What Should Corporations Aim to Do?
Session 9. Special Session Led by Prof. Waheed Hussain, The Wharton School of the University of Pennsylvania: What Should Joint-stock Corporations Aim to Do? What Special Duties Do They Owe to Their Shareholders? What Is the Social Responsibility of Business?
Read first: John Mackey and Raj Sisodia, "Flourishing, Welcoming Communities," Conscious Capitalism: Liberating the Heroic Spirit of Business (Harvard Business Review Press, 2013), pp. 123-139 [ClassesV2]
Whole Foods' co-CEO tells us about what he sees as the many social responsibilities of business.
Then read: Michael C. Jensen, "Value Maximization, Stakeholder Theory, and the Corporate Objective Function," Business Ethics Quarterly 12 (April 2002): 235-256, READ PAGES 235-247 ONLY
Finally: Waheed Hussain, "Caveat Investor: An Alternative to the Fiduciary Theory of the Business Corporation," Working Paper, The Wharton School of the University of Pennsylvania.
So you'd like to know more...
From John Steinbeck's 1939 novel The Grapes of Wrath (men from the bank come to foreclose on the tenant farmers):
"--We're sorry. It's not us. It's the monster. The bank isn't like a man.
"--Yes, but the bank is only made of men.
"--No, you're wrong there--quite wrong there. The bank is something else than men. It happens that every man in a bank hates what the bank does, and yet the bank does it. The bank is something more than men, I tell you. Men made it, but they can't control it."
Milton Friedman, "The Social Responsibility of Business Is to Increase its Profits," The New York Times Magazine, September 13, 1970
Famously argues from the fiduciary theory to the business executive's sole social responsibility being to
increase profits. Business executives are agents [fiduciaries] of the corporation's owners. We can assume that, in
general, the owners continue to own only because they hope to get the highest possible financial return on their
investment. Hence, as their agent, the business executive owes it to them to increase the corporation's profits, so long
as the corporation does not break the law, deceive, or commit fraud. Moreover, if the business executive spends
the owners' money on some other social responsibility on which they would not themselves have privately spent it,
then she is effectively taxing them. But in a representative democracy, there should be no taxation without political
elections and a constitution controlling the taxation. Yet a business executive was not awarded her job in a
competitive political election. Therefore, business has no other social responsibilities besides those that the
shareholders would themselves unanimously privately contribute to. And there are probably very few firms in
which shareholders unanimously agree on which social causes to contribute to.
Robert L. Heilbroner, "The Industrial State," Between Capitalism and Socialism: Essays in Political Economics (Random House, 1970): 225-235 [At bottom of this page]
Points out that Friedman's op-ed is a challenge to the normative consequences frequently drawn from the descriptive stakeholder theory developed by John Kenneth Galbraith. This note reviews the leading ideas of the book in which
Galbraith presented that theory, The New Industrial State (1967). On this theory, corporations are controlled by
an overlapping "technostructure," of professional technical elites, who are somewhat civic-minded. They are not
controlled by either shareholders or entrepreneurs; and hence the whole corporate sector of an economy is semi-
planned by this overlapping technostructure, the leaders of which act as quasi-public officials.
John Kenneth Galbraith, "The Big Corporation," Episode 9 of The Age of Uncertainty, with J. K. Galbraith (1977)
Galbraith here presents in 56 minutes his theory of the corporation as governed by the technostructure.
David Ciepley, "Beyond Public and Private: Toward a Political Theory of the Corporation," American Political Science Review 107 (2013): 139-158.
Argues that big 21st-century joint-stock business corporations aren’t creatures of the free market that are
colonizing the rest of life, but rather governmental creations that are colonizing the free market, as well as the rest
of life. Also argues from the differences between the legal rights and duties of partnerships and limited-liability corporations to two views: first, that corporate property is a distinct kind of property, neither private nor public;
second, that the idea that public corporations are nexuses of contracts among their shareholders should not be
taken as anything besides a limited metaphor, useful only for some highly specific purposes. Corporations are not, the argument holds, best seen for most purposes as nexuses of contracts.
Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (Macmillan, 1933)
Makes the famous argument that in the 20th-century joint-stock corporation, we see the divorce between ownership
and control. The owners--shareholders--don't control the activities of the corporation: the top managers do. This
opens up the possibility that management may take actions which the shareholders view as against shareholders'
interests. Also famously argues that the 20th-century US economy is organized around the activities of manager-
controlled large joint-stock corporations.