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Shareholder Primacy's Corporatist Origins: Adolf Berle and 'The Modern Corporation'

54 Pages Posted: 16 Oct 2007 Last revised: 13 May 2009

William W. Bratton

University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)

Michael L. Wachter

University of Pennsylvania Law School - Institute for Law and Economics

Abstract

Many corporate law discussants think of themselves as picking up where Adolf Berle and E. Merrick Dodd left off in a famous, precedent-setting debate in the 1930s. The generally accepted historical picture puts Berle in the position of the original ancestor of today's shareholder primacy position while Dodd is cast as the original ancestor of today's corporate social responsibility (CSR). This Article shows that both categorizations amount to mistaken readings of old material outside of its original context. The Article corrects the mistakes, offering new readings of some of corporate law's fundamental texts, texts that recently reached their 75th anniversaries and include Berle's famous book with Gardiner C. Means, The Modern Corporation and Private Property. Seventy-five years ago the normative issue of the day was the appropriate policy response to the crisis of the Great Depression. Both Berle and Dodd addressed the issue from a corporatist perspective which views the corporation as an entity that operates as an organ of the state and assumes social responsibilities. In so doing Berle took on the fundamental question "for whom is the corporation managed" at a time when the answer had crucial implications for social welfare. In answering the question, Berle articulated a political economy that integrated a theory of corporate law within a theory of social welfare maximization. It was a great accomplishment, but it was in a context very different from today's debates about corporate management and responsibility. Accordingly, Berle was not advocating shareholder primacy as we understand it today. Nor is there a strong claim that Berle was a CSR advocate; he never did make the final jump of advocating reorganization of the legal firm as a social welfare maximizer. His unqualified statements on the subject all presupposed a strong regulatory state and a public consensus against a corporate profit maximand. Dodd does not present a clear picture either. Dodd's Depression-era writing, once contextualized, offers only indirect support to today's CSR advocates. He is most plausibly read as a managerialist, and social responsibility within management's discretion is not what CSR tends to be about. The biggest lesson from this analysis is that the shareholder primacy school impairs its own position by making a claim on Berle.

Keywords: Adolf Berle, E. Merrick Dodd, corporate social responsibility, CSR, shareholder primacy, social welfare

JEL Classification: K22

Suggested Citation

Bratton, William W. and Wachter, Michael L., Shareholder Primacy's Corporatist Origins: Adolf Berle and 'The Modern Corporation'. U of Penn, Inst for Law & Econ Research Paper No. 07-24; Journal of Corporation Law, Vol. 34, Pg. 99, 2008; U of Penn, Inst for Law & Econ Research Paper No. 07-24; Georgetown Law and Economics Research Paper No. 1021273. Available at SSRN: https://ssrn.com/abstract=1021273 or http://dx.doi.org/10.2139/ssrn.1021273

William Wilson Bratton (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050
Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Michael L. Wachter

University of Pennsylvania Law School - Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-7852 (Phone)
215-573-2025 (Fax)

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