Discussions about corporations’ influence on health often implicitly or explicitly raise the following question: if the law allows corporations to amass money and consequent power, then why doesn’t the law require corporations to protect, and not harm, health? This simple question has been asked, in various forms, for at least a century.
The debate surrounding this question involves two competing versions of the corporation. In the first version, the corporation is viewed as the property of the individuals who purchased its shares—the stockholders or owners. According to this view, “the corporation’s purpose is to advance the purposes of these owners (predominantly to increase their wealth), and the function of its directors, as agents of the owners, is faithfully to advance the financial interests of the owners.” Those who adhere to this view argue that corporate law should govern “little more than the private relations between the shareholders of the corporation and management.” In the second version, the corporation is viewed “as a social institution.” Proponents of this view believe that corporate law should be “deliberately responsive to public interest concerns,” which includes health and safety considerations.
While federal and state courts have heard many legal challenges over the fundamental nature of a corporation, commentators trace the debate’s formal origin to two articles published in the Harvard Law Reviewin the early 1930s. In 1931, Adolf A. Berle, a professor at Columbia Law School, wrote Corporate Powers as Powers in Trust. In this article, he argued that “all powers granted to a corporation or the management of a corporation . . . are necessarily and at all times exercisable only for the ratable benefit of all the shareholders as their interest appears.” Berle believed that corporations were simply vehicles for advancing and protecting shareholders’ interests and that corporate law should be interpreted to reflect this principle. He suggested that any other account of corporations’ function and purpose would “defeat the very object and nature of the corporation itself.”
One year later, E. Merrick Dodd, a professor at Harvard Law School, challenged Berle’s position in For Whom are Corporate Managers Trustees. Dodd suggested that, “there is in fact a growing feeling not only that business has responsibilities to the community but that our corporate managers who control business should voluntarily and without waiting for legal compulsion manage it in such a way as to fulfill those responsibilities.” He quoted the heads of several major corporations, such as General Electric, to argue that business leaders had come to recognize that corporate managers needed to consider social responsibility when running their companies.
Dodd provided several interpretations of this view relative to the requirements of corporate law. First, he explained that if “social responsibility” meant that corporate managers paid more attention to the needs of their employees and consumers, this would ultimately benefit shareholders. Dodd supported this argument by noting that employee satisfaction leads to greater productivity and ultimately increased profits. By this logic, managers could actually increase profits by focusing on the needs of groups other than shareholders. Next, Dodd argued that courts had provided great latitude to corporate managers, allowing them “a wide range of discretion as to what policies will best promote the interests of the stockholders . . .” For example, Dodd suggested that corporate charitable giving, while not immediately increasing shareholder wealth, could generate good will in the community. Such good will could benefit shareholders, since consumers would be more likely to think favorably of the corporation and buy its products.
For Dodd, these arguments meant that corporations are “affected not only by the laws which regulate business but by the attitude of public and business opinion as to the social obligations of business.” He claimed that society’s view of the corporation as a purely private enterprise was shifting, and that corporate managers should “recognize that the attitude of law and public opinion toward business [was] changing . . .” By arguing that corporate law should reflect shifts in public opinion about the purpose of corporations, Dodd paved the way for those who would later argue that corporations can and should act to benefit constituencies beyond their shareholders. The echoes of Dodd’s argument are often heard among those who champion corporate social responsibility and responsible business practices.
Commentators continue to mention the Berle/Dodd debate, encapsulated by their Harvard Law Review articles, when contemplating how corporations should function within society. Today, variations of this debate surface each time advocates challenge corporate practices that have harmed or may harm the public’s health. The debate arises whenever policy-makers contemplate regulations that would require corporations to engage in behaviors that would protect the public’s health. And, the debate over corporations’ fundamental purpose will continue for years to come, as new corporate practices come to light and new regulations are proposed.
Interestingly, the Berle/Dodd debate did resolve, but with an unexpected twist. In 1954, Berle, who had espoused the view that corporations should be run exclusively to advance their shareholders’ interests, published The 20th Century Capitalist Revolution. In this book, he mentioned his debate with Dodd and stated that “[t]he argument has been settled (at least for the time being) squarely in favor of Professor Dodd’s contention.” Twenty years after articulating his original position, Berle conceded that the law had supported Dodd, in that it did allow directors some discretion to consider stakeholders other than a corporation’s shareholders.
Berle’s book was published one year after the New Jersey Supreme Court decided A.P. Smith Manufacturing Company v. Barlow (1953), which definitively established corporations’ ability to make philanthropic donations and offered support to Dodd’s arguments. In all likelihood, this decision convinced Berle that even if corporations must be run with their shareholders’ best interests in mind, the law gives corporations some opportunities to consider other stakeholders. For those who act to protect and promote the public’s health, this nuanced understanding of a corporation’s purpose is key.
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2. Harvard Law Review