BOSTON COLLEGE LAW BOSTON COLLEGE LAW SCHOOL PUBLIC LAW AND LEGAL THEORY RESEARCH PAPER SERIES RESEARCH PAPER NO. 2001-10 anuary 8, 2001 From Metaphor to Reality in Corporate Law Kent Greenfield Professor, Boston College Law School This paper can be downloaded without charge from the Social science Research Network. http://ssrn.com/abstract=254117
BOSTON COLLEGE LAW BOSTON COLLEGE LAW SCHOOL PUBLIC LAW AND LEGAL THEORY RESEARCH PAPER SERIES RESEARCH PAPER NO. 2001-10 January 8, 2001 From Metaphor to Reality in Corporate Law Kent Greenfield Professor, Boston College Law School This paper can be downloaded without charge from the Social Science Research Network: http://ssrn.com/abstract=254117
FROM METAPHOR TO REALITY IN CORPORATE LA W KENT GREENFIELDT Forthcoming in 2 STAN AGORA(2000). As David Millon so ably demonstrates, metaphor drives much of the debate within corporate law jurisprudence and corporate law scholarship. It has done so for decades, even centuries. Scholars have used metaphors-corporation as person, corporation as creature of the state, corporation as property, corporation as contract, corporation as community, to name the most prominent-as justifications for the imposition of, or freedom from, legal and ethical requirements. The metaphors are often taken as given or as self-evident. The legal and ethical arguments flow, then, quite naturally. I this essay I will join Millon in his criticism of the way metaphors are used within corporate law cholarship and then offer an alt While the use of metaphor and syllogism has been a rhetorical practice for many years for many corporate scholars, it certainly seems to be particularly common among those who have dominated corporate law scholarship over the last half century, the property theorists and the contractarians Corporations are property-it has been famously said- and thus any effort to spread the corporate surplus, for example, to workers or the community in a way that reduces corporate profit is spending money that belongs to the shareholders and imposing an illegitimate"tax"on them. 2 Indeed, in this iew, corporate governance that takes into account the interests of stakeholders other than o 2000 by Kent Greenfield. [Draft of December 27, 2000. 1 aSsociate Professor of Law, Boston College Law School. J.D., University of Chicago; AB Brown University See Milton Friedman, The Social Responsibility of Business is to Increase its Profits, NY TIMES(magazine), Sept 13, 1970, reprinted in MANAGERIAL DECISION MAKING AND ETHICAL VALUES: COURSE MODULE 1, 2(Kenneth E Goodpaster Thomas R. Piper, eds, 1989)
*© 2000 by Kent Greenfield. [Draft of December 27, 2000.] †Associate Professor of Law, Boston College Law School. J.D., University of Chicago; A.B., Brown University. 2See Milton Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. TIMES (magazine), Sept. 13, 1970, reprinted in MANAGERIAL DECISION MAKING AND ETHICAL VALUES:COURSE MODULE 1, 2 (Kenneth E. Goodpaster & Thomas R. Piper, eds., 1989). 1 FROM METAPHOR TO REALITY IN CORPORATE LAW * KENT GREENFIELD† [Forthcoming in 2 STAN. AGORA __ (2000).] As David Millon so ably demonstrates, metaphor drives much of the debate within corporate law jurisprudence and corporate law scholarship. It has done so for decades, even centuries. Scholars have used metaphors – corporation as person, corporation as creature of the state, corporation as property, corporation as contract, corporation as community, to name the most prominent – as justifications for the imposition of, or freedom from, legal and ethical requirements. The metaphors are often taken as given or as self-evident. The legal and ethical arguments flow, then, quite naturally. In this essay I will join Millon in his criticism of the way metaphors are used within corporate law scholarship and then offer an alternative for consideration. I. Metaphor While the use of metaphor and syllogism has been a rhetorical practice for many years for many corporate scholars, it certainly seems to be particularly common among those who have dominated corporate law scholarship over the last half century, the property theorists and the contractarians. Corporations are property – it has been famously said – and thus any effort to spread the corporate surplus, for example, to workers or the community in a way that reduces corporate profit is spending money that belongs to the shareholders and imposing an illegitimate “tax” on them.2 Indeed, in this view, corporate governance that takes into account the interests of stakeholders other than
shareholders, if such a practice disadvantages shareholders in any way, is an unconstitutional taking or, even more provocatively, socialism. Or, corporations are contracts (or so most law students in 2000 are taught), and thus have no ethical or legal duties other than those specified in the contract. Most shareholders, it is assumed would contract with the business s managers to ensure that the managers seek to maximize profit. So-called corporate social responsibility activities cannot be allowed, much less required, therefore, unless the shareholders expressly agree to contract around the standard contract terms provided by corporate law to allow the managers to forego profits for such reasons. In other words, there can be no responsibil ity outside of the contract, so unbar responsibility is oxymoronic. Non-shareholders are parties to the contract and deserve only what they SSee Lynda J. Oswald, Shareholders V. Stakeholders: Evaluating Corporate Constituency Statutes Under the Takings Clause, 24 J CORP. L 1(1998) See Friedman, supra note 2, at 1. This name-calling occurs not only in scholarly works recently gave a faculty colloquium arguing for changes in corporate governance that would require corporate management to take into account the interests of workers. One listener referred to my views as"socialism. For a partial justification for my views that the interests of workers be taken into account within corporate law, see Kent Greenfield, The Place of workers in Corporate Law, 39 BC.L.REV.283(1998) See daniel R. Fischel, The Corporate Governance Movement, 35 VAND. L REV. 1259 1273(1982)(because corporations are contracts, they are"incapable of having social or moral obligations much in the same way that inanimate objects are incapable of having these obligations") See Jonathan R Macey, An Economic Analysis of the Various Rationale for Making Shareholders the exclusive Beneficiaries of Corporate Duties, 21 STETSON L. REV. 23, 36, 42 (1991)(arguing that workers and other non-shareholder constituencies can protect themselves through contract or through the political process); FRANK H. EASTERBROOK AND DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 23(1991)(all parties to the corporate"contract"can protect themselves through negotiation); cf. Joseph W. Singer, The Reliance Interest in Property, 40 STAN. L REV. 611, 649(1988)(because contract outcomes depend on preexisting entitlements bargained for outcomes are just only if preexisting circumstances are fair and just), Greenfield, supra note 4, at 283, 322-26 (arguing that market defects make contract between labor and the corporation inefficient, and criticizing assumption that contract norms should be the basis for public policy since"the ability of parties to bargain is a function of their preexisting entitlements and wealth)
3See Lynda J. Oswald, Shareholders V. Stakeholders: Evaluating Corporate Constituency Statutes Under the Takings Clause, 24 J. CORP. L. 1 (1998). 4See Friedman, supra note 2, at 1. This name-calling occurs not only in scholarly works. I recently gave a faculty colloquium arguing for changes in corporate governance that would require corporate management to take into account the interests of workers. One listener referred to my views as “socialism.” For a partial justification for my views that the interests of workers be taken into account within corporate law, see Kent Greenfield, The Place of Workers in Corporate Law, 39 B.C. L. REV. 283 (1998). 5See Daniel R. Fischel, The Corporate Governance Movement, 35 VAND. L. REV. 1259, 1273 (1982) (because corporations are contracts, they are “incapable of having social or moral obligations much in the same way that inanimate objects are incapable of having these obligations”). 6See Jonathan R. Macey, An Economic Analysis of the Various Rationale for Making Shareholders the Exclusive Beneficiaries of Corporate Duties, 21 STETSON L. REV. 23, 36, 42 (1991) (arguing that workers and other non-shareholder constituencies can protect themselves through contract or through the political process); FRANK H. EASTERBROOK AND DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LA W 23 (1991) (all parties to the corporate “contract” can protect themselves through negotiation); cf. Joseph W. Singer, The Reliance Interest in Property, 40 STAN. L. REV. 611, 649 (1988) (because contract outcomes depend on preexisting entitlements, bargained for outcomes are just only if preexisting circumstances are fair and just); Greenfield, supra note 4, at 283, 322-26 (arguing that market defects make contract between labor and the corporation inefficient, and criticizing assumption that contract norms should be the basis for public policy since “the ability of parties to bargain is a function of their preexisting entitlements and wealth”). 2 shareholders, if such a practice disadvantages shareholders in any way, is an unconstitutional taking3 or, even more provocatively, “socialism.”4 Or, corporations are contracts (or so most law students in 2000 are taught), and thus have no ethical or legal duties other than those specified in the contract.5 Most shareholders, it is assumed, would contract with the business’s managers to ensure that the managers seek to maximize profit. So-called corporate social responsibility activities cannot be allowed, much less required, therefore, unless the shareholders expressly agree to contract around the standard contract terms provided by corporate law to allow the managers to forego profits for such reasons. In other words, there can be no responsibility outside of the contract, so unbargained-for responsibility is oxymoronic. Non-shareholders are parties to the contract and deserve only what they bargain for.6
These metaphors of property and contract are powerful and seductive. While they may b helpful pedagogically, as Millon suggests we must be careful not to mistake the descriptive power of metaphor for normative prescription. To oppose corporate social responsibility reforms on the basi that it is inconsistent with the property or contractual rights of shareholders is simply unhelpful, since in reality neither pure property nor explicit contract is involved. What is meant, presumably, when one says that a stakeholder statute is contrary to the property and contract rights of shareholders is that such a statute is inconsistent with corporate law as it is now, or is inconsistent with the way corporate law should be. If the former argument is what is meant, such a description is beside the point of a normative debate. That is, in considering whether, say, directors should owe fiduciary duties to workers is in an important sense asking whether shareholders should"own"the firm. One cannot answer this question simply by saying that the shareholders own the firm If the latter argument is what is intended, then the argument must depend on a detailed description of why corporate law should be based on property or contract principles. It is meaningless to talk about property or contract"rights without a much thicker normative justification for those rights To the extent that these metaphors are placeholders for that thicker justification, the debate should take note of that fact and encourage that the justification be brought forward so that the debate can progress on specific normative grounds Another problem with the use of metaphors is that they do not inexorably lead to the conclusions that one supposes. Even if corporations are best seen as contracts, that decides little in itself since contract law includes a wide range of common law and statutory exceptions to contractual obligations. A contract for murder or for blackmail is unenforceable. a court would require an employer to pay an employee the minimum wage, even if the employee had entered into a contract to ' Greenfield, supra note 4, at 290; see also Margaret M. Blair, OWNERSHIP AND CONTROL RETHINKING CORPORATE GOVERNANCE FOR THE TWENTY-FIRST CENTURY 224(1995)(argument that shareholders own the corporation and should thus be able to control it"is simply circular logic"); Singer, supra note 6, at 637-38( To assume that we can know who property owners are, and to assume that once we have identified them their rights follow as a matter of course, is to assume what needs to be decided)
7Greenfield, supra note 4, at 290; see also Margaret M. Blair, OWNERSHIP AND CONTROL: RETHINKING CORPORATE GOVERNANCE FOR THE TWENTY-FIRST CENTURY 224 (1995) (argument that shareholders own the corporation and should thus be able to control it “is simply circular logic”); Singer, supra note 6, at 637-38 (“To assume that we can know who property owners are, and to assume that once we have identified them their rights follow as a matter of course, is to assume what needs to be decided”). 3 These metaphors of property and contract are powerful and seductive. While they may be helpful pedagogically, as Millon suggests we must be careful not to mistake the descriptive power of metaphor for normative prescription. To oppose corporate social responsibility reforms on the basis that it is inconsistent with the property or contractual rights of shareholders is simply unhelpful, since in reality neither pure property nor explicit contract is involved. What is meant, presumably, when one says that a stakeholder statute is contrary to the property and contract rights of shareholders is that such a statute is inconsistent with corporate law as it is now, or is inconsistent with the way corporate law should be. If the former argument is what is meant, such a description is beside the point of a normative debate. That is, in considering whether, say, directors should owe fiduciary duties to workers is in an important sense asking whether shareholders should “own” the firm. One cannot answer this question simply by saying that the shareholders own the firm.7 If the latter argument is what is intended, then the argument must depend on a detailed description of why corporate law should be based on property or contract principles. It is meaningless to talk about property or contract “rights” without a much thicker normative justification for those rights. To the extent that these metaphors are placeholders for that thicker justification, the debate should take note of that fact and encourage that the justification be brought forward so that the debate can progress on specific normative grounds. Another problem with the use of metaphors is that they do not inexorably lead to the conclusions that one supposes. Even if corporations are best seen as contracts, that decides little in itself since contract law includes a wide range of common law and statutory exceptions to contractual obligations. A contract for murder or for blackmail is unenforceable. A court would require an employer to pay an employee the minimum wage, even if the employee had entered into a contract to
work for only $2 an hour. In many jurisdictions, a duty of good faith is injected, as an act of law, into the terms of every contract Some states prohibit firms from terminating employees for reasons that are contrary to the public interest, even when the agreement between the employee and employer provides for "at will "employment. These are only a few of the "exceptions"in the law of contract, 0 and the contract metaphor cannot be applied to corporate law without an exploration of why any number of exceptions should not be applied as well Similarly, to say that the shareholders"own the company is unhelpful without a description of why certain aspects of property law are relevant and others are not. Notwithstanding the"illusion of absoluteness that accompanies much property-rights rhetoric, property has always been subject to reasonable regulation. The broad principle that one should not use one's property to inflict harm on others has been"routinely applied"in U.S. courts since the nations beginning. 2 The Supreme Court recognized over 150 years ago that"[w ]hile the rights of private property are sacredly guarded, we must not forget that the community also have [sic]rights. 3 A property owner cannot burn noxious trash in her backyard so as to cause a nuisance to her neighbors, for example, and a factory owner may not operate a factory that is unreasonably dangerous to the employees working there. To use the metaphors of property or contract as a normative argument therefore is unhelpful without an explanation SSee Restatement(Second), Contracts S 205(1979) See, e.g., Derose v. Putnam Management Co, 398 Mass. 205(1986); Hobson v. Mclean Hosp. Corporation, 402 Mass. 413(1988) I See, e. g, Sternamen v. Metropolitan Life Ins. Co., 170NY. 13, 18, 62N E. 763(1902) (The power to contract is not unlimited. While as a general rule there is the utmost freedom of action in this regard, some restrictions are placed upon the right by legislation, by public policy and by the nature of things. Parties cannot make a binding contract in violation of law or public policy. II See marY aNN glendon rights talk: THe IMPoVERISHMENT OF POLITICAL DISCOURSE 18,20(1991) ld. at 25 IGLENDON, Supra note 11, at 26(citing Charles River Bridge v. Warren Bridge, 36 U.S (11Pet)420,548(1937)
8See Restatement (Second), Contracts § 205 (1979). 9See, e.g., Derose v. Putnam Management Co., 398 Mass. 205 (1986); Hobson v. McLean Hosp. Corporation., 402 Mass. 413 (1988). 10See, e.g., Sternamen v. Metropolitan Life Ins. Co., 170 N.Y. 13, 18, 62 N.E. 763 (1902) (“The power to contract is not unlimited. While as a general rule there is the utmost freedom of action in this regard, some restrictions are placed upon the right by legislation, by public policy and by the nature of things. Parties cannot make a binding contract in violation of law or public policy.”). 11See MARY ANN GLENDON, RIGHTS TALK:THE IMPOVERISHMENT OF POLITICAL DISCOURSE 18, 20 (1991). 12Id. at 25. 13GLENDON, supra note 11, at 26 (citing Charles River Bridge v. Warren Bridge, 36 U.S. (11 Pet.) 420, 548 (1937)). 4 work for only $2 an hour. In many jurisdictions, a duty of good faith is injected, as an act of law, into the terms of every contract.8 Some states prohibit firms from terminating employees for reasons that are contrary to the public interest, even when the agreement between the employee and employer provides for “at will” employment.9 These are only a few of the “exceptions” in the law of contract,10 and the contract metaphor cannot be applied to corporate law without an exploration of why any number of “exceptions” should not be applied as well. Similarly, to say that the shareholders “own” the company is unhelpful without a description of why certain aspects of property law are relevant and others are not. Notwithstanding the “illusion of absoluteness” that accompanies much property-rights rhetoric, property has always been subject to reasonable regulation.11 The broad principle that one should not use one’s property to inflict harm on others has been “routinely applied” in U.S. courts since the nation’s beginning.12 The Supreme Court recognized over 150 years ago that “[w]hile the rights of private property are sacredly guarded, we must not forget that the community also have [sic] rights.”13 A property owner cannot burn noxious trash in her backyard so as to cause a nuisance to her neighbors, for example, and a factory owner may not operate a factory that is unreasonably dangerous to the employees working there. To use the metaphors of property or contract as a normative argument therefore is unhelpful without an explanation