th e en tire Italian sto ck m ark et would be damaged . Maybe he was right. But the hand of stock-pricem aximizing Am eri can ca p ita l was all over th e d eal. As one report put it, "The juggernaut known as the glob al market is responsible, in several ways, for expanding shareholders' power in Europe . So

much of America 's fore ign in vestm ent ca p ita l h as poured into eq u ities in Western Europe - nearly $ 1 trillion .. . that Am eri can reverence for share h older valu e an d share holde r rights h as in evitabl y influenced th e att itu des an d pri oriti es of in vestors an d co m pa n ies alike. " ! While this com me ntat o r suggeste d th at co m p lete co nvergenc e of Eu ro p ea n an d America n for ms was unlikely given th e stro ng European sta ke holde r orie n tatio n, the pressure of Ame rican capital is increasin gly h ard to resist. On e of the most kn owled geable o bservers of co r po ra te financ ial structure , Caro lyn Kay Brancato, re cently wrote , "T he ec on o mic power an d co rpo ra te gove r nance influen ce of US investors in glo ba l m ark ets is [sic] undisputed. US institutio n s co n trol th e largest p roportion of glob al in vestment."2And she 's go t th e numbers to ba ckit up . According to th e l nst itutionalln vestrnent Report sh e prep ar es fo r th e Co nfere nce Board , Am eri can in stitu tional in vestor fin an cial assets were over " ten times th ose of France an d Ge r many an d almost fo ur times th ose ofJa pa n ." America n instituti on al assets co m p rised 66 .8 p ercent of the total in five maj or economies." She further no tes th at TIAA-CREF itself "represen ts much of th e sto ck market ca pitali sation of so me Asian co u n t ries ."4 While 49 .2 p ercen t of Am erican in stitu tions' equ ity in vestm ents were m ad e by p ension funds, incl udi ng h eavy parti cipa tio n by TI AA-CREF an d by sto ckholde r value activist CaIPERS, money managers co m prise a large and fastgrowing segme n t as well. An d thi s cap ital is hi ghly co ncen tra te d . Six ty-six pe rcent of for eign eq uities h eld by America n in vestors toward th e end of 1999 were owned by th e twen ty-five larges t American p en sion fun ds in vesting in internati onal sto ck, an d " th e lar gest 20 active eq u ity man agers with interna tional h oldings h ave portfolios . . . [r epresentin g] sligh tly more than 67 p ercent of . .. total for eign eq uity in vestm ents h eld by all U.S. in vesto rs in 1998. " a Am eri can influence is further co m pou n d ed by the dramatic gro wth of eq uity issued by fo reign co rporatio ns in th e Un ite d Sta tes."Ame rican ca pital is a m aj or exp or t, an d its push to unlock stockholder value throu ghout th e world is very powerful indeed. "Bran cato notes d ifferences in tur nove r rat es from a relatively low 16 perce n t for indexed funds to ove r 95 percent for agg ress ive grow th fund s. A M E R ICA RI GHT A ND W RO NG

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A report in th e Economist in April 2000 analyzed th e trend of European corp or ation s toward de conglomeration . Big, powerful European co nglomerates were being broken up by th eir managem ent. Wh y? Th e Economist reporter exp lained it as rati onalizin g businesses tha t were built for growth and stab ility and applauded th e m ove. Wh at did h e m ean by ra tio nalizatio n? Maximizin g stoc k prices. As th e reporter somewhat ar rogan tly put it , "At long last , th e m essage is sinking in .?" H e ap p lau de d the r estructuring of Siemens, whi ch aime d to d est ro y "the co m pany's cu ltu re of co m placency an d conc en trat e on finan cial performance, installing a former investm ent banker as fin an ce ch ief. Some 60% of top managers' p ay h as b een linked to targets for re tu rn on capita l." The former World Bank chief economistJoseph Stiglitz recently co m me n te d o n th e disaster th at h as been th e priv ati zati on of East European economies. H e co n traste d th e approach of what h e calls "sho ck th erap y," which be came the m ethod of choice and was largely push ed by th e Un ite d Sta tes an d "international fin an cial ins titu tions " (presumably including the World Bank and the IMF) , with th e "gra d ualist" m ethod advocate d by "specialists in the stu dy of th ese cou n tries an d co m p arative econ o m ic syste ms , an d th ose who b elieved there was more to a market eco n o my th an 'free markets.' "7 Th e economic an d id eological impe rialism of American advisors resulted in a disaster in Russia, where an American-style co rp orate law was push ed , ad opted, an d failed, failure elsewhe re, an d a false start in th e Czech Republi c, whi ch initially ap peared to be one of the bright spots for privatization ." Is ca p ita lism specific to ce r tain cu ltu res? It d oesn 't see m SO . h Poland an d Slovenia m oved at th eir own pa ce and , d espite so me setbacks, have been re latively successfu l in th eir tran sitio n to capitali sm .? But perhap s th e brand of ca p ita lism th at a n ation ad op ts is more cu lturally specific than Americans are willin g to admit. As Stiglitz put it , "T he failure of th e tran sition is not a fa ilu re of ec onomic th eory, but it is a d amning indi ctment of th ose who rely on "At least if wh at we mean by ca p ita lism is so meth ing o ther tha n th e very specific idea, put forth by Max Weber, of acq u isition for its own sake .

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simpl e textbook models or naive id eology."!" At least th e advisors were thinking and well intentioned. Capital markets don't think. The id eology of th e Am erican fr ee market system is, as I discussed in th e beginning, bas ed upon th e tenets of Enlightenment liberal philosophy taken to extremes. Whether or not we have perverted th at philosophy, however, it is not universal. It is, historically, a pe culiarly An glo-American doctrine .!' In his fascinating book American Ex ceptionalism, Seymour Martin Lipset claims that th e full developm ent of lib eral philosophy is uniquely American. '? Enli ghtenment attitudes in France, most notably in the philosophy ofJeanJ acques Rousseau , stressed an id entifiable common will. German policies of soc ial solida rity developed an d were implemented by O tto von Bismarck and , while take n to ex tremes that led to disastrous conse q ue nces, h ave remain ed intact in a more co nstr uc tive way as Germany has reformed. Strong family ties, apparent in the ownership structure ofItalian corporations, characterize Italy. And it h ardly n eeds noting th at th e An glo-Ameri can (r eally Scottish) Enlightenment was no part of East European or Asian culture or, for th at matter, th e cu ltu re s ofAfri ca or Latin Am eri ca." Yet it is this brand of market cap italism , based on th e primacy of individual choice, individual autonomy, th at we are exporting to the rest of the world. It 's n ot terribly h ard to p redict th at , even if th ere is so me move toward convergence, it is a convergence tha t is unlikely to last, at least without ca usin g some serious d amage to other cu ltu re s and ec o nom ies. And if it d oesn 't last, th ese cultures may pa y a very h eavy

' O ne co m me n ta to r interestingly notes th e divid e in Easte rn Europe between co un t ries th at have more successfully moved to ca p italism and th ose th at have not as co r re spo nd ing to th e divid e betw een th ose who were historically under H ap sburg rule -with its "tradition of ed uca tion , ad m in istra tio n and co m me rce, backed by a middle-class th at look ed west" - and th ose "wh ose history is bound up with Byzantium and Orthodoxy." "E uro pe : Flickers of Eco no m ic Light," Th e Economis t, Se pte m be r 5 , 1 ~H) 8 , 4 7. Leavin g aside th e whiff of cult ural superiority implicit in th e co m me n t, one notes th at th e point d oes suggest tha t th e successfu l introduction of ca p italism d ep ends at least in part on sens itivity to tradition al and cult u ral norms.

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pri ce in th eir atte m p t to ret ain or regain th eir cultural integrity in the wake of potentially sig nific an t social di slocation. O th ers h ave ob served th e tr end toward cu ltu ra l co nve rge nce in th e m edia, product ma rk ets, an d in creasin g world taste for American popular culture .!" My point is that th ere is a deeper aspect to th e culture th at is e m be dde d in o ur very style of ca pitalism, a culture th at we h ave th e pow er to push in light of th e stre ngth of our capital marke ts, but a cul ture we sh o uld b e wary of exp orting and others sh o uld be wary of acce pt ing. As Lip set puts it, "[The Ame rican Creed 's] emphasis on individualism threatens tr adition al forms of co m m u n ity, m oralit y, an d th us h as hi storically p romoted a p articula rly virule n t strain of greedy behavio r," !" an atti tude whi ch does not characterize much of the res t of th e world. The problem is th at ca pital m arkets are in creasin gly d omin ating th e will, if n ot th e p ower, of foreign gove r n me n ts and cultures to r esist. " Do we reall y want the world to look like us? Maybe Te lecom Itali a's min ority stoc kh olde rs were being hurt. And maybe big, diversified co nglo m erates are not a good idea. Ce r tain ly Ame rica n m an agers h ave decid ed th at they' re n ot . Maybe a form er investment b anker will turn o ut to b e a good man ager for Siemens' sta ke holde rs an d for Ge r man society as a whole, alth o ug h one sus pects th at th e choice of an investm ent banker res u lts from a de cision to maximize sto ck prices . Bu t th e relevant point for our purposes is th e em p hasis on stoc k price maximization , an em phasis clearl y res ulting from the pressu res of America n ca pital. Corporations built for gro wth and stabilit y may not re turn the hi ghest profit to ca p ita l. But th ey d o maintain em p loyme n t; th ey do co n tin ue to p rovide th e goods and se r vices on whi ch co ns u me rs depend. And wh at one com me n ta tor see s as a " cu ltu re of co m p lace ncy" can also be see n as a culture of com m u n ity an d coo peratio n in co n tras t to the hi ghly individualistic cu lture of both American managers and workers reported by Lip set.!" It is possibl e, is it no t, th a t the desir e to maximi ze stoc kholde rs' wealth is not a universal valu e? Nor is it at all clear that th e drive to maximize sto ck price is effec tive. We 've already see n th e ex te n t to whi ch th at pursuit in a globalized ca pital market h as damaged the prosp ects of Am erican workers. As Jeff Faux an d Larry Mish el writ e , th e gr eat est increases 2(j(j A M E R I CA NS A B ROA D

in in com e in equality during the I 980s an d I 990S occ urre d in th e stro ngest adherents to th e Am eri can way, th e Uni te d Sta tes and Great Britain . Moreover, while soc ial safe ty n ets h ave protect ed th e displ aced in other ca p ita list econom ies, p overty grew by 2 -4 perce n t an d 5.4 p ercent, r esp ectively, in these co u n tries from 19 79 to 1991. Faux an d Mish el point o ut that globaliza tio n of the stoc k p rice drive h as n ot on ly diminish ed Ame rica n wo rk ers' in comes b ut h as do ne littl e to improve overa ll inc ome growth an d productivity. They co mpare th e re lat ively stagnan t 197 0S an d th e booming 1950 S an d 1960s to th e 1990S and find th at per cap ita in come gro wth in the latter peri od was actually so me what less th an in th e seventies an d considerably less than duri n g the growth spurts of the fifties and sixties. As I have arg u ed, th e diminution in wor kers ' co m p e ns atio n h as been to th e ben efit of ca p ita l. An d th e p ower of th e glo ba l cap ita l m arkets h as given cap ita l gre atly in cr eased bargaining pow er over lab or. Faux an d Mish el fin d th at Am erica n prod uc tivity growth h as be en the same "s luggish " one p ercent during the 198 0s and 1990S th at it was during th e seventies, an d th ey cite OEeD figures to show th at U .S. productivity is no b ett er th an that in Ge r many, Belgium , Fr ance, Italy, an d th e Netherla n ds .l? Europe offers fres h ne w bloo d , an d American investm ent bankers and buyout specialists like Goldman Sach s, Morgan Stanley, Lehman Brothers, an d KKR h ave p articip at ed in some of the biggest European acq uisition fights, in cludin g Banque Na tionale d e Paris' atte m p t to buy Paribas and Societe Cen erale an d Olivetti 's bid for Te lecom Itali a. T h e n ew h ostile activity in Euro p e, catalyzed by Americans, led Business Week to predict at least a $ 1 trilli on m erge rs an d acqu isitions busin ess o n a co ntine nt long kn own fo r co rporate stability. These cor porate guns lingers have been me e tin g so me resistan ce fro m Europ ean execu tives raised in cu ltu res that em p h asize respons ibility and schooled in lon g-term , hum an e, res po nsib le Europe an corporate practices. But it ap pears that the Am erican way is winning, aide d by th e fea r of tak eover, sto ck ma rk et e nvy, an d th e allure of gargan tuan , Ame rica n-style executive salaries . (N ot lost o n th em are suc h exam p les as Mich ael Eisner, wh ose 199 8 payyear AM E R ICA RI GHT AN D W RO NG

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amo unted to $575.6 m illion , and even Margaret Wh itman , hired as eBay In c.'s CEO in February 1998, who finis hed the year with $43 mi llion fo llowing the company's ini tial public offering.) Legal "reforms " that make tak eov ers easie r and strength en minority sto ckholder r ights have been adopte d in Italy and Germany and are b eing conside re d in Fran ce."

WATCH ON THE RHINE

It won't come as any surprise to readers that bas ica lly two mode ls of corporate capitalism dominate th e West ern world ." T h e first is th e model I h ave been describing throughout this book, th e An glo American model, whic h, with some legal and cultural variation, charac te rizes th e corp o ra te ec o n o m ies of th e Anglo-American world; the second is th e West European model. (In speaking of an Anglo-American mo d el, I recognize that England and Ca nada, for exam p le, h ave more far-re ac h ing social welfare progr ams th an th e United States and th at Australia has a stronger lab or tradition, fea tures th at am eliorate th e h arshness of th e system in those co u n tr ies. Su ch differen ces have led Michel Alb ert to distinguish the American system from that of the rest of th e English-speaking world and term it a "nco -Ameri can model ." Nevertheless, I will refer to th e "Wh ile it might a ppea r o n th e face of thin gs th at minority stoc kholders ' rights ar e a good thin g , m an y Euro pea n corpo ratio ns are charac te rized eithe r by own ers h ip of a co n tro l b lock in the hand s of founding fam ilies (It aly, Fran ce , Ge r ma ny) o r by banks whi ch e ithe r own sha res o ut righ t o r act as d epositories for sto ck ho ld ers and have the power to vot e th e shar es (Germ an y.) There is no d oubt th at thi s limi ts th e power of min ority sto ckholders. But th e minority sto ckho lde rs weren't co m plain ing until Ame rican ca p ital becam e minority sto ckholders in th ese co un tr ies, presumab ly becau se th e stab ility o f th e owne rsh ip structure provid ed social ben efits like co rpo rate survival an d continued em ployme n t.

"I hope J ap an ese read ers will forgive my inclusion of th eir ec o no my (b ut not necessari ly th eir cultu re ) as part of the West ern wo rld , for surely west is th e princip al o u tlo o k of th e J ap an ese ec o n omy. And includingJap an as a West ern co rpo rate sta te is not unpreced ented. See Mich el Alb ert, Capitalism us. Capitalism. 2(j8 A M E R I CA N S A B R OA D

An glo-Ameri can model becaus e , for my purposes of analyzing disparate corporate systems, the two are more alike than they are different, even if important socia l differen ces make th e British, Australi an, New Zeal and, an d Canadian models less d amagin g to th eir societies.) IH The Anglo-American model is one in whic h corporations are run for th e sake of cap ita l, with bo ards of directors an d managements that are h eld directly responsible to cap ital, primarily through a series of laws and practice s th at attempt to ensure board independen ce from m an agem ent (and from labo r, too, for th at matter) and prohibit management from serving itse lf at the expense of capital. As we have see n , th ese laws are relatively in effective in en fo rce me n t, if n ot in symbolism. This model is ch aracterized also by tran sp aren t capital markets to which corporations are responsible for providing informati on an d rough ca p ita l m arket equality en sured by laws prohibitin g fraud and insider trading. Although this litany of laws might suggest that th e Anglo-American model is a hi ghl y regul at ed on e, th e realit y is th at co rp o ra te law does relatively little as a governance matter. Most of the work is don e through fed eral regu lation of ca p ita l m arkets an d tak eover markets, whi ch themselves provide little regulation be yond th e (ver y important) requirements of disclosure an d th e prohibition aga ins t fra ud . Th e very str uc ture of th e model , n ot to m ention th e norms whi ch have come to govern it, demands stock price maximization as th e corp orate goal. The West European model is, at lea st tr aditionally,rather dissimilar from th e Anglo-American. I borrow Albert 's term "th e AlpineRhin e model " of Germany, Switzerl and, an d Scandin avia (in whi ch he includes th e Japanese model) to refer to it. I will casually use it to refer to th e rest of Western Europe as well, for whi le Sp ain, France, an d Italy h ave unique differen ces, th ere is com m o nality in th e social and societal aspects of the model, which clearlyjuxtapose all of th em with the Am erican tradition of in vestor capitalism. And whi le th ere are con side ra b le vari ations am o ng th e co rp o rate laws of th e countries that u tilize some form of this model - French boards and m an agers, for exam p le, are selected in a m anner very unlike German ones, and the J apanese method differs from both of th ese - I b elieve th at the tech n ical legal characteristics of these corporations A M E R I CA RI GHT A ND W RO NG

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are less important than th e social and cultural for ces that hav e shaped them. The clearly distinguishing feature of countries which adopted th e Alpine-Rhine model is that all of th em treat th e corporation as serving social goals b eyond simple sto ck pri ce m aximization, and all of them are situated in cultures in which cooperation an d com m u n ity are highly prized. I !! This is a matter as much of ownership structure as oflaw, with substantial bankholdings ch aracterizing German corporations, heavy government involvement in Fr an ce, strong family own ership in Italy, an d th e famous system of crossholdings known as keiretsu in Japan . Under the pressure of Am erican capital, law reform effo r ts under way in th ese countries are atte m p ting to break th ese co nce n tr ate d owne rsh ip str uc tu res and make them look more like the American, regardless of th e n egative aspects of th at structure. Albert, envisioning an ultimate battle of capitalisms throughout th e world and predicting the ultimate success of the " m o re efficie n t," "more equ ita ble " Alpin e-Rhine model, notes, "Each of these models [the neo-American and Alpine-Rhine] belongs to the lib eral ca p ita list family by right, yet eac h car ries an inner logic whi ch con trad icts the other. The battle may ultimately com e down to a confrontation be twe en whole value-s ystems, an d on its ou tco me will be decid ed th e an swers to suc h issu es as th e individual 's place within the company, the function of the marketplace in socie ty, and th e rol e of law and authority in international ec o no m ic affai rs."20 Precisely so . Yet it appears that Albert, writing in 1993 , was too optimistic , at least in th e shor t term. Wh at I h ave shown so far unmistak abl y su gge sts the in creasing dominance of the American model. In order to explore this further, we must dis tinguish be tween claims abou t legal an d str uc tu ral differen ces between kinds of co r po rations and attitudinal differences. While I have been at great pains to point out that th e legal structure of th e Am erican co rp oratio n is a m ajor, if not th e major, facilitator of th e eth ic of sto ck price m aximization , I have been careful to emphasize that this approach itself is a conseq ue nce of Am eri can social thought an d att itu de an d th at it is law and structure whi ch make it possible . Indeed, even in th e

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U n ite d Sta tes, th e law an d st ruc ture predate th e att itu de, eve n if th e latter is implicit in the former and even if the attitude can be traced to our earl iest d ays as a n ati on. There are marked legal di fferences among th e world's corporations, but th ere is so m e debate over how important they are in terms of creating stoc kholder power over corporate man agers an d, as a derivation of th at , ca p ita l p ower. For whil e issu es lik e th e m ann er in which the board is ele cte d an d m an agement is ap p ointed an d th e str uc ture of th e board an d m an agem ent gro u ps suggest real divergences in atti tude , for th e most part board ele ction is a stoc kholde r matt er." Co nse q ue n tly, o ne mi ght ex pect th at all co rporat e systems in whi ch th e ultim at e res id ual powe r lies with th e shareholders would exhibit th e same typ e of atti tude toward sto ck price an d stoc kholde r welfa re . As I hav e so far suggeste d, they don't . One rea son may be th e ext ent to which corporations in a given system rely upon equity mark ets for th ei r ca p ita l. In Germany, wh ere , despite a co m p lex language th at cr eates new words out of multiple roo ts, no word ex ists for "stockh old er value," banks, n ot stoc kholde rs, are the principal so urce of ca p ital. Co rporatio ns an d b anks form web s of cross-stockholding in J ap an.22 This m ay b e ch anging, especially in Germany with th e enormous in flux of Ame rica n ca pi ta l in to th e German sto ck market and th e substan tial merger activity it has ge nera te d . Moreover, as a result perhaps of cross-bo rde r m ergers suc h as th at of Daiml er-Benz with Chrysler, German corporations as well as other foreign corp or atio ns are in creasingly availin g themselves of Ame rica n ca p ita l markets. To th e ex te n t th at things are changing, it is ap pare nt that legal st ruc ture alo ne is n ot an impedim ent to a co rp orate attitu dinal shift: toward stoc kh olde r valu e. More important th an law, pe rh ap s, is ownersh ip st ruc ture . As I' ve n ot ed, Am erican cor p o ratio ns, at lea st the r elatively lar ge Ame rica n co rporatio ns with whi ch we h ave been co ncer ne d, tend to be characterized by a se para tio n of ownersh ip an d co n trol. T hat is, stoc k is fairl y wide ly dispersed in the hands of far-fl un g in vestors, an d whil e th e rise in in stitutio nal ownersh ip I di scu ssed in chap ter 7 h as had some effect o n th is by co nce ntrating owners h ip , we have

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seen that, for th e most part, institutional sto ckholders co n tin ue to behave in the relatively passive way tha t American stockholders always hav e, thus suggesting no gr eat ch ange from th e norm. But not all corp ora te systems h ave dispersed own ership structures. Quite the contrary, in fact. Rafael LaPorta and his coauthors con d uc te d an exte n sive and d et ailed survey of th e own ership structure of corp oration s in twenty-seven wealthy co un tries and co ncluded th at , in both large and medium public corporations, widely dispers ed own ership is quite rare. In fact, th e German model of ownership concen trated in banks is rare, too . Far more common in th ese countries is a system in whi ch families or th e state own controlling inte rests in th e m ajor co rp o ratio ns. Thus th e Am e ri can model as an ownership model, and as a structural and normative model, is relatively un common.F' As La Porta and his colleag u es see it, the corp or ate ownership structure in various countries is not unrelated to law. But the specific laws th at th ey find co r re lative with own ership structure are laws governing minority stockholder rights. Not terribly surprisin gly, th ey find th at co ncen trate d own ership is greatest in those co un tries whi ch provide weak legal prote ction for minority sto ckholders an d leas t prominent in countries that provide strong min ority stoc kholde r rights. (Th ese rights include n ot on ly th e right of each share of each class of stock to be treated equally, but also, an d perhaps for th ese purposes most important, eq ua l rights to hav e access to con trol premia in th e ma rk et for co r porate con trol. In blockholding countries, control blocks tend to be sold privately, an d minority sto ckholders remain as a so rt of perman ent ca p ita l, at the mercy of con tro lling interests.) And La Porta et al. do not see any likelihood of ultimate convergence upon an American-style model, lar gely becaus e of th e intractability of en tre nc he d co n t ro llin g corporate interests.s! Interestingly, the countries with weak minority sto ckholder protections principally ar e those whose legal system is bas ed on civil law, whil e th e cou n t ries with strong protections are those whose legal system is based on common law, whi ch of co urse are the anglo ph o n ic co un tries. I don't want to car ry th e point too far, but not unexpectedly minority stockholder protections appear in countries which lay 2 72 A M E R I CA NS A B ROA D

greate r e m phasis on individual autonomy. Aft er all , to say that minority stockholders have important righ ts in a system in whic h almost all sto ckhold ers ar e minority sto ckhold ers is to say that th e individual sto ckholder m atters, th at th e system is d esign ed for him . In socie ties that p lace a greater stress on the co llectivity, on the com m u n ity (and in wh ich, p erhaps not coinc ide n tally, sto ck own ership is most h eavily co nce n trate d ) , it shouldn't b e terribly astonishing to see th e individual subordinated to th e common good by a re lative lack of righ ts. This of co urse puts th e best sp in on th e pi cture .' It implies tha t concentrated ownership makes for stable own ership , and th at allows th e cor po ra tio n to b e run in th e longterm interests of the worke rs, th e co ns u mers, an d th e soc ie ty. An d it is also no surprise to see that these ownership structures tend to co r re late with co u n tries th at h ave greate r soc ial welfare program s and provide greate r downside protecti on tha n th e an glophonic

'To put a no ther sp in o n it, La Porta a nd h is co lleagues found th at th o se co u nt ries wh ich provided greater sto ckholder prote cti on h ad larger ca pital market s a nd greate r access to ex te rnal (tha t is, foreign ) ca pita l (both d ebt a nd eq u ity) , a nd th at co m pa n ies with hi gh e r ca p ita liza tio n ra tes a lso had fa ster gro wing eco no mies . T hese stoc kho lder p rote ct ions ge ne rally co r relate d with wh et he r a co u n tr y's laws were based o n co m mo n law (the anglo p ho n ic co u ntri es) o r civil law (most o f th e rest o f th e world) . Rafae l LaPorta , Floren cio Lope z-de-Silanes, Andrei Sh le ife r, a nd Robert W. Vishny, "Legal Determinants o f Ex te rnal Fin ance ,".f. Fin. 52 ( 199 7) : 1 13 1. Fau x 's numbe rs suggest th at American productivity gro wth has in fact not been sig n ifica n tly greate r, if at a ll, th an the a ng lophon ic co u n t ries in rece n t years despite la rge r ca pita l market s. Moreov er, LaPorta' s find in gs are not co nclus ive o f th e issu es I raise in thi s bo ok, eve n if th ey a re co r rec t. Whil e he a nd hi s co lleag ues specu la te th at we ll-devel oped ca pital market s mi ght have so me relati onship to trust (wh ich I will tak e up la ter ) , it may we ll be th at m ore d evel oped co r po ra te soc ial values in civil law co u n t ries lim it mi nority stoc kho ld er p rote cti ons in favo r o f th e greate r sta bility a n d gro wth th at relatively in vu ln erable protect ions agains t ca pita l m arke ts a llow. In o ther wo rds, wealth maxi mi zat ion m igh t not be a valu e in suc h co u n tries, a nd th e sac rifice o f m inority stoc kh o lder interests co uld we ll be th e price th ose socie ties are willing to pay in o rder to maintain a greate r commu na l a nd soc ial co ns c ie nce withi n th e ir co rpo ra tio n s, particularly with resp e ct to issu es o f e m ployme n t a nd the me aning o f wor k. A M E R I CA RI GHT A ND W RO NG

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co un tries in whi ch th e model of wid ely dispersed sto ckholding exists. Corporations that have concentrated ownership are , whatever th e law - unless it is simply co nfiscato ry - r elatively take over-pro of, an d m an agement in su ch firms h as less fear of b eing ousted b ecause of poor stock price performance than that in corporations ruled by ca p ital markets . Th e dark sid e, of co urse , is that co n tr olling sto ckholders, esp eciall y in countries with weak minority stockholder protections, are able to divert corpora te resources to th emselves, to th e ex clusio n of minority stockholders. In th e academic literature on comparative corp orate governan ce , this is gen erally d ecri ed as a bad thing, and , from th e p ersp ective of th e Am eri can corporate syste m , it is. But it need not be viewed as necessarily bad , at leas t when "side paym ents," or bribes, in co m mon parl an ce , m ad e by managers to co ntrolling sto ckholders are kept within reason. For while suc h prefere n tial treatment might well divert some wealth from minority sto ckholders to con t ro lling sto ckholders , it is possible an d not at all unreasonable to regard tho se payments as the price of a system whi ch prizes valu es of stability an d con tin uity over maximizing returns to sto ckholders. If indeed th ese structures ar e more stable, th ey are so both because of th e wagon-circling effect of controlling interests an d because minority stoc kholde rs are ade quate ly, if n ot maximally, compensated. Controlling sto ckholders may ver y well ac t as r eal own ers, with broader notions of co rp o rate success, than th e Am eri can stoc kholder we saw in chapter 6 . And if min o rit y stockholders are willing to accept adequate , and not maximal, comp en sation , it presumabl y is becau se th ey, too, valu e th e soc ial result of a syste m of stable , long-term co rp o rate owners h ip. It is tr u e that minority stockholders in many of these cou ntries (Germany, it see ms, in p arti cul ar) are beginning to become restless and more demanding of rights and value . But that is a fairl y re cent d evelopment-remember, th ere's no German word for "stoc kholder valu e ") - roughl y cote r m in o us with an d surely d eriving from the extraordinary growth in American equity investmen ts abroad . There was n o great outpouring of minority stockh older sen tim en t abroad until Am eri can cap ital b ecame involved. This book is not the place to go into an extensive ex amination of 274

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com p arative international cor po rate law or of th e legal systems of nations and the advantages and disadvantages of their structures over that of th e United States. For what I hav e said so far should make th e point clear: th e overwhelming pow er and influen ce of American capital are changing everything, creating nearly irresistible pressures on corp ora te systems throughout th e world to replicate th e U.S . model for the ben efit of Am eri can investors. To th e extent that I am right in claiming that th e American system disse r ves even American investors in a society in whi ch at a minimum it accords with social and cultural norms, however distorted, it is a short step to con clu de that th e ex p o r ta tion of Am erican corporate ir resp onsibility serves n obody's long-term interests. It is time th at we stop to look at what we are doing, at home and abroad , curb our desir e for ever more wealth at th e ex pe nse of a h ealthy world , an d de velop more con sid ered and sustainable approach es to reform.

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CONCLUS ION

Th e sta te of Ame rica n corporate ca p ita lism is th e p roduct of a structural and a legal system grounded in a uniquely American tradition an d su ite d to th at tradition. Th at system , h owever, whil e conc ep tu ally so un d and co nsiste nt with our democratic ideas of power and responsibilit y, h as gone seriously awr y.T he fau lt lies with nobody in particul ar an d everybody in ge nera l. Fo r th e system has grown and deve loped in a way that reflects not careful, considered pl anning, but instead th e unthinking for ces of a relatively unconstrained cap ital market . It is both our benefit and misfortune th at th e corporate structure is highly sensitive to these market pressures: ben efit becau se wh en m arket ac to rs are th oughtful an d co n trolle d and corporations are res trained by considered so cial policy, th ey are ex treme ly efficie n t at allo cating resources in ways that lead to th e p roduction of desirabl e go ods and services; mi sfortun e because our personification of the corporation and our consequent unwillin gness to regu lat e it allow selfish an d unrefl ective ca p ita l markets to take the p lace of co nsidere d policy making . The result has been no t policy, but reaction, and reaction by boards and managers who are con straine d both by law an d human instinct to bow to th ese pressures rather than to resist them . T h e conseq uence has been for Am erican co rp oration s to develop a wid espread, ifnot universal, fo cus on th e short term, a focus aimed at raising short-term sto ck prices at the expense oflong-term pl anning , a focu s whi ch results in an unsustainabl e rush to m ak e money now rather than to p lan for th e future, a fo cus th at results in the displace m ent of the costs of that short-term vision on workers,

th e enviro n me n t, cre d itors, su p plie rs, co ns u me rs, an d en tire co mmunities, a focu s whi ch indeed has affe cted the way we th in k about o urse lves an d our soc iety an d thus h as perverted an d threat ens to overwhelm o ur d emo crati c tradition an d h as led to th e pursuit of individual gain over th e de sire for greater societal well-being. These are results th at n o thoug h tfu l p erson sho uld wan t, an d yet eve ry th oughtful person is trapped in the dil emma of foregoing econ omic b etterment for the sake of principle or going alo ng for the ride. Gove rn me n t largely h as forsa ke n its ro le as solving this co llective action problem through re gulation , and business leadership is as ca ug h t up in th e cycle as the rest of u s. The str uc tu re is not intrinsically bad, but its oversensitivity to th ese pressures h as led us to a bad p lace . Nobody is in ch arge. T he solutio ns I h ave suggeste d are not to change th e st ruc tu re excep t ar ound the edges. Ce n tr alize d co rporate management is part of its great efficie n cy. Bu t the unconstrain ed corp o ra te ability to p ro fit any way you ca n leads to immoral an d ir resp onsibl e behavior. And the structural roles we have created for corporate managers allow th em to d en y accou n ta bility, to fa ll b ack o n the old defen se th at th ey are only foll owin g orde rs. Nobody doubts that lo ng-ter m manag ement is b ett er than shortterm management, th at fo regoi ng some wealth today will brin g greater, more sustainable wealth tomorrow. Nobody doubts that long-term man agement leaves greate r ro o m for resp onsibl e an d accoun table be havior, p reventing p ro blems like environ me n ta l de gradation and economic inequality instead of leading to th e much mo re cos tly soc ial alte rnative of cleaning up th e m esses afte r th ey've b een made. Long-te rm m an agemen t is b etter for all of us, from the wealthiest executive to th e j anitor who swee ps the factory flo or. How d o we cu rb th e p ower of the market? How do we ensure long-term m an agement? I h ave m ad e a number of proposals, most of whi ch are aime d at overcom ing our collec tive actio n probl ems by crea ting in centives for co m m u n al restraint. Bu t the most important solutio n is n ot legal; it is n ormat ive. At a tim e wh en o u r professions - m edicin e, law, and even tea ching (with the introduction of co rporate sponsors into classroom instruction) - h ave remad e th emC ONCLU SI ON

277

selves ever more in th e model of profit-maximizing business, it is time that we tu rned to business as a profession. It is tim e that we fr eed corporate managers to do th e right thing, to provide ex ac tly th e kind of ec on om ic lead ersh ip th at our co rpo ra te ca pitalism id eally leaves it to business leaders to provide. It is not some thing that we ca n fairl y ex pect th em to ach ieve in a leg al system th at treats th em with distrust, that assumes that the y will steal or slack off if not constantly watched or pressured by mar kets. I t is not so m eth ing we ca n fairly expect th em to achi eve if th ey are co n st ra ine d by structu re and markets to focus on the bottom line h ere and now in order to keep th eir jobs an d e nsure th eir own welfare and that of th eir families. It is some th ing we can fairl y expect only if we free man agers to do what it is they do best - manage our business economy - an d fr ee th em with th e kn owled ge th at we will hold th em acco un tab le for the means they ch oose to accomplish that end. It is something we can achieve only if we free them from th e need to be slaves to th e market, to be chained to th e bottom lin e. Freedom. Freedom to behave in accordance with the lib eral id eal. Freedom to act as a n atural human being, situated in so ciet y an d in a moral an d eth ical environment that allows all of us to make our choices and th at hol d s us to account for the choices we make. Freed om th at co mes o n ly if we br eak with th e n oti on th at co r po rations are people, and instead demand th at they be run by people . The only alte r n atives I see ar e our even tual self-destr uc tio n or extensive regul ation of busin ess by govern men t. Neither alt ern ative is attractive . It's time to change our attitude toward corporations so th at th ey behave like us, in stead of allowing ourselves to beh ave like th em.

278

C ONCLUSION

NOTES INTRODUCTION 1.

For an analysis of the development of th e e thic of stockhold e r value, see Allan A. Kenn edy, Th e End

ofShareholder Valu e: Corporations at

the Crosslloads (Cam-

bridge : Pers eus Publishing, 2000 ) . 2.

Gre tchen Mo rgenson, "A Co m pa ny Worth More than Spa in ?" New York Ti mes, December 26, 199 9, sec. 3, p . 1.

3. Jo hn Tagilabue , "Res isting Those Ugly Am eri can s: Co n te m p t in Fr an ce for U.S. Funds a nd In vestors," N ew York Times,Janua r y 9 , 2000, sec. 3, p .

I.

4- Judith Mille r, " Glo ba liza tio n Widens Rich-Poor Gap , U.N. Re po r t Says," N ew York Times,July 13, 1999 , A8; Uni ted Na tions ' Hu man Deuelopment Report 19 99

(Oxford: Oxford Un iversity Pr ess 1999) .

5· Uni ted Na tions' Hu man Development Report 199 9 · 6. Short -te rrnism in Ame rica n corpora te life is a su b ject ofl ively deb ate . On e of my princip al go als h er e is to e xp lain how short-ter rnism is stru cturally embed ded in o ur econ o mic life . For a n eco no m ic ana lysis of the short-ter mism of Am er ican business, see Michae l E. Porte r, Capital Choices: Changi ng the W lY A merica Invests in Indu stry (Wash ing to n : Co unc il o n Co m pe titivenes s, 199 2) .

Porter's study was supported by th e Co un cil on Co m pe titiveness a nd th e H arvard Busin ess School, a nd h is co nclus io ns are e ndorsed by th e co u nci l. See also a summar y of th ese co nclusio ns in Mich ael E. Porter, "Ca pi tal Ch o ice s: Chang ing th e Way Am erica In vests in Industr y," in Studies in Int ernat ional CorporateFin ance and Governa nce Systems: A Comparison oj the United States, [apan , an d

Europe, ed . Donald H . Che w (Ne w York: Oxford Un iversity Pr ess, 199 7) . See also C. K. Pra halab ad , " Re th in king th e Primacy of Sha rehol der Value ," in the sam e volume for a cr itiq ue of th e sh ort-te r rnism implicit in th e sto ckholder ma ximizati on norm. 7. Gre tc hen Mo rge nson , " Inve sting's Longti m e Best Bet is Bein g Tra mpl ed by th e Bu lls," N ew York Tim es, J an uar y 15, 2000, AI . For more informati on on h igh turn over ra tes, see Rob ert

J.

Shi ller, Irrational Exuberance (P rincet o n :

Princeton Un iversity Press, 2000), 39 . 8. See Terrance Odean , " Do In vestors Trade too Mu ch ?" Amenmn Economic Review , forth coming; Brad Barber an d Terran ce Odean , "Trading Is H azardous

to You r Wealth : The Co m mo n Stoc k Perfo rm an ce of Ind ivid ual Investors," http:/ / www.gsm .u cd avis.cdu z' odean / pap ers / returns.html. 9. C. K. Pra halah ad ar gues in favo r of a model focu sing on "co rp o rate value

added " whi ch ba lan ces stoc k pr ice a nd stoc kho lder value wit h the demands of a variety of ot her corporate constituents inc lu di ng suppliers, em ployees, cre dito rs, a nd custo me rs. Prahala bad , " Re th in king Sha re ho ld er Value ." 10 . Robert Lever ing and Milto n Moskowitz, "T h e 100 Best Companies to Wo rk Fo r," Portun e,Jan uary 10 , 2000, 82; Shelly Bra nch , "T he 100 Best Co m panies to Wo rk For," Fortune,Janu ar y II .

I I ,

1999, 118.

Floyd Norris, "Visio n s: Powe r; Economic Thin kin g Finds a Free Mar ke t," New York Times, janua ry 1, 2000, E4; Russell Reyno lds Associat es, "Toward A Co m-

mo n Standard : 1999 In te rna tio n al Surv ey of In stitu tional Investors" (reporting wor ldwid e tr end toward ad o pting the stockho ld e r value maximiza tio n no rm an d th e in cr easin g d esire of German an d j apan ese in stitu tional in vestors to inst ill Am er ica n-style co rpo ra te gov er nanc e in th eir co un t ries); La ur a M. I-Iol son , " Ca n Europe Learn to Love Am e ri cans at th e Gat e ?" Ne w York T imes, April 25, 1999 , sec. 3, p . I ; Roger Co e hn, "Big Busin ess in Lin e to Ge t

Lar ge Tax Cut from Schroder," N ew Yrn-ll Tim es, Februa ry 10 , 2000, AG (d escri bing use of German tax cut to develop Am er ica n-style sh areholder cu ltur e) ;JcfI'rey N. Gordon , "Pathways to Co rpo ra te Co nvergence? Two Steps on th e Road to Sh ar e hold er Cap italism in Germany: Deutsch e Tel ekom and Dai ml e rCh r ysle r," 5 Colu m. j. Eur. L. 2 19 ( 1999) (noting likel y pressure to sharehold er-centric model in Ge r many as a re sult ofth e Daiml e rCh r ysle r merger) . Some legal aca dem ics, apparently wit ho ut m uch hard evidence , describe the battle as already over, th e victo r y go ing to th e for ces of Am er ican-style corporate law. H e n r y H ansman n an d Reini e r Kraakm an , "T he End of Hi story fo r Co rpo rate Law," Yale Law Sch oo l Law an d Econom ics Wo rking Pape r no . 235, j anuary 2000. 12. Leo n H adar, "Amer ica , Am e r ica ," Bu sin ess Tim es (Singapore) , December 3 1, 1999 , 19 · 13. Carolyn Kay Bran cato, "Build ing o n Sand," 35 Asian Busin ess 8 (Aug . 1999 ) ; Co nfe re nce Board , Institu tional Investment Report: International Patterns oj Institutional In uestment (Conference Boar d , Ap ril 1999 ) .

14. Norris, "Visio ns: Power"; Ho lson , "Ca n Europe Learn ?" ; Pa t rickJ. Lyo n s, "A Global Vo te fo r U.S. Style of Corporate Openness," New Yor!{ Times, May 9, 19 99 , sec. 3, p . 4 · 15. Sec, for exa m ple, the inter est in g ar gnment made by form er Monsanto CEO Rich ard Mahon ey in "Sh are h o lder Value : Sorting O ut th e Voi ces," 2 19 Direc-

torship 1 (Ma rch 2( 00). I

G. See, e .g., Sch iller, Irrational Exub erance; Mich ael Usee m, Investor Capita lism: How Mon ey M anagersA re Changing thePace of Corporate Am erica (New York: Basic

Boo ks,1 9 9G). 17. Mich el Albert, a promin en t French exe cu tive, has mad e this poi nt q ui te well, 280

N OTE S T O P A GE S 7-13

at lea st with resp ect to n on -An glo co un tr ies, in hi s book Capitalism us. Capitolism: Ho w America \- Obsession with Individual A chievement and Short-Term Profit Has Led It to the Bli nk ofCollalJ.le (New York: Fo ur Walls Eight Windows, 1993 ) . I have

also arg ue d th at American s understand th is, too , in Stacked Deck: A Story of Selfishness in A merica (Ph ilade lp h ia: Temple Un iversity Pr ess, 199 8 ) .

18. Seym o ur Ma rtin Lips e t a nd Gabri el Salma n Len z, "Co r r u p tio n, Cultu re, an d Mark ets ," in Cu ltu re Matters: Ho w Values Shape Human Progress, ed . Lawrence E. Har rison a nd Sa m uel P. Hun tin gt on (New Yo rk: Basic Book s, 20()(» , 11 2. 19. On this point, see th e followin g ch apte rs in H arrison a nd Huntington , Cu ltu re

Matters: Ronald In gleh a rt , "C ulture a nd Dem ocr acy," 80; Mari an o Gro don a, "A Cu ltural Typology of Economi c Development," 44; Michael E. Porter, "Att itudes, Values , Beli efs, a nd th e Micro economics of Prosp erity," 14 . 20 . David Landes, " Cultu re Mak es Almost All th e Differ en ce ," in H ar rison a nd Huntington , Cu ltu re Matters, 2 . CHAPTE R 1. AMER ICAN LIBE RALISM AN D THE FUNDAMENTAL FLAW I .

Aaron Bern stein, "Too Mu ch Co rpo ra te Power? Bu sin essWeek Onl ine, Se pte mber 11, 2000.

2.

I exp lo re d th is cultu ral co n tex t in co n siderably more det ail in Stacked Deck: A Story of Selfishness in A merica (Philadelphia: Temple Un iversity Pr ess, 1998) .

3. Co nsta nce L. Hays, "C oc a-Co la to Cu t 20% o f Em ployees in a Big Pullback ," N ew York Times,Januar y 27, 2000 , AI . 4 . J ohn Doe v. Unocal Corp., 96 3 F. Su pp . 880 (S. Dist. Calif. 1997) .

5. Linda Werth eimer a nd Dani el Zwerdl in g, "La n d ma rk Lawsuit Against U .S. O il Fir m Unoca l Stemming from Its Operati ons in Myanmar," Na tio nal Public Radio, A ll Th ings Considered, Ma rch 10 ,2000 . 6. Ther e is evide nce that some corporat ions, in th ei r d ecision making abo ut wher e to invest, a re paying more a tte n tio n to human righ ts ab uses, but clea rly th ere is a lon g way to go. Alison Matil and , "H uman Rights Weigh H eavie r with In vestors," Fina ncial Times, Apr il 6, 20 00, 15.

7. "J udge Slash es More th an 3 Billion Doll ar s fro m GM Pu nitive Dam ages Award ," Agen ce Fran ce Pr ess, August 27, 1999.

8. For a n exp an de d d iscuss io n of th is po in t, see Elizabet h Wol gast, Ethics oj an Artificial Person (Stanford: Stanford Un iver sity Press, 1992). 9 . HB Koren uaes Investment s, LP v. M arriott Corporation, 199 3 WL 25 74 22 (De l.

Ch .); PPM America, In c., v. M arriott Corporation; 853 F. Supp. 860 (U .S. Dist. Md . 1994 ) · 10. David Cay John ston, " Co rp o ratio ns' Taxes a re Falling Even as Individuals ' Burden Rises," N ew York Tim es, Februar y 20 , 20 00,

1.

NOTES TO P A GES

14 - 2 8

28 1

11. Stating th e form ula is easy. Plugging in re al n um ber s is difficult. I've mad e som e sug gestions as to h ow to go about th is in Stacked Deck.

CHAPTER 2. THE PERFECT EXTERNALIZING MACHINE

I . Lawrence E. Mitch ell , "Tr us t and Tea m Productio n in Post-Capitalist Soc iety, 24 1 Corp. Law 869 ( 1999)· 2. See also Rob ert Kuttner, Every thing fo r Sale: Th e Virtues and Limits

'1 M arkets

(Ne w Yor k: Alfre d A. Kno pf, 199 7) (d iscussing no rm s of civility as a publ ic good) , 66 -67 . 3. Patricia McLagan and Ch risto Ne l, Th e Age oj Part icipation: N ew Governance[or the WorkfJla ce an d the HfrJrld (San Fran cisco: Ber rett-Koeh ler, 1997 ), xiii.

4 . Leverin g an d Moskowitz, " 100 Best Co mpa n ies," suggest that imp ro vem en ts in e mp loyee tr ea tm en t by Am erica n co rpo ratio ns ar e u nli kely to sur vive an in crease in th e un employmen t ra te, at least to th e ex te n t that th ey ex ist now. See also Ku ttn er, EverythingforSale, 74 -77 . 5. Albert, Capitalism vs. CafJitalism, 75 . G. Co n tras t some wha t Mich ael Usec m 's arg u me n t, th at to some ex te n t th e idea th at sto ckho lders wan t sho rt-ter m pri ce maxim izatio n is used as an exc use by und erperfo r m ing m an agers (alt hou gh qu estion what " und er perfo r ming" means ). Use ern , Investor Capi talism, 78 -79 . Whi le Usee m h as a point, h is arg ument largely supports mi n e. 7. For mo re exte nded ana lysis of this asse rtio n , see Lawren ce E. Mitchell, "Close Corp oratio ns Recon sid ered ," 63 Tulan e L. Rev. 114 3 ( 1989 ) . 8. Richard A. Posner, "T he Eth ical an d Politica l Basis of th e Efficiency Norm in Co mmon Law Adjudication," 8 Hofstra Law Review 487 ( 1980) . 9. Ro nald H . Coas e, "T he Pro blem of Social Cos t, 3 J. Late and Econ . I ( I9Go) . 10 .

Ypsilant i v. General M otors Corporation , 506 N.W. zd 556 (Mich . Ct. App . 1993) .

11. T heresa Gabaldon, "T he Lemon ad e Stan d : Feminist an d Other Refl ection s on the Limi ted Liabilit y of Co rpora te Sha reho lders ," 45 \!rind. L. Rev. 1 ( 1992) . 12. Brian Reid an d Kimb erlee Millar, " Mutua l Fu nd Assets an d Flows in 1999 ," 6 1 Investment Company Institu te Perspective, Febr uary 2000 (as to tota l m utu al fu nd

investments) ; Social Investm en t Fo ru m , 1999 Report on Socially Respon sible Investing Tren ds in the Uni ted Stat es, November 4 , 1999 (as to do llar s invested in all

design ated soc ial respon sibility fun ds, inclu ding th ose that em ploy o n ly shareho ld er advo cacy, thos e tha t employ only social screen ing, those that em ploy bo th , and co mm un ity investm ent fu nds, all of which ar e d iscu ssed in mor e detail in cha p ter 5) . Also , as to total do llars in vested in mutu al funds, see Margot Roosevel t, " Ho w Gre en Is Your Money?" Time, Oc to ber 16, 2000, and as to amo u nts invested in soc ial responsibilit y fu nd s, see Ro b Wh er r y, "T h e Clea ns an d th e Gree ns ," Forbes, Ju n e 12, 2000. 282

N O T ES T O P A GE S 3 6 - 6 4

CHAPTER 3. CORPORATE PSYCHOLOGY 101 I .

The following arg umen t is bas ed in portion Lawren ce E. Mitchell, "C oope ration and Co ns tra in t in th e Mod ern Corpora tion: An In q uir y in to th e Ca use s of Corporate Imm or ality," 73 Texas L. Rev. 477 ( 1995) .

2.

Kuttner, Euerythi ng for Sale, pa ssim .

3. Perhaps th e lead ing con tem porary philosophical arg u ment to th is effe ct is Micha el J. San del, Liberalism and the Limits ofJu stice (Cambridge: Cambridge University Press, 198 2) .

4- National Public Radio , Fresh A ir, Februar y 23,2000. 5. Lon L. Fuller, "Two Prin cip les of Human Associati on ," in Voluntary Associations, ed ..J. Roland Pinnoch an d John W. Ch apman (New Yo rk: Ath erton Pr ess, 19 ( 9) ,1 , 6.

CHAPTER 4. IS WEALTH A VALUE? I.

Ronald Dworkin , " Is Wealth a Value ?" 9J. Leg. Stud. 191 (1980) .

2.

See , for ex ample, Lawren ce E. Mit ch ell, "Understandin g Norms," 49 Un iversity

ofToronto Laurjournal i rrj

(1 999) '

3. Claude S. Fisch er et aI., Inequ ality by Design : Cradli ng the Bell Curve Myth.(Princeton : Princeton Un iversity Press, 1996) . 4 . Rob ert A. Dah l, A Preface to Economic Democracy (Berke ley: Un ivers ity of California Press, 1985) . CHAPTER S. CORPORATE MANAGERS I .

Kenn ed y, Th e End of Shareholder Value, 5 1.

2.

Blasius Indu stries, I nc. v. Atlas Corp ., 564 A. s d 651 (Del. Ch . 1988) .

3. Prahalabad, " Re th in king Sh ar eholder Value ," 4.26 U.S.C. Sec. 16 2(m ) (19 94 ).

5. David M. Schizer, "Executives and H edging; The Fragi le Legal Foundation of In centive Co m pa tibility," 100 Colum . L. Rev. 440 (2000) . 6. Rich ard H . Wagner an d Catherine G. Wagner, " Rec en t Developments in Exec utive, Directo r, an d Emp loyee Sto ck Co m pe nsatio n Plans : New Co ncern s for Corporate Dir ectors ," 3 Stan .J. L. Bu s. and Fin . 5 (1 997) · 7. Sp ecia l Repor t, "T he Pack age that Laun ched a Doz en Lawsuits, Bu sin essWeeh Onl in e, Apri l 17, 2000 ; Nation al Public Radio , M orning Edition, April 13, 2000

(in terview ofJ en nife r Reingold by Bo b Edwards) . 8. Donald E. Co n lo n and Dani el P. Su llivan , " Exam in ing th e Act io ns of Organ izations in Con flict : Eviden ce from the Delaware Court of Ch an cer y," 4 2 A cad. of

Mngmn t.] . 3 19 (1999) ' 9. See Lewis v. Vogel5tein, 699 A. zd 327 (Del. 1997) . The Vogelstein ca se is par-

ticu larl y astonish ing in that the court essen tially held th at the d irectors d idn 't NO T ES T O P A GE S 66 - 1 1 1

28 3

need to di sclose th eir valuati on of the o p tio ns to be gran ted in see king stoc kholder ap prova l because th ey wer e theoretically difficult to value. The co ur t thus ignored th e obvio us practical fact th at th e d irecto rs had to have had some sense of th e potential value of th e options in deciding to gra n t them to th emselves in th e first p lace, an d also th e obvio us legal fac t th at if th ey didn't , th ey wer e violatin g th ei r duty of ca re to the corpora tion . 10. Although h e rec ognizes some impe rfec tion s in cap ital mark ets, this is principa lly the basis up on whi ch Nobe l laureate Mer ton Miller d efends th e stockholder valu e m aximization norm. Merton H . Miller, " Is American Corpora te Gover na nce Fat ally Flawed ?" in Chew, Stu dies in Governance Systems. Miller h as good reason to be inve ste d in th e th eory of effic ien t cap ital markets . See also Pet er Bernstein, Capi ta l Ideas: Th e Improbable Origi ns

ofM odern

Wall Street (Ne w

York: Free Press, 199 2), for a discu ssion o f Miller 's ro le in th e d evelopm ent of modern fin ance th eory. 11. Sh iller, Irration al Ex u berance, 18(). Shill er canvases a var iety of ex p lanatio ns for thi s phenomenon but finds non e of th em cons iste n t with th e conclusion th at th e stock market is elfic ien t. 12. Kutt n er, Every thing Jor Sal e, 197- 201 , sho ws h ow ma rke t sho rt-te rmism res ults in underprodu ction of research an d development. 13. Rich ard .J. Mahoney, "Sh are holde r Valu e : Sortin g Ou t th e Voices," 2() Directorship : (March 2( 00 ).

14 . Nati on al Scienc e Foundati on , Na tional Patt erns oj R and D Resou rces: / 999 Dat a Up date, http:/ /www.nsf.go v/sbe / srs /nsfo0 3o() /start.htm!.

15. Kenned y, Th e End of Shareholder Valu e, ()4-()5 , n otes a number oflead ing Ame rican co rp orations which h ave in creased th eir sto ck p rices at th e expe n se of th eir resear ch and development ex pen d itures . I ().

Por ter, "Ca pita l Cho ices ," 7. See also J am es M. Po terb a and Lawren ce I-J. Summers, "Time Horizons ofAm erican Finns: New Evidence from a Survey of CEOs ," in Por ter, Capi ta l Choices.

17· Kuttner, EverythingJor Sal e, 198, 199. 18. I'm not alo ne in thi s beli ef. App ar ently man y co rpora te CEOs agree. Porter, "Capi tal Ch oices ." 19. For ag ree me n t o n thi s p oint, see Ca ro lyn Kay Bran cato , lnstitutional Inuestors an d Corporate Governance: Best Practices for In creasing Corporate Valu e (Ch icago:

Ir win Professional Publishing, 1997) . 20. David M. Go rdo n , Fat and M ean: Th e Corporate Squeeze ofWorking Americans an d the Myth of iHanageri al ''Down sizi ng '' (New York: Free Press , 199()) .

21 . Rob ert Putn am , M aking Democracy Wilrk: Civic Trad ition s in M odern Italy (Princeton : Prin ceton Un iver sity Pr ess, 199 3) . 22 .

L ewis v. VrlgeL,tein, 699 A. z d 32 7 (De !. Ch . 1997).

284

N O T ES TO P A G ES

115- 2 7

23. Mar tin Lipton and Steven Rosenb lum , "A Proposal for a New System o f Corporate Governance: The Q uinq ue n n ial Election of Directors," 58 U Chi. L. R ev. 18 7 ( 199 1) . CHAPTER 6. TRADITIONAL STOC KHOLDER S 1.

Un ite d Sta tes Depar tm en t of Co m mer ce , Statistical A bstract oj the Uni ted States 1999, tables 839, 842, 843. T he figu re for n ew issues ex clu des , amo ng other thi ngs, sto ck issued in e mployee sto ck plans and sto ck sold abro ad . T he aggrega te number m ay be slightly overst at ed because the statistics break out stoc k fro m o p tions and ot her deri vatives for th e exch anges b ut no t fo r the NASDAQ.

2. Correspond ing values were $ 123 . 11 billion , $52 2.85 billion, $ 1.99 trill io n , and $2 1.37 trilli on . Dat a fo r 1997 co me from th e 1999 Statistical A bstract ofthe Uni ted States. All ot her data have been comp iled fro m

2000

Securit ies Indu stry

Fact Book (New York : Secu rities Ind ustry Association, 2(00).

3. 19 85 Statistical A bstract oJthe Uni ted States, tab le 856.

4- In vestm ent Company In stitu te and Secu rities Industr y Association, "Eq uity Own ers h ip in Amer ica" (Fall 1999) , 13. 5. A fascin atin g, if somewhat un critical, int ellectual hi stor y of th e developmen t of modern fin an ce th eor y is Pet er L. Bernstein, Cap ital Ldeas: Th e Impr obable Origin s of M odern YVrIlI Street (New Yo rk : Free Press, 1992) .

6. J ohn Bu r r Williams, The Theory

'1 In vestment

Value (Cambr idg e: H ar var d Un i-

ve rsity Press, 1938 ) . 7. Eu gen e F. Fam a, "Efficie n t Capital Mark et s: A Review of Theory an d Em pirical Work," 25 ). Finan ce 383 ( 1970) 8. Peter L. Bernstein, "A New Look at th e Efficient Marke t Hypoth esis," 25 Jou rnal

ofPortfolio M anagement

I

( 1999); Pat rick]. Rain es an d Charles G. Leather s,

"Veblen ian Stock Markets an d th e Efficient Mark et s Hypoth esis," 19). oj PostKeyn esian Econo mics 137 (1996 ); David Dreman, "An In efficient Mark et ," Forbes, March 28, 1994 , 146 ; Burto n Malk iel , "T he Influen ce of Co nd itio ns in

Fin an cial Mark ets on th e Tim e Horizon s of Bu sin ess Man agers: An In ter n ation al Co mpariso n ," in Porter, Cap itul Choices; cr. Mert on H . Miller, "T he H istor y of Fin an ce, 25 .J. Portfolio M a nagemen t 95 ( 1999) (sup porting th e th eor y in a ver y mod est way but no ting th at substan tial emp irical eviden ce weigh s against it. It migh t be not ed th at Mille r, a 1990 No bel Laur eate , has a substantial p ers on al and pro fessio n al inve stment in th e th eor y) ; see also Pet er Coy, "T h is Alc hemy May Yield Real Go ld ," Bu sinessweek On lin e, April 17, 2000 (re po r ting on a study d one at MIT sugg est ing th er e might be at least modest validity in th e use of th e widely mocked charting techniqu e [or " tech n ical ana lysis"] for pred ictin g stock p rice movem en ts) . 9· 1999 Securities In du stry Fact Book, 47· N O TES T O P A GE S

12 9 - 4 4

285

10. Data ar e bas ed on an estimate d U.S. po pulat ion of 27 5 m illion in d ivid uals and 10 2, I 18 ,600 h ou seh olds. United Sta tes Bur eau of the Census, Curren t Popu lotion Reports. I I .

Investme n t Compan y In situ te and Securities In dustr y Association, " Eq uity Ow ne rsh ip in Am er ica" (Fall 1999 ) , 5.

12. Laura Co hn , "Day Trad ers ' Power Grows, " Businesswedi, May 1,2000, 36 . 13. Lawren ce E. Mitch ell , "T h e H um an Corporation: Some T houghts on Hume , Smit h , a nd Bu ffett ," 19 Cardozo L Rev. 34 1 ( 1997) . 14. Fred Block, Postind u strial Possibilities: A Critique ofEconomi c Discou rse (Berkeley: Un iversity of California Press, 1990 ) . Bran cato also id entifi es a n umber of ways in which co rporations are trying to acco u n t fo r lo ng-te r m investments in ways that are more evaluative than cur re n t acco unting co nve n tio n permits. Bra ncato, Institutiona l In vestors. 15. Block, Postindu strial Possibilities, 189 . 16. See Kuttner, Everything for Sale, 109 , 162 -63, lor dis cussi o n of Tobi n tax . See also J ames Tobin , "A Pro posal for Inte r n a tio n al Mo n et ar y Refo r m ," 4 East ern

Eam.] . 153 (1978) ;J am es To bin, " O n Limiting the Do main of Ineq ual ity," 13

J. Law and Econ. 26 3 ( 1970)

(proposin g redistributive taxation for th e purpose

of providi ng rel ative eq ua lity of essen tial goods a nd services) . 17. T his last id ea was suggest ed to m e by th e co nsulta n t a nd form er busin ess executive H arol d Porosoff,

CHAPTER 7 . THE NEW S T O C K H O L DE R I .

Co nfe re nce Board , In stitut ional Investment Report: Turnover, Investment Stra tegi es, and Ownership Patt erns (2000) (noting that third-quarter dropoff in 1999 in

perc e n tage of in stitu tion al shareholdi ngs in dicates "a stro ng in crease in equi ty own ership by ind ividuals.") , 5. 2. Ib id ., table 20 . 3· Ibid ., 25· 4 · Ib id ., 7· 5. Porte r, " Capital Cho ice s," 9. 6. Social Investme nt Forum, 1999 Report on Socially Responsible Investing Trends in the Unit ed Sta tes. T he Social Investmen t Forum re ports tha t almost te n times

more socia lly invested assets wer e invested in pr ivatel y ma naged sepa rat e acco unts th a n in m ut ua l fun ds . 7. Ib id . See also www.domini.com and www.ca lvertgroup.com . 8. Bran ca to makes careful, p ersuasive distinctions a mo ng them. Spac e lim itations pro h ib it me from thoroug h ly evalua ting h er cat egories, b ut I believe that , even with h er distin ctions amo ng lo ng-te r m a nd short-term in stitutio ns, th e textua l poi nts still h old . She also ech oes Reichhelds in te resting suggestion 286

NO T ES T O P A GE S

14 7 - 6 8

that co rpo ratio ns work to cultiva te th e kind of sto ck ho ld er they wou ld like to attract, a poi nt I think is valuable bu t beyon d the scope of my analysis. See Bran cato, l nstitutional In oestors. 9. As to investment go als, the evidence is mixed. Rich ard A. J o h n so n and Da niel W. Gr ee n ing , "T he Effects of Co rpo ra te Governa nc e a nd Institu tio n al Ow ne rsh ip Typ es o n Corporat e Socia l Respo nsib ility," 42 A cad. oj Mngmnt. J. 564

( 1999) (concluding that inves tment managers ' behavio r had no significant effect o n ce rtain dim ensions of co rpo ra te socia l pe rfo rman ce but th a t pu blic pension fu nd behavior di d); Keit h C. Bro wn , W. V. Harl ow, an d Laur a T. Starks, "O f To urn ame n ts and Temptations: An Analysis of Mange ria l In ce ntives in th e Mutual Fund In d ust r y," 5 1 J. Fin . 85 ( 1996) (concluding th at investme n t managers cha ng e th eir behavior on the basis of short-term performance ince n tives and suggest in g that th is co uld be "effe ctively ch ang ing man ager ial o bjectives from a lo ng-ter m to a short-term process"). As to legal regimes, see Tamar Frankel, Th e Regulation oJ M oney Managers (Boston : Litt le , Brown , 19 78, as supplemen ted) (with respect to investm en t advisors and m utual funds).

10. Conference Board, Inst itutional Investment Repor', G. 11. Confer en ce Board, In stitu tional In vestment Report, 5. 12. Useem , Investor Capita lism, provid es evidence whi ch largely supports this point. 13. Shi ller, Irrational Ex u berance. 39, re p o rt s it as hi gh as 78 per cent in 1999. 14. Conference Board , In stitut ional I nvestmen t Report, ta bles 1, 3; Brancato, Institutional In oestors, 27.

15. Useem , In vestor Capitalism, 3 1.

IG. Investme n t Co m pany Institu te, Mutual Fund Fact Book (2000 ed itio n ), 70- 7 1. 17. The age of th irty-six is given by Cindi Fukami of th e University of De nve r Busin ess school, qu ot ed in J e rd Smith, "Peo p le Power : Co n sulting Resear ch Finds Compani es that Invest in Wo rke rs See H igh er Sto ck Prices," ROc/IY M outain N ews, May 28, 2000, re lying up on da ta in Jefl'rey Pfeffer, Th e H u man Equation: Bu ilding Profits by Putting People First (Bost on : Harvard Business School

Press, 1998) ; twenty-eig ht is the age given by money manager Charles Allmon , in Don Baude r, "Fear -Dri ven Mon ey Is Fue ling Marke t's Climb ," San Diego Union-Tribune, Jun e 7, 1998; forty-fo ur is the age given in a survey performed

by Morn ingstar, In c. "Fund Exp er ie nce," Orlando Sentin el Tribune, Febr uary

28, 1999· 18. Po rt e r points o ut that "the performance of U.S. money managers is typically evalua te d based on q ua rt er ly or a n n ual appreciation re lative to sto ck ind ices, an d they th us seek near-term apprec iat ion of th eir shares, hol d ing stock for an average of only 1.9 yea rs." Po r te r, "Capital Ch o ice s," 9. See also Kuttner, Everything Jor Sale, 160-6 1, quoting Ro bert Sh iller: "The goal for a portfolio man-

ager is to be right in the short r un if he wants to be around fo r the lon g r un ." NO T ES T O P A GE S

1 6 8-7 0

287

19. Russell Reynold s Associates, Toward a Common Standard: 1999 Int ernational Survey of I nstitu tional I nvestors, 3.

20 . In add itio n to th e mate rial discu ssed in the tex t, see Kuttn e r, Euerythi ngfin.Sale, 187; Useem , Investor Capitalism, 55- 56. 2 I . Reynolds 2000 Survey. 22. Russell Reynolds, 35 . 23 . Russell Reynolds Associates, Corporate Governa n cein the N ew Economy: 2 00 0 Int ernat iona l Survey ofInstitu tion al Investors, 2 1- 22.

24 . In 1975, 3 2 p er cent of work ers with em ploye r plan s particip ated in a d efin ed con tribu tio n plan and 87 per cent p ar ticip ated in a defi n ed ben efit plan . By 1995, 8 1 percent of covered work ers h ad defin ed cont rib uti o n p lan s. http:/ / www.urban. org/ retiremen t! rep orts/ 4/ re tirep4 ·h tml. 25. Sam uel B. Gr aves and Sandra A. Wadd ock, " In stitu tiona l Own er s and Co rporate Social Per form an ce ," 37 A cad. o[!vIng mnt.]. 1034 ( 1994 )· 2(). Richard A.Joh nson and Dani el W. Gree n ing , "T he Effects o f Co rpo ra te Govern an ce an d In stitut ion al Own er ship Types on Corpora te Social Per form an ce,"

4 2 A aul. ofM ng mnt.]. 564 ( 1999) . 27 . It h as been hi ghl y su ccessful in its inf o r m al letter writing to corporations. Willard T. Carle to n , J ames M. Nelson, an d Michael S. Weisbach , "T he Inll uence of th e Institu tion s on Corporate Govern an ce Through Privat e Negot iation s: Eviden ce fro m T IAA-CREF," 53 ]. Finan ce 1335 ( 1998 ) . No ne of th e letters deal with social issu es; th ey deal rathe r with issues of cor porate governance. 28 . Investor Respon sibility Resea rch Ce n ter (IRRC) , lRRC Corporate Governa nce Bulletin 8 (Novembe r 1999-J an uar y 2( 00) ; http:/ /www.tiaa-cref.o rg /site-

lin e / p ro xyefforts.html; J oh n A. Byrn e , "T he Teddy Roosevelts of Corp orat e Govern ance, " Bu siness Week, May 3 1, 1999, 75. 29 . Investor Respon sibility Research Center, Social Issu es Reporter's Checklists of Shar eholder Resolu tions,

19 9 5 - 2 0 0 0 .

To be fair, an d as I will late r note , T IAA-

CREF usu ally m akes its proposals more informally than through th e sh areh older prop osal mechan ism created by securities law, but non e of th ese in formal cont ac ts involved socia l issues. 30. Betty Liu , "Ne w York Pension Fund Calls fo r Coke Sett le men t," Finan cial T imes, March 3 1, 2000, 29.

3 1. Available at its web site, http:/ /www.ca lpers-governan ce .or g / alert / fo cu s. 3 2. Audrey Y. William s, " Pensio n Investor Ta kes Heat O ff First Un io n ," Charlotte Observer, Februar y 26 , 20 00 . ("C aIPERS m eets with th e companies on its list

and pu sh es fo r govern ance refo r m to imp rove stock pri ces.") T he re is som e qu estion whethe r th ese effort s succeed. Com pare Carlet on et a!., "In fluen ce of the In stitutions o n Co rpo ra te Gover nan ce " (find ing some positive correlatio n 288

N O T ES T O P A GE S

171 -7 9

between T IAA-CREF' s le tt e r-wr itin g ca m pa ign a n d sto ck pri ce pe rfo rman ce) with Bar r y Rehfeld , " Low-cal Ca IPERS," Instiiutional I nuestor (March 199 7), 4 I (" Th e re is ac tually scan t evide nce tha t Ca IPERS - o r, for that matte r, a n y shareholder ac tivist - has prod uced significant stock gains in targeted com pani es through stan d ard corpora te governa nc e actions ") . 33 . IRRC, Corporate Governance Bu lletin , Proponent s Subm it In novative Proposals for 2000

(November I 999- January 2(00),

I ;

IRR C, Corporate Governa n ce Bu lletin,

Binding Bylaw Amend ment s to Ma rk / 998 Shar eholder Resolut ion Ac tivity (O ctober-

Dece m be r 19 9 7), 3· 34 . IRRC, Corpora te Gouernance Bu lletin , Proponents Subm it Innovative Proposals [or 2000

(November I 999-:Januar y 2(00) ,

I.

35 . Ji n n y St. Go al', " Labo r Force ," lnstitu tion al Inuestor (March 199 G) , 97 . 36 . Stewar t] . Schwab a n d Ran d all S. Thomas, " Rea lign in g Corporat e Gov ernan ce: Shareho lder Activism by Labo r Unions, " 96 M ich. L. Rev. 10 18, 101 9- 20 ( 199 8). 3 7. www.d ornin i.com . Mo st in vestm e n t advisors an d mutual fun ds do n ot d isclose th eir voting re cords, a ltho ugh the re is a c ur re n t SEC proposal to require th em to do so . Barry B. Bu rr, " O n e Fo rm of H id d e n Assets Could be Forced into View," In vestment N ews, May

I,

2000, 3G.

38 . "Do m in i So cia l In vestm e n ts Pu bl ish es Fifth Annual Pro xy Vo tin g Gu id e lin es a nd Soci a l Scr e en ing Cri teria ," B usiness Wire, March 30 , 2000. 39 . Investm e n t Co m pan y In stitu te, Mutu al Fund Fact Book (2000 e d itio n ) , 69 , 71 . 4 0. Br an cat o , Inst itu tional In vestors. 4 1. Ilyan a Po lyak , " Pac kage s ln ce n rive-H eavy, Study Finds: Asset Managers Paid to Pe rfo r m ," Investment N ew.I,J u ly 19 ,1 9 99 , 3. 42 . Be atrix Payne , " Pe n alty System: J. Sainsbury Pla ns to Ch arge Man age rs th a t U n de rper fo r m," Pension s and Investments, J an u ar y 24 ,2000, 4 . Se e also Floyd Norris, "W h en the Marke tin g De par tm e n t De cid es H ow to In vest," N ew Yorh Tim es, May 5 , 20 00 , C I .

43. AIMR and Russe ll Reyn olds Associates 1999 Investment iVIan agemen t Compensa tion Survey.

44 . Lin d a Sakelaris, "Wh o Makes Wh at: Compensation Story Is in th e In ce ntives; T he Little Extras - Lik e Sto ck Optio n Eq uity Ownership - Mea n a Lo t," Pensions and In vestments, May 3 , 1999.

CHAPTER 8 . ABANDONING THE STOCKHOLDERS I .

See , ge ne rally, Lawre n ce E. Mitch ell , "The Gentleman Scholar in Po litics" (H onors th esis, Willi a m s Co lle ge , 19 78 ) ; H e nry Ad ams, Th e Edu cation ofH enry Adams (Boston : H o ugh to n Mifflin , 191 8 ) ;John G. Sproat, Th e Best M en: Lib eral Reformers in the Gilded Age (New York : Oxford Universit y Press, 19( 8 ) . NO T ES T O P A G E S

1 8 0- 8 7

289

2.

Bayer o. Bemn, 4 9 N .Y.S . 2d 2 (5 . C1. (94 4 ) .

3· Aronson v. Lewis, 47 3 A. zd 805 (De l. 19 84 ) . 4 . In re Carematk Int em ation al Inc. Derivat ive Li tigation, G98 A. zd 959 (De l. Ch .

19 9G) ; Kam in v. A merican Ex/ness Compa ny, 3 83 N .Y.S . sd 807 ( 197G) (whi le this is a New York case , th e sta n da rd o f bu sin essjud gm ent is p re tty m uc h th e same as in Del awa re ) . 5. Se e]oy v. N orth, G92 F. zd 880 (z d Cir. 19 8 2) .

G. Groboto v. Perot, 539 A. z d 180 ( 1988) .

7. Grimes v. Don ald, G73 A. s d 120 7 (De l. 199 G) . 8. Fo r more , see Lawrence E. Mitch ell , " Fa ir n ess and Tr us t in Co r porate Law," 4 3 Dulw LJ 4 25 ( 199 3) . CHAPTER 9 . THE DILBERT SOCIETY ?

I . Debora Vran a, " 1998: Review an d O u tlook; Corpo rate Marriages: No t All Bliss," Los Angeles Times, Jan ua ry 2, 199 9 , C I (Ba nkA m e rica a n d Cha lle n ger Gray an d Christmas report o f layoffs); Au drey Y. Will iam s, "Execu tive Pay Is Lik ely to be an Issu e a t Ban k of Ame r ica 's Ann ua l Mee tin g ," Char lotte Observer, Ap ril 2 1, 2000 (BankAm e rica m erge r) ; "Be ll Atlan tic Pro xy Stat ement," Ap ril 14 , 19 9 9; New Yorl< Times, Jan uary 20 , 19 99 (Be llAtlan tic /GTE m e rger ) ; Ro ss Ke rbe r, "Flee t Boston Pa id Executives Millio ns in Me rge r," Boston Globe, March II , 2000 (Flee tBoston / Bank Bo ston Me rger ) ; T im o th y L. O ' Brie n , " Citigro u p Says It Will Cu t 10,400 Jobs," N ew YO/Ii Times, De cember l G, 1998 (Citigro u p layoffs) ; Robert D. H er sh ey,Jr., "Exx o n Mo bil Plan s to Cu t Payroll by I G.o oo J obs," N ew Yorl< Times, Dece mbe r I G, 1999, C I (Exxon Mo bil layofis) .

2. Se e Lawrence E. Mi tch e ll, "Tr ust an d Tea m Pro ductio n in Post-Capitalist Socie ty," 24 1 Corp. L 8G9 ( 1999) . 3. J e nnifer Rein gold, "Exe cu tive Pay," Bu siness Weel