Corporations are people — let’s make sure they act like it
Ever wonder about the values, and not just value, of your money?
This is the first in a series of blog posts behind the beta launch of Greener Change, a uniquely free and open source database for corporate social responsibility. Our aim is to democratize business by providing a community of enlightened investors, consumers, and employees with the information they need to vote with their wallets. (Think of us as Wikipedia for corporate sustainability, which encompasses factors such as renewable energy usage, pay equity, and workplace diversity.) In order to fully explain why such a database might be useful, it’s important to understand how we got here, which requires telling a story about the evolution of corporate personhood and constitutional law. Sounds boring, but it’s actually pretty interesting. (Really!)
The modern corporation was born with the advent of the Industrial Revolution and laissez-faire economics around the beginning of the 19th century. By providing a mechanism for raising the huge amounts of investment capital needed for long-term, industrial-scale projects (e.g., railroads), the corporate structure gradually emerged as the favored vehicle for business organization largely because of three essential characteristics:
- Limited liability: stockholders are liable only up to the unpaid amounts of their shares and are not liable for the company’s debts, which allows investors to risk their own money without going completely broke in case the company itself goes bankrupt.
- Transferability of ownership: corporate ownership may be transferred from one individual to another via the buying and selling of shares at prevailing market rates.
- Perpetual existence: there is no connection between the life of a corporation and that of its shareholders, employees, and managers. Unlike a partnership, a corporation can continue to exist even if one of the partners dies.
Underlying it all, the legal innovation that made possible the three features above was the notion of “corporate personhood,” in which a corporation is declared to be a distinct legal entity with its own rights and responsibilities, separate from that of its various stakeholders. In other words, corporations are people. Despite the legal distinction between natural persons (actual human beings) and juridicial persons (groups of individuals, such as corporations, which are treated by the law as if they were a single person), corporations are considered to be people nonetheless.
The concept of corporate personhood developed as a way of facilitating the administration of business and the law as the economy expanded and became much more complex. By establishing a company as a separate legal person, investors and managers could more efficiently channel their rights and duties under a single unified entity. Moreover, prior to the development of modern corporate law, litigation against businesses organized as unincorporated associations had to be carried out in the names of all its members, which became absurd and unworkable as businesses eventually grew to include hundreds or even thousands of members.
Corporate personhood, then, was indispensable for the maturation of capital markets and the resulting explosion in economic activity over the past two centuries. You would not be reading this blog post on some fancy electronic gadget were it not for corporate personhood. In fact, there’s a good chance that, without corporate personhood, population growth would have been so low that you might not even exist at all.
It is important to recognize that corporations enjoy only some, but not all, of the rights and privileges of human beings. Like natural persons, corporations can own property, enter into contractual agreements, and sue in a court of law. Corporations are also obligated to pay taxes and can be prosecuted for crimes. However, unlike natural persons, corporations obviously cannot marry, vote, or run for political office, which would be an egregious violation of common sense.
Just like actual people, corporations have been granted an increasing number of rights as they have aged and grown. Whereas formation of the earliest corporations in Europe required special royal decrees or legislative charters, laws passed in the early- to mid-19th century made it possible to incorporate through a simple registration process, greatly expanding the number and size of corporations. In the United States, more permissive, or “enabling,” corporate laws were passed in the late 19th century as states competed with one another to attract more business. In particular, New Jersey and Delaware passed laws just before the turn of the 20th century allowing corporations to own shares in other corporations, paving the way for enterprises to grow via mergers and acquisitions.
Over time, the U.S. Supreme Court has extended to corporations many of the rights guaranteed to individuals under the Constitution, including the right to:
- have contracts honored by the government (1819)
- be treated as citizens for the purposes of suing and being sued (1844)
- equal protection of the laws as granted by the 14th Amendment (1886)
- due process of law (1893)
- protection from unreasonable search and seizures (1906)
- trial by jury (1970)
- be tried only once for the same criminal offense (1977)
- engage in political speech (2010)
Although the legitimacy of these decisions is well beyond the scope of this post, the historical trend points to an inescapable conclusion: corporations are organizations of people and, in general, should not be deprived of their rights as such. Without constitutional protections for corporations, the risks associated with private investment would be unmanageable, undermining the very raison d’être of the corporate form. As the law professor, Kent Greenfield, has written:
…the opposite of a constitutional right is a government power. If corporations have no rights, then governmental power in connection with corporations is at its maximum. That power can be abused, and corporate personhood is a necessary bulwark.
The problem, however, is that corporations have historically tended to abuse their own power, behaving in ways that would rightly be considered impolite in good company. Certainly, we cannot paint all companies as bad actors, but it would not be an exaggeration to say that a meaningful sample of corporations are the organizational equivalent of assholes. Rather than gratefully assuming a larger set of responsibilities commensurate with the broadening of their rights, corporations have generally chosen instead to selfishly abdicate their obligation to employees, the environment, and society at large. Many of today’s most vexing problems — including climate change, environmental degradation, and wealth/income inequality — can be largely attributed to corporate misbehavior. Corporations may be people, just not very good ones.
The good news is that corporate personhood is a mechanism not only for economic growth but also for the enforcement of accountability. Perhaps somewhat counterintuitively, the best way to control corporate power is to make corporations more like people, not less. According to Greenfield:
American corporations have become a vehicle for the voices and interests of a small managerial and financial elite — the notorious 1 percent. The cure for this is more democracy within businesses — more participation in corporate governance by workers, communities, shareholders, and consumers.
In the 1819 Supreme Court case Dartmouth College v. Woodward, Chief Justice John Marshall wrote that “a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it.” In other words, corporations owe their very existence to the societies in which they operate. Corporations are accountable to us.
As an independent, nonprofit organization, Greener Change aims to play a part in bringing more democracy to our businesses and holding companies accountable for their actions by keeping a free and open record of the social and environmental impact of publicly-traded corporations. For example, which companies power their operations with mostly renewable energy? Does the store you shop at pay its workers a living wage? Does the company in your retirement portfolio have a diverse C-suite and a truly independent board? Does the business you work for provide adequate family leave to all of its employees? Greener Change provides a unique platform for the public to aggregate such information in a single repository, empowering us all to make more informed — and therefore better — economic decisions.
As we’ll examine in future posts, greater transparency ought to help keep companies honest, but it is certainly not a panacea. An evolution in corporate culture will not happen overnight and it will not be easy. We must consistently act — as socially responsible investors, consumers, and employees —on the information in the Greener Change database to ensure that companies compete on behalf of people and planet in addition to profits. Moreover, Greener Change is a supplement to, not a replacement for, vigorous enforcement of existing rules and regulations. Clearly, illegal behavior —be it fraud, discrimination, or wanton destruction of the environment — cannot be tolerated and should continue to be prosecuted to the fullest extent of the law. The purpose of Greener Change is to encourage companies — as people — to fulfill not just their legal, but also their moral, obligations.
Homo sapiens has been around for close to 200,000 years now, so we’ve had plenty of time to work out many of the kinks. Although we still have some petulant, xenophobic narcissists lurking in our midst, the overwhelming majority of human beings are of good, upright character; modern society could not function otherwise. By contrast, corporations have only been people for about 200 years now, making them more like irresponsible, bratty teenagers than mature grownups at this point. Despite a tepid push in recent years towards greater social responsibility, corporations have yet to make the transition into full-fledged adulthood. Having established the legal structure that gave birth to the corporate form, it is our duty as citizens to give corporations a gentle nudge in the right direction.
As the modern understanding of corporate personhood began to emerge nearly 200 years ago, Chief Justice Marshall wrote that “the great object of an incorporation is to bestow the character and properties of individuality on a collective and changing body of men” [emphasis added]. Corporations are undoubtedly people. Let’s make sure they act like it.