Can Corporations Be Held to the Public Interest, or Even to the Law?
53 Pages Posted: 19 May 2018 Last revised: 10 Jul 2018
Date Written: January 18, 2018
The present article addresses our failing ability to hold business corporations to the public interest, or even to bare legality. From the first application of the corporate form to business enterprise, and for centuries thereafter, the reigning norm (if not in all instances the reality) was that business associates received the privilege of incorporation only on condition that their enterprise would generate public benefits. The essay’s first section defends, in brief compass, the reasonableness of this expectation—that corporations provide public benefits as consideration for their public privileges. But this reasonableness confronts a stark reality. As succeeding sections recount, the traditional instrument for holding corporations to the public interest has gradually been undermined. What is more, as John Coffee Jr. ably argued a generation ago, corporations are so structured that our standard tools for holding them even to bare legality—for example, punishing the legal entity, or punishing the culpable individuals—suffer from inherent limitations and fail adequately to deter corporate misconduct. Nor, I argue, would deterrence be increased were we to follow the recent proposal of Christian List and Philip Pettit and punish the corporate group as a whole whenever it acts as a single “group agent.”
From these considerations the essay draws the lesson that punishment, while necessary, will always be insufficient to hold corporations to the law, let alone to the public interest. A more adequate approach would be to supplement the current punitive regime with reform of corporate governance in directions that would decrease the temptation of managers to engage in misconduct in the first place. Among the many possibilities, three are singled out for consideration, each of which targets simultaneously the problem of corporate short-termism and the problem of corporate misconduct. One reform would be to change the way in which corporate executives are compensated, curbing pay in the form of stock and stock options so as to eliminate its perverse incentives. A second would be to institute some form of German-style “co-determination.” A third would be to allow ownership of corporations by Danish-style “industrial foundations.” The essay concludes that the last reform holds the most promise as the most realizable supplement for decreasing corporate misconduct. The reform adds two additional benefits. Foundation ownership is one of the few effective devices for institutionalizing progressive corporate governance over the long term; and industrial foundations customarily direct a portion of corporate dividends to charity, in effect reinstating the norm that for-profit corporations provide public benefits.
Keywords: corporation, punishment, group agent, deterrence, industrial foundations
Suggested Citation: Suggested Citation