Failure unsettles. From personal disappointment to public tragedy, failure upsets the order of things. Part of the genius of capitalism’s dynamic stability lies in its capacity to both allow and contain these disruptive energies, integrating failure into the pattern of its own re-creation. The end of one business is an opportunity for another. Far from endangering the system, such failures are an ordinary and necessary feature. The corporation too, the central institution of contemporary capitalism, has been developed in expectation of failure. For all of their associations with wealth and success, the defining features of contemporary corporations—limited liability and diffuse, fungible shares of ownership—serve primarily to mitigate loss.
The recent implosion of some of the largest American companies has nonetheless exposed enduring economic vulnerabilities. Moreover, the threat posed to our economy by a dysfunctional financial system has challenged our settled understanding of the corporation as well, drawing it into public arguments that seemed resolved long ago. As Alan Trachtenberg observes elsewhere in this issue, “It has rarely been clearer that the business of business is everyone’s business.”11xSee Alan Trachtenberg’s essay “Images, Inc: Visual Domains of the Corporation” in this issue of The Hedgehog Review. But if failure unsettles, it does not do so at random. More often than not, the energies of failure are released along deep fault lines. As the corporation again becomes a topic of public concern, it is worth considering where those lines are.
Corporate Responsibility and Corporate Existence
Outside of politics and economic policy, the standing of the corporation within the broader public is typically understood through the lens of managerial obligation. This is never more true than in the response to failure. Stories of unambiguous failures of duty—cases of theft, fraud, and corruption—scandalize pundits and public alike, focusing attention on the flawed consciences of people like Bernard Madoff, Allen Stanford, and the executives of Enron. In public discussion, these stories are typically treated as the most extreme cases of unrestrained greed. We stand together in horror at humanity so disfigured by vice. In the academic discourse of business ethics, economics, and law, they are more often taken to be instances of what is seen to be a timeless problem of acting on behalf of someone else—“the problem of agency.” In practice, however, obligation does not appear as a pure test of conscience, nor does it take the form of a single abstract problem. Obligations arise out of history and are made with the lumpy material it provides. Choices and obligations appear within the bounds of historically specific assumptions about reality that are then etched in law and politics, strategy and corporate governance. Even in the theoretical reflections on managerial duties in academic journals, the subject (whether acknowledged or not) is never a generic human agent, but the particular cultural figure of the manager, a character set within the prevailing understanding of the corporation. By their nature, such assumptions tend to stay in the background, behind explicit concerns about the ethics of business leaders today, conflicts of interest, compensation structures, and so on. These assumptions are also more basic. In the moral life of corporations, ontology is primary, obligation secondary.
Consider, for example, a seminal debate over the legal responsibilities of managers, which took place on the pages of the Harvard Law Review in the 1930s. Two young legal scholars, representing the debate’s two sides, wrote in a moment of widespread distrust of business. The world was in the midst of a historic economic collapse, a situation that aggravated decades of conflict between industrialists and laborers, to be sure, however, it was a fraternal struggle among the rulers of industry themselves that occupied the minds of these men. Their categories were not capital and labor, but capital and management. Publicly traded companies in America were often suspected of being vehicles for managers to defraud their shareholders, and with good reason. Insider trading was legal and common, financial transparency was optional and lacking, and shareholders, like workers, were subject to the unchecked power of managers.
At the heart of this conflict was the emergence of a new concept of property, which separated ownership from control. The traditional owner-operator did not have to reconcile these two roles, which were bound together in his person. The situation was not much different when an owner hired employees. As the head manager, owners could defend their economic interests quite well (sometimes too well) against lazy, incompetent, or dishonest employees. Investors in companies with hundreds or thousands of shareholding “owners” spread across the country, on the other hand, did not have operational control. Nor could they rely on gossip and unannounced visits to keep tabs on their managers. Even if shareholders did learn of some impropriety, few could do anything other than sell their shares. Individual ownership stakes were simply too small to throw out top managers. Thus, ownership was not only severed from day-to-day control, but also from any effective means of holding the managers accountable. There was little to stop executives from helping themselves, in more and less subtle ways, to the capital of their investors and little to stop the wealthy, well-connected investors from gaining an unfair advantage over their less powerful counterparts.
In 1931, Adolf Berle set out to clarify what seemed to him a basic and dangerous failure of legal thought to come to terms with the declining salience of personal trust and surveillance in the impersonal world of publicly traded companies. He believed that nothing less than the system of private property was at stake. However, in the logic of U.S. law, Berle saw an idea that, fully worked out and consistently applied, might help. This was the principle of trusteeship—the idea that corporate powers could only legitimately be exercised for the benefit of shareholders. The relationship of manager to shareholder, he argued, was akin to that of a guardian charged with caring for the interests of a disabled child. In this way, ownership and control, previously held together by convention and biology, could be bound again through law.
A year later, Merrick Dodd, another rising star of American legal scholarship, responded to Berle in the Review with an article titled “For Whom are Corporate Managers Trustees?” Where Berle argued that managers were properly understood as trustees of shareholders, Dodd countered that this idea of managerial obligation was too narrow. Noting the size and influence of corporations, and drawing on the words of leading executives, Dodd suggested that managers at their best were more like trustees of the corporation itself. They were statesmen representing diverse and competing constituents. Dodd saw a new public-mindedness among managers and suggested that the law might be required merely to “keep those who failed to catch the new spirit up to the standards which their more enlightened competitors would desire to adopt voluntarily.”22xE. Merrick Dodd, Jr., “For Whom Are Corporations Trustees?” Harvard Law Review 45 (1932): 1153.