Dispatches From the Moderate Left

Wednesday, June 14, 2006

Immoral Duties

The central thesis of the movie The Corporation, a thesis shared by many anti-corporate activists, is that the corporation is inherently immoral/evil because it is legally required to ignore any interests other than their shareholder’s financial position. It is pointed out that there are various Common Law and statutory sources for this duty. One Australian example is found in section 181 of the Corporations Act:
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.

The scenario which is usually painted when these legal obligations are pointed out is that corporations and their officers are legally prohibited from acting in an altruistic way and thus never do so. When I started corporations law this semester I was interested in learning more about this and finding all these examples of where shareholders had sued the directors of their companies for acting altruistically. Because you see corporations doing apparently altruistic things all the time. Think of the massive amounts raised by the business community after the Boxing Day Tsunami or any number of other instances of charitable of philanthropic donations. Surely if the law formally prevented the corporation from acting altruistically there should be dozens of cases of shareholders suing the company from breaching their duty to them.

These cases do not exist and I did press my (ex-labor lawyer and Labor party member) lecturer on this. There is precisely one case where a shareholder successfully sued a company for an altruistic act. In Parke v Daily News a small newspaper company was in the process of being wound up and the director decided to throw an employee party with the proceeds of the sale of a particular asset. One of the large shareholders got annoyed at this and successfully found the director in breach of his duty (so he had to cough the money up). This is a fairly unique situation because it was unarguable that the act was in the best (future) interests of the company because the company was about to end its existence.

The problem with the idea that director’s and other company agents are legally unable to act altruistically is that courts give a lot of deference to a company’s officers in how they exercise their powers. If there’s an even remotely arguable case that an act was in the company's best interests (eg. ‘I’m doing this to raise the company’s profile,’ ‘I’m paying my employees more so they work better,’ ‘I’m making a loss here to make money in the future’) then courts defer to that opinion, by and large. To defeat the presumption that a company’s officers aren’t acting ‘in good faith and in the best interests of the corporation’ you, in essence, need to show fraud. And it’s essentially impossible to show that an altruistic director is acting fraudulently because the personal interest simply isn’t there. This sort of statement, from Teck Corporation Ltd. v Miller is typical:
By what standards are the shareholders' interest to be measured?
...
If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not acting bona fide in the interests of the company itself. Similarly, if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders.
...
[I]f they observe a decent respect for other interests lying beyond those of the company's shareholders in the strict sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company.


So at an abstract theoretic level, yes, the picture The Corporation and activists in general paint – where companies don’t act for the common good because they’re legally prohibited from doing so – is correct. But the real world doesn’t match up to the theory. Companies do good and companies do bad. The reasons for these actions lie more with the predilections of individual officers and certain corporate cultures than the legal definition of a company’s duties. The fact that directors and officers are legally obliged to only take into account shareholder interests has very little bearing on their real world actions. Now, there’s an entirely different argument with respect to limited liability, but that’s a story for another day.

7 Comments:

  • the proposition that a corporation exists to serve its shareholders' interests shouldn't need a 2-hour movie to establish. I found it very mediocre, little more than pandering to the I-think-capitalism-is-bad-here's-proof-at-last crowd.

    The joint-stock corporation was created to raise capital, so how you judge it depends on whether you see capital accumulation as a bad thing. And more broadly what you think of the current world economic system, in whose development corporations played a crucial role and whcih is still underpinned by them.

    By Blogger boy_fromOz, at 9:56 AM  

  • Thanks for clearing the whole "is corporate altruism legal" issue up from the perspective of someone who knows about the law - it's actually something I'd wondered about when the tsumani thing was going on, but never looked much into. Dunno if I'll fork out to go see the movie though...

    By Blogger John Provis, at 6:40 PM  

  • Dunno if I'll fork out to go see the movie though

    Heh, what John L said... don't :). In any event, it's on the Melb Uni streamed video page* in glorious 120x100 resolution (it's not really a special effects movie) so you definately should't fork out for it!

    *There's actually some interesting viewing there. The documentary The Staircase is well worth watching, ditto The Office if you haven't seen it already :)

    By Blogger Jeremy, at 6:45 PM  

  • A separate but related question is whether corporations, in all their philanthropy, are best placed to determine where the philanthropic dollar is spent. Tsunami relief gets plenty, AIDS gets little... it all seems very arbitrary.

    My preference would be for corporations to pay their dues in taxation, and let the State - with its democractic mechanisms - decide where that money is spent.

    By Blogger Ari Sharp, at 10:33 PM  

  • Unfortunately, Jeremy, there is a difference between acting altruistically and acting contrary to one's own narrow financial self interest. Just because Corporations give money to charity when they are under no obligation to do so proves nothing.

    Natural persons are ethically aND legally obligated to moderate the impact that their actions have on the rights of others. The true test is whether a corporation would forgoe its self-interest i.e. the pursuit of profit for shareholders wholly or partially in preference to the interests of workers, consumers, the environment, society as a whole etc etc.

    Grants that generate positive publicity are all well and good, but what about day to day practices, tax reporting, workplace safety, corporate culture?

    To go pop-culture on your ass, there was nothing preventing Hannibal Lector form being a patron of the arts.

    By Blogger Communista, at 12:49 PM  

  • @Ari
    I agree with you on a very abstract level but there's no way of translating that into public policy. What would you do? Enforce strictly the existing techical prohibitions on charitable giving without, somehow, avoiding the "it's good business judgement" reply? And replace it with either a new surcharge or earmarking existing corporate taxes for foreign aid, distributed in a completely non-arbitrary, non-emotional utilitarian manner? I'm not sure any public policy measure you could bring to bear here could actually improve the situation.

    @Anthony
    there is a difference between acting altruistically and acting contrary to one's own narrow financial self interest.
    Giving out wads of cash is very often directly in conflict with the narrow financial interests of shareholders given that value of the publicity received is rarely commensurate with the amount spent (there's various studies showing little causal link between CSR stuff and profitability).

    what about day to day practices, tax reporting, workplace safety, corporate culture?

    Important issues. All I was trying to establish here is that there's nothing about directors duties preventing them from making the companies they control comply with such laws, which is the argument made by the movie and a book I read a couple of months ago by Harry Glasbeek. Big picture explanations like that don't do it for me, I prefer taking the issues as they come.

    By Blogger Jeremy, at 4:03 PM  

  • Sorry my phrasing was a little off. 'contrary to narrow financial self-interest' was referring to the grants you were discussing and I was using altruism ins a broader sense than mere charitable giving.

    By Blogger Communista, at 1:02 PM  

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