essays

Sep 1, 1980

Corporations: Rights and Obligations

“Corporations are legitimate, then, when they arise through the exercise of individual rights.”

“Corporations and Rights: On Treating Corporate People Justly,” Georgia Law Review Vol. 13, No. 4 (Summer 1979):1245–1370.

The growth of the modern business corporation over the past century has encouraged an ever larger number of economic, legal, and historical studies of this institution—some critical, others defending it. Critics such as Berle and Means, for example, have questioned the “legitimacy” of the large corporation by pointing to the separation of ownership and control, to the “power without property” that characterizes corporate behavior. Ralph Nader and others have recently resurrected the “concession theory” to claim that because the state “creates” the corporation it has a right to regulate it “in the public interest.” In response, defenders of the corporation have argued it already serves the public interest and hence should not be further regulated. Their case, that is, has rested primarily on economic grounds alone. In fact, with the exception of Robert Hessen’s In Defense of the Corporation, which focuses primarily on historical issues, we have had no systematic normative theory of the corporation, one that could tell us whether and why the corporation has rights, what rights (and obligations) it has, and what rights are held by those who interact with it—shareholders, directors, managers, employees, consumers, and members of the public generally.

The development of such a normative theory requires us first to set forth a theory of individual rights and obligations; for corporate legitimacy—the right of the corporation to exist—is a function of the legitimacy of the acts that bring the corporation into being. The theory of individual rights advanced here rests upon recent work in the theory of action which shows, along neo-Kantian lines, what it means for individuals to have rights, that they have them, and what things they do have rights to. More specifically, individual rights are functions not of values or interests but of property claims in oneself, one’s actions, and in the world, which when explicated serve to underpin the broad areas of the common law—and in particular, serve to underpin the rights of association, delegation, and contract, the exercise of which lead to the creation of the corporation.

Corporations are legitimate, then, when they arise through the exercise of individual rights: i.e., when they arise without violating the rights of others. This means that each of the “features” of the corporation from entity status, to perpetual life, to limited liability for contracts and torts must arise and characterize corporate behavior in such a way as not to violate rights. This can be shown even in the case of limited liability for torts, which has always seemed an unjustifiable corporate feature; for close examination of the respondant superior doctrine, upon which this feature ultimately rests, shows that far from being a violation of the rights of tort victims, whose claims are held against individual corporate actors, limited liability for torts, absent contractual arrangements to the contrary, is a violation of the rights of inactive shareholders. As a corporate feature, then, limited liability for torts can be justified vis a vis shareholders when it arises through contract.

lf0353-11_1980v3_figure_011.jpg

But if corporate legitimacy, i.e., the right of the corporation to exist, is a function of the individual acts that create this institution, then the further rights of the corporation are likewise functions of the individual rights of the corporate owners.

These owners do not lose their individual rights, that is, simply because they exercise them in concert. Corporations, then, have all and only those rights that their owners first have to exercise through this institution, those rights that the owners can exercise through such an institution, and those rights that the owners have chosen, in their articles of incorporation, to be exercise through their corporation. When applied to the wide range of issues before the corporation today, this analysis shows that corporations have most of the general rights of speech, action, and association that individuals have, all of the general obligations of noninterference (as with nuisance and endangerment) that individuals have, and all of the special rights and obligations of contract they choose to create. These findings apply to contexts as various as those involving production and pricing, hiring and firing, discrimination, pollution, product and workplace safety, disclosure, antitrust, bribery and kickbacks, board selection, going private and shareholder freezeouts, corporate gift-giving, and many more.

Although the theory of rights is only one domain of ethics, it is, for epistemological reasons, well suited to serve as a model for legal sanctions. Beyond rights, however, there are considerations of value, which is where issues of “corporate responsibility” appropriately arise. It is in this domain that the tension between civic virtue and economic survival comes to the fore, raising fascinating problems as it does, though these are problems best left to private solution.