The Divine Right of Capital: Chapter 9

Chapter 9: Protecting the Common Welfare

The Principle of the Public Good:
As semipublic governments, public corporations are more than pieces of property or private contracts. They have a responsibility to the public good.

Publicly traded corporations have their hands tied when it comes to truly acting in accordance with the public good. Concern for the public good is built into the very structure of our democracy. It’s built into the system, not simply through broad voting rights but also by the protection of individual rights enshrined in our Constitution. Democracies acknowledge the importance of self-interest and how to harness it. A democratic economy must do the same, as self interest is often the engine of prosperity. But self interest has its limits, places where the government needs to fill in.

We need a new economic principle that says that public companies have a responsibility to the public good. We had this once upon a time at our founding as a nation, when corporations were chartered by individual states only to serve the public good. This tradition was gradually eroded by the courts right around the time of the Robber Barrons. The original intention behind the corporation in America’s early years, however, was definitely serving the public good – the “polar star” of the American Revolution.

Shareholder primacy emerged out of common law in the mid-nineteenth century, right around the same time stockholders’ agents developed our modern financial statements as a way to keep tabs on how well their principles’ investments were doing. These reports were never intended to represent the corporations overall performance. They were simply the slice that stockholders cared about – and that’s the part that we are stuck with today, and something all companies are legally required to produce on an ongoing basis.

The other idea that emerged from this time is the notion that companies are private entities – that they are the result of private contracts rather than public charter. This shift stemmed from the Supreme Court’s 1819 Dartmouth College decision, which found that a grant of incorporation was a contract that could not subsequently be altered by government.

The notion that corporations are private is the legal lynchpin of stockholder primacy, but it stretches the notion of private beyond recognition. The original term was reserved for the household or to one’s body or to an intimate group of persons apart from the general community. The notion that corporations are like households or these intimate groupings does not fit with entities whose very ownership is traded in huge volumes by a faceless public every day. The power of corporations today is so great, in fact, that they function like small, semipublic governments. This is not a new notion and it has been made by many followers of corporate organizational theory over the years. As private governments, corporations today represent the private realm swollen so large as to threaten the public realm – and there is a historic precedent for this; it’s called feudalism.

America went through a period of feudalization at the time of Robber Barrons, when men like Rockefeller, Morgan, and Carnegie ruled the land like feudal princes. Kelly makes a mistake here, wrongly attributing the Homestead strike to Rockefeller rather than Carnegie. Our dedication to free markets provides a kind of cover to the actions of these corporate leaders by claiming that their collective actions will result in the best outcome for all. This clearly was not the case with the Depression, during which time our country recognized the market’s inability to always self-regulate in alignment with the public good. These lessons were lost in the post-war era, however, through the teachings of Milton Friedman and the revived enthusiasm for free market fundamentalism of the Reagan presidency.

The problem is that despite all these changes, we’ve never really changed the corporate structures and rules left to us by the Robber Barrons. Shareholder primacy is one of the big assumptions left unchallenged. As Thomas Paine once argued in The Rights of Man, “Every age and generation must be as free to act for itself, in all cases, …Man has no property in man; neither has any generation a property in the generations which are to follow.” We are free to challenge assumptions of the past.

State courts continue to act helpless as though constrained by legal requirements to maximize shareholder returns, but actually there is more room for maneuvering than is typically imagined. Much of our current restraints are based on common law, which can be easily overturned with legislation. Expanding fiduciary duties beyond shareholders to stakeholders would be one set of policy objectives that would go a long way toward ensuring the public good. Thirty-two states had already enacted some form of stakeholder statutes at the time the book was written (1991). These laws give boards broad legal cover to take stakeholder needs into account in the event of hostile takeovers, but they are still rarely used in practice. It is mostly the critics of these laws who have noticed their potential for real impact.

Kelly closes the chapter with the following: “We may picture the public corporation as a rational tool of accountants, but it is not. It is the brainchild of brutal men in a brutal age, hell-bent on amassing for themselves untold wealth, and leading a feudal revolt against the notion that corporations must serve the public good.”