Should corporations serve only their shareholders?

On shareholders’ rights an organizational sociopathy.

Mike O’Hare and I agree on what I take to be two central points.

1. Corporate actions call for moral judgments on the part of corporate managers, who can’t legitimately hide behind Friedman’s claim that their duty to maximize shareholder wealth are the only duties relevant to their jobs.

2. Managers ought to restrain then natural temptation to do good at others’ expense, just as they ought to restrain their natural temptation to line their own pockets.

O’Hare points out that the implicit assumption that shareholders care exclusively about financial returns may well be wrong. But I’d go further than that.

Even if the shareholders unanimously want their company to engage in lawful but morally outrageous behavior, I doubt that the managers are morally justified in complying with their wishes. If I think that pimping is wrong independent of its illegality, why should I hold a pimp morally blameless because he carries out his trade as a salaried manager of a company in the Thai sex-tourism trade rather than a solo entrepreneur? If slave-trading was wrong, how could corporate slave-trading have been less wrong than sole-proprietor slave-trading? If only a scoundrel would sell arms to the Nazis or the Khmer Rouge, does he become less a scoundrel by incorporating?

The conventional view is that the shareholders are the company, and that the company’s managers owe complete loyalty to them. That’s the legal fiction, but I doubt it’s the best empirical description of the contemporary corporation or the right basis on which to frame a theory of managerial moral responsibility.

The alternative view is that the shareholders are transaction partners of the company, just like lenders, employees, suppliers, franchisees, and customers. Stockholders are suppliers of one of the resources that the suppliers of one of the company’s needs — equity capital — as banks and bondholders supply debt capital, employees provide labor, customers provide revenue, and so on.

Shareholders, on this (in my opinion, more accurate) account, are the holders of an option on the company’s assets and the residual claimants, once all creditors are satisfied, should it be broken up. They also have the power to elect directors. If they are mistreated by managers, they have the options of exit, either individually by selling their shares or collectively in the face of a hostile tender offer, and (with some difficulty) voice through the proxy-challenge process.

The responsibility of the management, on this account, is for the health of the enterprise, including its relationships will all of its transaction partners. “What would our shareholders want us to to do?” is, I would argue, a good question to ask in any situation, but not the only question. “What would our employees want us to do?” also counts. And so does the question “What is the right thing to do, all things considered?” The answer to that last question will include all of the stakeholder-desire questions, but won’t be exhausted by them.

Footnote Some email and blogospheric comments on my original post argue that my reductio fails since all companies depend to some extent on good public relations, and therefore truly spectacular wrongdoing won’t generally be in a company’s long-term interests. But this can’t be right, either practically or morally. A company might maximize its shareholder value by pulling off some very profitable but very disreputable deal and then dissolving itself, leaving the money in its shareholders’ pockets and no successor-in-business to reap the whirlwind of public disapproval.

Still, it’s true that public opinion will provide some check on corporate wrongdoing, and that a company will therefore be obliged to consider how its actions will appear. On the Friedman theory, this should be the only ethical guidance it takes seriously as a reason not to engage in wrongdoing.

Psychiatrists have a name for people who have no actual conscience, but merely conform to social norms insofar as not doing so has costs to them in excess of its benefits: to people, that is, whose behavior is limited by shame but not by guilt. They’re called “sociopaths.”

A corporation whose managers are shareholder-wealth maximizers, but within the limits imposed by public opinion, would, then, be an organizational sociopath. That’s not a bad description of some companies I could name, or of some government agencies, for that matter. Organizational sociopathy is much more common than the individual variety, and an organization doesn’t have to be composed of sociopaths to act in that way.

But is corporate sociopathy an ideal? I doubt it.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: