In Defense of the Corporation
[NOTE: This piece was written in 2008 (I believe), discussing Robert Hessen's 1978 In Defense of the Corporation.]
There is a charming moment in Robert Hessen’s thin treatise,
when he says, “The entity idea and its corollary—that a corporation cannot
derive rights from its members—is false and should be discarded.” Hessen goes
on to explain that any organization
is only a collection of individuals, and therefore is only a useful construct.
From this he derives one of his central tenets: “…when rights are imputed to a
corporation, what we really are referring to are the individual rights of its
members—the shareholders, directors, and officers.”
Charming, in an “if only it were true” sense. Skip the
obvious rights of individuals that cannot, apparently, be transferred to a
corporation: the right to vote, to bear arms, to be free of cruel and unusual
punishment. There are also burdens on individuals that cannot be transferred to
their corporate surrogates, most notably, of course, the inevitability of death
within a (so far) inelastic period of time after the attainment of majority,
say, 80 years. Following from that, of course, are all the evils to which men
are subject: the need to eat, and breathe, and rest. Corporations experience
none of these burdens, so it is perhaps more accurate to say that individuals,
rather than transferring their own rights to corporations, seek to create
privileges and indemnities, by creating corporations, that they do not
themselves possess.
Hessen’s book was written at the end of the 1970s, when
scholars at the Hoover Institution, its publisher, could perhaps be forgiven
their worry concerning the onward march of Socialism (a Democrat was in the
White House). The book’s intention is to defend the American corporation
against the attacks of Ralph Nader, who in those days had mounted a spirited
attack against corporate structure. It is instructive to read Hessen’s
characterization of Nader’s arguments, if only to see how distant some of
Nader’s prescriptions now appear. Nader’s notion (as described by Hessen) that
the solution to the evil excesses of corporate America is federal chartering seems
today not only questionable. It seems hopelessly naïve to believe that the
federal government can be a force for restraint against rampant capitalism, in
an age when taxation itself is viewed by a substantial portion of the
electorate as unpatriotic, and the notion of graduated tax rates as
“socialism.”
So Hessen’s book is, largely, a curiosity. He does have some
interesting things to say, however irrelevant to our current problems they may
be. His book breaks down roughly into two partially overlapping sections. He
begins with an explication of the origins of corporations, with a grade-school
sort of step-by-step (“Now imagine that the original group of general partners
is growing old …”) description of how inevitable is the progress from sole
proprietor to international corporate behemoth.
In his first four chapters Hessen is at some pains to
explain how medieval guilds and boroughs and the like are not the legal or logical precursors to the modern corporation. This
presentation is interesting because of its reminder that, in Western society,
all rights, no matter to whom belonging, were at one point considered to derive
solely from the dispensation of an absolute monarch. But the right of
individuals to contract with one another for private purposes, rather than any
state-granted status, is the source of corporate existence.
The last half, roughly, of Hessen’s book addresses the
questions of corporate democracy, shareholder rights, and state statutes
relating to corporate governance. It is here that he parries the Nader attack;
and he does so rather easily, both by citing some apparent procedural errors in
different versions of Nader’s Taming the
Giant Corporation and by examining some of Nader’s substantive claims and
proposed remedies. The former approach would seem to have been hardly
necessary, except that it is testimony, read now in Nader’s dotage, to the
respect he once enjoyed: showing that the great man was capable of slipshod
work was deemed important to an academic such as Hessen in attacking Nader’s
arguments.
And what arguments they are! According to Hessen, Nader
advocates a series of complex devices aimed at ensuring, for example, that all
shareholders vote on virtually all significant operating decisions of a
corporation. This, of course, is a non-starter; were it to be somehow enacted
it would simply end corporate activity as we experience it today; and Hessen’s
presentation leads one to the suspicion that Nader, if he is being represented
accurately, simply wanted to force the dissolution of these large
organizations.
Indeed, in his chapter “Dismantling Big Business,” Hessen
presents Nader’s arguments that size itself, in business, is evidence of
malfeasance, or at least, ill intent. Size offends the competitive spirit; it
leads to foreclosing consumer choice; it produces unused industrial capacity
and resulting unemployment and suppression of wages; it allows companies to
manipulate consumer demand. Hessen counters most of these assertions with
common-sense defenses, but his most effective answer to Nader is this: assuming
you are correct, why is your proposed solution an improvement?
It is a difficult question. The truth is, American
corporations have indeed produced great societal benefits, as well as important
ills. But the interest of this subject, not to say Hessen’s text, is provided
by the environment in which we find ourselves. It used to be possible to say
that there was a feeling of resentment, in some quarters, against the real or
imagined depredations of large corporations against the average consumer. In
2008, it is possible to sense the rage of, perhaps, a majority of Americans
against the greed of what has begun to be seen as a plutocracy. The government,
moreover, is seen as the source of a solution only by a minority of people, and
often, by them, only reluctantly. Hessen, in this book, has nothing to say
about this; he is defending the picnic against the ants: “…we are told that the
evil of capitalism is prosperity and that giant corporations must be destroyed
because they depend on and are committed to economic growth…”
We face a different scene today. Dissatisfaction with
American business, as well as government, has seldom been greater. Government
and business are seen as having gone, hand-in-hand, into enterprises aimed at
creating a privileged class. Business writes the rules by which it consents to
be governed, and government, through collusion or bribery, consents; the will,
and the interest, of the people is everywhere given lip service, and nowhere
respected.
We are at war with ourselves, as in the cell-phone
commercial where the corner-office executive mutters with satisfaction, “it’s
my way of stickin’ it to The Man.” When the office boy reminds him that he is The Man, he muses, “…maybe.” No one
really believes, however, that this man waits interminably on hold for customer
service, or fills out infuriating forms and cuts off product-code labels to get
his fifty-dollar mail-in rebate, or takes off his belt and shoes for the edification
of a three-hundred pound mouth-breather with a government emblem on the pocket
of his straining white shirt in the line at the airport. Government and
business, by moving closer towards one another in the regulation of the citizen
and the consumer, have managed to become conflated in the minds of many.
This has not worked to the advantage of business.
Pharmaceutical and insurance giants are seen as the new malefactors of the
economy, now joined by “Wall Street” and the financial services industry generally.
The question that Hessen, were he writing now, would ask is, “What has gone
wrong with the American corporation?” It cannot do what it was not designed to
do, of course: improve the culture, create general prosperity, right our social
or political wrongs. But is it making these problems worse, through its pursuit
of profits, heedless of external costs it may be imposing? Is unfettered
capitalism a reasonable way to organize one of the pillars of any society, its
economy? And, in the end, what, if anything, should be the role of government
in business?
Hessen’s ultimate argument is that, as the rights of
corporations are simply the rights of individuals, any attempt to restrain
corporations is an attack on individual liberty. It is tempting to say that he
would be unlikely to have a helpful prescription for what ails us. Certainly
American business, which has always been characterized by pragmatism and
practicality, does not today show itself eager for reform; adjustments are
necessary, to deal, for example, with what critics call socializing losses while leaving
profits strictly private. But there is no groundswell, among its defenders, of
sentiment that American business has gone too far. Indeed, blame for the
financial crisis is generally directed at a few imprudent egomaniacs in
sensitive positions, and an army of irresponsible individuals who had the
temerity to think that they should be deserving of the temptations that were
being waved under their noses.
Other examples exist, however. European capitalism, which
has had all the sharp corners knocked off by 140 years of state welfare
policies, has nevertheless been able to produce some of the benefits of modern
corporate achievement. European society, many observers agree, has produced a
better way of life for the average citizen than has American society. Infant
mortality in America, to
cite one statistic, is behind that of most of Europe, including Greece and Portugal,
as well as Cuba
and some Asian countries. Clearly, if huge corporate enterprise is necessary
for societal well-being, it is certainly not sufficient. Could the missing
element be government-applied restraint?
To go back to Hessen’s argument, he spends most of his time
showing that, because interactions between corporations and third parties are
invariably voluntary, no one should be harmed by the corporation’s existence,
at least, not repeatedly (George Bush: “Fool me twice … you can’t be fooled
again”), because consumers, like shareholders, have choices. And it is
certainly true that if you don’t like Cellular One, you can try Verizon.
But in a sense, the attack against Nader is against a straw
man. To say that nationalizing all significant corporate activity won’t solve
any problems is not to say that there aren't problems. And it would seem that
modern American business has succeeded reasonably well (with government nudges)
in preserving competition, in encouraging innovation, and in producing a
steadily increasing Gross Domestic Product, not to mention its first purpose,
which is to make profits for its owners. The issues are elsewhere. Here are a
couple of them.
First, there is the issue of Hobbesian or Darwinian
struggle. If life, like Donald Rumsfeld, is nasty, brutish, and short, should
there be, in an advanced society, no mitigation of the worst life has to offer
in a state of nature? There is a tension between allowing failure, it would
seem, and protecting individuals against the worst consequences of failure. The
most unreconstructed laissez faire
capitalist would presumably rather not see people starving in the streets of
American business districts. In this century, I mean.
No one, presumably, would argue that the secretaries at
WorldCom or Lehman Brothers got what they deserved. Hessen’s assertion that a
corporation is just a collection of individuals notwithstanding, it seems a
signal characteristic of American business that, while the profits go
disproportionately to the executives (much more than to the owners, by the
way), when ruin comes it is the employees least able to recover who suffer the
most. This is particularly true during a
wholesale collapse like the one we seem to be witnessing now.
Corporations, like all of us, enjoy enormous benefits
provided by government and the society at large, some of which they help pay
for: streets and sewers; a more or less peaceful society governed by a
generally accepted social contract; reliable enforcement of commercial
contracts; predictability, within a wide margin, when it comes to economic,
social, political, and legal norms. It was, for most of the 20th
century, more or less accepted that some minimum of social welfare system is a
reasonable price to pay for those benefits; that some minimum redistributive
efforts are appropriate to promote social stability in an environment that
encourages rapid and drastic economic adjustments. The question always in play
is, what minimum, at what price?
Second, it is also true that consumers have choices, sort
of. But, just as the nature of competition is to encourage innovation in order
to satisfy perceived needs of consumers, competition allows, sometimes, for the
degradation of standards or, at least, their suppression. To put it another
way: if my competitor is not doing something, then doing it may help me at the
margin; but not doing it will also, at the margin, not hurt me. If no one has
live human beings answering the phone, no one is at a competitive disadvantage
who follows suit. If no provider of cell phone service, or manufacturer of
personal digital assistants, standardizes the charger interface, then no one
else must do so to remain competitive, with the result that every upgrade or
model change requires a new plug-in device that costs an extra $20. Those of us
who remember the introduction of cable television can recall the promise that,
because we would be paying for the programs, there would be no commercials, as,
once upon a time, there were none in movie theaters.
These trivial examples point to one way in which the drive
for profits overrides considerations of efficiency and the avoidance of waste,
and results in consumer dissatisfaction. To say that the consumer has a choice,
in other words, is the type of truth that can obscure a larger, countervailing
truth. We can all still get a hamburger the way we like it; but does anyone
believe this would be true if McDonald’s and Burger King (having it my way
notwithstanding) could create barriers to entry on the scale of those enjoyed
by Toyota and Ford?
The point is, while some products naturally require
commercial enterprises of large scope to produce, that very fact encourages
some (and only some) behaviors that are not in the interest of the society at
large. The anticompetitive practices of the commercial dairy industry in
attempting to suppress certain organic milk producers is another example of the
corporate use of economic power to deny consumer choice. In other words, the
invisible hand does not everywhere function optimally.
Corporations are both the heroes and the villains of the
piece. The challenge is to take advantage of their strengths while hampering
their ability to do harm by the over-enthusiastic exploitation of those
strengths. Recognizing that corporations (and limited partnerships, etc.)
possess advantages that individuals do not serves only to highlight the need
for serious consideration of public policy initiatives.
This is not an argument for a command economy; but it does
point out that “free-market capitalism,” in the phrase of the immortal Larry
“I’m for keeping America
strong!” Kudlow, is not without its shortcomings. Hessen’s Defense is successful in countering Nader’s arguments; but as those
arguments were never a threat to American capitalism, his effort might have
been better spent in identifying and addressing the societal dislocations that
corporations and their milieu help exacerbate. It is only prudent, when
evaluating any construct, to assess both its strengths and its weaknesses.
Hessen, at most, gets us halfway there.
