Thursday, August 5, 2010

Thoughtful Thursday, Corporations and Corporate Democracy

  1. Dodge Versus Ford Motor Company 1780 N.W. 668
  2. Joel Bakan, The Corporation:The pathological Pursuit of Profit and Power


    In the early 1700's in Britain, many confidence men created fraudulent corporations, the most notorious of them being the South Sea Company Bubble. Thus, in 1720, Parliament outlawed the corporation.
  1. In 1776, Adam Smith warned in Wealth of Nations, corporations inevitably would be victims of insider fraud. Managers could not be trusted to "steward 'other people's' Money."
  2. England repealed what was known as the Bubble Act in 1825, bringing back the corporate form.
  3. In 1853, Edinburgh Journal called for workmen to have a share of the ownership of the firm so they understand the concerns that now only a manager/owner understands.
  4. Gilbert and Sullivan satirized the corporation in Utopia Limited Though a Rothchild you may be, in your own capacity, As a Company you've come to utter sorrow, But the liquidators say "Never mind--you needn't pay" So you start another company tommorrow

  5. England limited Corporate liability in 1856
  6. In the 1890's states competed to have corporations incorporate in their state and made their corporate laws most friendly. As we know, Delaware was very successful in this regard, which effort to this day brings in money to the state.

Corporation Purpose

I am sure everyone here has heard that corporations goal is to make profit, improve the bottom line and increase shareholder wealth, generally by increasing the stock price. John and Horace Dodge invested $10,500 in Ford at 1906. Ford, famously, paid his workers more than the going rate. He also halved the price for his Model T. Bakan quoted him as saying 'I do not believe that we should make such awful profits on our cars. A reasonable profit is right but not too much.' And in this case, the Dodges sued Ford and this established the legal principle that managers and directors have a legal duty to increase profit. Robert F. Kennedy Junior recently gave a talk at our University to a packed Western Hall, our largest venue. He said that a corporation must maximize its value. He used the example of Walmart donating supplies after Katrina. It could do to that to make people feel good about the company. But it could not donate because there were people who really needed help. That would be spoliation of assets and it should be illegal. Thus, we must regulate corporations. Bakan cited Hutton versus West Cork Railway Company allowed this saying 'a company which always treated its employees with Draconian severity' would have bad employee relations but that 'charity has no business to sit at boards of directors qua charity.'

But according to Wikipedia that is not the case. The real problems was that the Dodges wanted a big dividend to start a competing car manufacturing company! Ford did not want this. And the court awarded a special dividend to the Dodges with which they started the famous Dodge company. And the case was much concerned with minority rights in a corporation as henry Ford owned fifty-eight percent of the shares. And it was about the argument of gaining market share versus profit. 'My amibition' declared Mr. Ford, 'is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this, we are putting the greatest share of our profits back into the business." And in fact the complaint said asked that Ford restrained from taking money that would be given out as dividend and from building "fixed capital assets" including possibly an iron smelting plant versus distributing a cash surplus of sixty million dollars. At the time the shareholders were receiving a return from their original investment of sixty per cent per year!

In the share economy, we have similar problems with an individual, A loaning to another individual, B. B as a sovereign indivdual would have the right to vary his income, e. g., stopping work, going to medical school, etc. or vice versa. B might work for share of future income, from building a house where they would both receive money as it was rented out. Or B might work for a startup biotech firm--in exchange for the revenue if their drug succeeds. A is at the mercy of B's decisions, except where they represented waste. Thus A might take action if B decided to sit on the meadow and watch the grass grow, particularly, if A was living in B's house and agreed to pay a 20% of their income in exchange. In a share economy, people would not rent an apartment for a fixed amount of money; they exchange a share of their income for the right to live there. If there was no corporate form, we boil down to that in Ford vs. Dodge, because Ford still retained majority ownership even though Dodges contributed to Ford's business.

In reading the decision, I find, "The difference between incidental humanitarian expenditure of corporate funds for the benefit of the empoyees, like the building of a hospital for their use and the employment of agencies for the betterment of their condition, and a general purpose and plan to benefit mankind at the expense of others, is obvious...A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself..."

Fiduciary Duty

Many of the problems with corporate decisions are a director or manager self-dealing. Voting to approve the big purchase to the company they or their relative own. The manager reveals his conflict of interest. A group of disinterested directors or a majority of the shareholders approves the decision. I see no reason that a sortition jury could not do this. Thus a firm can hire the managers' wife when she really is qualified.


By contrast to my proposal, the shareholders have no power. In 1913, A Congressional Committee found that that not only had the shareholders never overthrown the existing management in any large corporation, they had not even started an investigation. The management is "virtually self-perpetuating."

I contrast a sistuation where randomly selected groups of shareholders, and shareholders would include the employees who receive a share in lieu of salary, make the decisions. As I outlined in that proposal, a certain percentage of each group could escalate a decision to a larger group or even force a vote of all members.

In the 1930's, AT&T advertised a picture of an older women looping at her AT&T Share Certificates with her children in the background and pronounced in another advertisement 'a new democracy of public service ownership' that is 'owned directly by the people--conrolled nto by one, but controled by all.' Now, we would have that same mother, sitting at her computer participating in the decisions, big and little, teaching her children, looking over her shoulder, about the company that they would one day inherit--I don't believe in stocks being sold.

Limited Liability

Now the corporate form by limited liability did allow middle class to contribute capital to large enterprises. And the idea was this middle class investor who may have invested a few thousand dollars should not lose their house and all their other savings should the aiport or railway go bankrupt with more liabilities than assets. Let's look at Ms. Jones from my earlier post. Should she lose all her assets if the doctor she financed commits malpractice during a delivery and a child is born with severe cerebral palsy. What if the plumber that the apartment complex hired causes a gas explosion killing dozens?

I distinguish contract and tort liability. In our current system, an enterprise can promise more than 100% of its incomes. This usually does not happen deliberately--I hope. It promises fixed payments totalling a million dollars a month at a time that its revenue may be several million a month. However, if the economy sours.... This is what happened to General Motors whose revenue halved and Pittsburgh whose population halved (reference,, 7811 which disappeared from the net in a few days), but which still has large pension and debt service obligations. But in a share economy, no enterprise can promise more than 100 percent of its revenues. Thus, unless it commits a tort offense, there is no problem with the business going bankrupt. As I mentioned in that post, the owners might liquidate if the revenue cannot cover the current variable costs.

But what about a BP spilling oil, Massey Coal having a mine accident, or an Arthur Anderson not auditing Enron properly resulting in many investors losing money. Or a small businesses delivery driver crashing into someone.

I propose the sortition juries in dealing with a tort case would have to decide how to allocate the costs. one seventh of Britain's total dividend income came from BP. These individuals certainly had no control over the decisions that led to the blowout and spill! Is it fair they lose their retirement?

In a sortition system, ordinary stockholders would have the authority to contribute to the day to day decisions of the enterprise. In the rig control room, the partners and employers could call in a sortition jury to make an important decision. What if there is another big spill like Macondo? The share holders would be individually judged as to what share if any they should bear. Computers keep good records. The sortition jury in the tort case could look at each juror: What did you know and when did you know it? What did you say? Did you try to bring the problem to other shareowner's attention. What did you vote? The Corporate Bylaws would have a mechanism where any shareholder or employee or even an outsider could bring the matter to the attention to a randomly chosen set of the shareowners. They could vote, don't worry about it--it's just a gadfly. Or they could say this is a real concern and escalate it further.

And, sortition jury would look at the general climate in a corporation. Bakan described (page 81) how BP was negligent in handling its Prudhoe Bay facilties. Massey's Upper Big Branch coal mine had five times violations than the national origin. In 2005, BP's big rig Thunder Horse had many problems, bad underwater welding and a valve installed backwards. JoulesBurn documented many other near misses in the Gulf of Mexico. The Texas City refinery disaster in 2005 was similar with 300 safety violations 21 million in fines. Workers were working twelve hours per day--reminds me of the concern about medical residents working twenty-four hour shifts. Occupational Safety and Health Administration revisited them in 2009 and found 700 safety violations and $87.4 million in fines--most because BP did not live up to its agreement after the 2005 disaster.

In the United States and Australia uses a mind and will test in corporate criminal liability. If it is run by a series of decisons sortition jury, it could look at the decisions as a whole. Do they give a wink and nod at safety violations? Or do we see 987 of the 1032 situations where sortition juries had the opportunity to act on safety situations being decided on the safety/conservative side.

Revocation of Corporate Charters

State governments can revoke corporate charters. And Elliot Spitzer and Robert Benson proposed that corporations that repeatedly release toxic waste or otherwise endanger the public can have their charter revoked. But, there are many small investors in any of these large corporation, and should they suffer for offenses they did not do, had no knowledge of, and had no way of stopping. I propose that a corporation would lose its governance to a sortition jury, forever if it is convicted of murder, a capital offense. It would be under the control of a sortition jury. The sortition jury would run the corporation as the board of directors, considering whatever stakeholders it wished to including investors. The sortition juror would command every move of the corporation just as a jailor controls the minute-by-minute activities of a prisoner.

Similarly, a corporation convicted of a lesser charge, that would be punishable by a few years in jail if done by a natural person, would find their affairs controlled by a sortition jury for the same length of time. They would have to avoid not wasting assets in the same manner that a conventional jail could not work a person to death, even thought the thirteenth ammendment specifically allows involuntary servitude as due punishment for a crime.

The Corporate Purpose

A corporation, by law's, sole duty is to increase shareholder wealth. in the opinion of Milton Friedman of Peter Drucker, that is as it should be. This creates a psychopath. It has no empathy for anyone else and have superficial relationships crafted by Public Relations types.

A true shareholder democracy, would allow the Walmart share holders to genuinely feel for the Katrina victims and put the full power of Walmart's distribution to get them things they need. One may argue that the role of a corporation is simply to make money for the share holders. The share holders could then give to whatever charitable enterprise they wish. If they all donated to the Red Cross, the Red Cross should simply contract with Walmart to buy at the market value whatever Katrina victims needed. To some extent, that is the Coase's work on the nature of the firm--is it more efficient to have several entities interacting or do everything within one organization. It depends upon the relative transaction costs. There are empirical sociological issues of group identity as well, would people get a better feeling, be more likely to contribute, as part of the identity: Walmart shareholder.

And it is a broader issue of Rule-Based utilitarianism vs. Original utilitarianism, which is of course beyond the scope of this blog. But we hear stories of top executives, top lawyers or partners in big accounting firms, deciding to leave those organizations and help a non-profit or become teachers in inner school districts. Utilitarianism would tell a public spirited individual with the talent and luck to be a partner in an accounting firm: stay in that job that brings to you hundreds of thousands of dollars. Spend only what you need to be socially acceptable there--I know that a partner at Big Four accounting firm must dress a certain way, and probably could not get away with living in a slum. Give the remainder to that cause. Would an individual who was fortunate to be a big tobacco lawyer do more for the anti-smoking cause by staying in that job--after all someone would take it anyway who probably would be at least almost as an effective litigator for the tobacco company for you. Secretly contribute money to the anti-smoking cause!

For Future Thoughtful Thursdays

Corporate Criminal Liability -- a good bibliography is in the Wikipedia article on this subject.

Rights of Minority ShareHolders and the fiduciary duty of one share holder to another.

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