Calblog

Corporations...

On Thursday, School started back up, and yesterday, I was back in my Corporations class as we discussed Corporate Constituency Statutes. Amusingly, Prof. Bainbridge had posted on just this issue recently. Of course, he also recently discussed student participation negatively, yet I decided not to let that deter me from engaging in this class. Yet as the class began to discuss corporate constituency, the class meandered down the path that 'of course directors should have a duty to consider everyone not just their shareholders.' Of course, when the professor asked if anyone disagreed, a single hand went up...

I should have been concerned when my professor mentioned the film Roger and Me (I don't know if the professor endorses the view expressed in that movie or even cares for Michael Moore, he may have just been using it to capitalize on the Moore craze here in S.F.), about how mean GM was to Flint, going unmentioned of course is that GM still exists unlike say AM (for the most part) or Chrysler (as an independent company).

According to my classmates directors should care about all these other constituencies because...

a) Shareholders can diversify so if one corporation mismanages their investment, well the shareholders can live with it

b) Shareholders are uniquely positioned to deal with financial loss (I guess it is just assumed that shareholders are rich)

c) Employees have taken a unique risk by investing their lives into a firm (A risk, evidently that the employees should not bear because the employees should be protected by the corporation, Of course the actual risk is that if an employee specializes is that their specific position may become less valuable as time progesses and they may eventually lose their job, the reward of course, is that their job becomes more valuable and they are able to exercise significant leverage over their employer and other employers in the industry)

d) Corporations have no soul. (I'm sure they felt the same way about me!)

e) Corporations offer the Shareholder Limited Liability. (This of course explains why a corporation has a duty to creditors as the corporation approaches or is in insolvency, but not why the corporations should cause shareholders to suffer for suppliers, customers, or employees)

Of course, I made the case, that no one benefits by failing to maximize efficiency, as well as some other points. (The hypo was selling a factory that was losing $4 Million a year to a Corporation with an income of $15 or $50 Million a year, agreed that that was the long-term and short-term losses and that no other benefits accrued from the factory) Keeping the factory only serves to minimize the employees' value (they become more entrenched in a dead end job) and the capital parcel which (according to the hypo) could be sold and put to a better use by another company. Instead apparently, the company had a duty to throw money down the drain to make the community happy. Little is mentioned of the fact that ultimately the community is worse off by maintaining the facade of utility over the unprofitable factory. Or by the fact that the company will eventually go bankrupt because "He who is faithless in little will be faithless in much" and as a result the community will end up picking up the tab for all those underfunded pension promises.

Unfortunately, by the end of class only a few people agreed that a corporations sole duty should be to its shareholders. Away from class I was thanked for my diversity of opinion to which I responded, but of course the goal is that you will agree with me by the end of the class.

Update: And I bet you thought I was kidding about the pension problems, but apparently the part about the underfunded pensions applies more than ever.

Posted by Joel at August 25, 2004 09:21 AM | TrackBack