Friday, August 12, 2011

"Corporations are People, My Friend": American Presidential Candidates Confront Fundamental Confusion About Corporate Personality in the United States

Recently, presidential candidate and former governor Mitt Romney caused a bit of a stir while campaigning among the people of Iowa in search of credibility and signs of popular support for his presidential ambitions. The object of interest was Mr. Romney's effort to describe his sense of the character of the corporation and to contextualize that characterization within the framework of his campaign policy positions.  Appropriately, it seems, the comments were delivered at the Iowa State Fair, an entertainment extravaganza.

 (From Philip Rucker, Mitt Romney says ‘corporations are people’ at Iowa State Fair, Washington Post, Aug. 11, 2011).

As reported by Philip Rucker (Mitt Romney says ‘corporations are people’ at Iowa State Fair, Washington Post, Aug. 11, 2011), the colloquy in context went something like this:
Romney’s appearance at the fair’s soapbox grew unusually testy when a few angry people heckled the Republican presidential candidate over his declaration not to raise taxes. They urged the campaign front-runner to increase taxes on the wealthy to help fund such entitlement programs as Social Security and Medicare.
 Romney explained that one way to fulfill promises on entitlement programs is to “raise taxes on people,” but before he could articulate his position on not raising taxes, someone interrupted.
“Corporations!” a protester shouted, apparently urging Romney to raise taxes on corporations that have benefited from loopholes in the tax code. “Corporations!”
“Corporations are people, my friend,” Romney said.
Some people in the front of the audience shouted, “No, they’re not!”
“Of course they are,” Romney said. “Everything corporations earn ultimately goes to people. Where do you think it goes?”

An alternative version of the events is described in Michael P. Falcone and Z. Byron Wolf, Mitt Romney At Iowa State Fair: 'Corporations Are People, My Friend', ABC News, August 12, 2011.  The moment was also recorded and, to no one's surprise, posted to YouTube: Here is the link.

(From Mark LeVine, Opinion: 'Corporations are people, my friend...' , Al Jezeera, Aug. 12, 2011)

The colloquy produced a flurry of reaction--much of it amused or negative.  Yet these comments and reactions were, in some sense, as ridiculous as Mr. Romney attempts to synthesize the essence of corporate character is a few words (also mean to perform service in favor of his presidential ambitions).  The democratic spokesperson, not surprisingly given the political context, provided a taste of the ridiculous:  "“Mitt Romney’s comment today that ‘corporations are people’ is one more indication that Romney and the Republicans on the campaign trail and in Washington have misplaced priorities,” she said in a statement, calling the comment a “shocking admission.”“Mitt Romney’s comment today that ‘corporations are people’ is one more indication that Romney and the Republicans on the campaign trail and in Washington have misplaced priorities,” she said in a statement, calling the comment a “shocking admission.”" (quoted in Philip Rucker (Mitt Romney says ‘corporations are people’ at Iowa State Fair, Washington Post, Aug. 11, 2011).  Others were kinder: "ABC’s Jake Tapper on Thursday night scolded Republican presidential candidate Mitt Romney for a “gaffe” over his assertion that “corporations are people” since “everything corporations earn ultimately goes to the people.”" Brent Baker, Bias Alert: Romney's 'Corporations Are People' Called a 'Gaffe' as Nets Disguise Agenda of Leftist Hecklers in Iowa, Media Research Center, Aug. 11, 2011.  
Before we get too excited, says Greg Sargent at The Washington Post, consider "the larger context" of Romney's words. He clearly meant that "corporations are made up of people, and that when you tax corporations, you also end up taxing the people who comprise them." Well, this is "probably not the way he wanted that to come out," says John Marshall at Talking Points Memo. "Oops."  (From Mitt Romney's 'corporations are people' gaffe, The Week, Aug. 11, 2011).
Still other reactions were substantially more considered but are fueled by a particular political point of view and might be meant to further the underlying political debate for which the corporate colloquy serves as a sort of metaphor.  See, e.g.,  Mark LeVine, Opinion: 'Corporations are people, my friend...', Al Jezeera, Aug. 12, 2011) ("If we return to Romney's comment, the confusion within it is illustrative of the larger problem of considering corporations as people. First he argues that "everything corporations earn ultimately goes to the people". The people? As in "We, the People"? That is certainly how the wealthy would like us to imagine corporate wealth being distributed. Indeed, the most basic argument of the neoliberals is that corporations and corporate capitalism is the most efficient and equitable means available for ensuring the widest distribution of wealth and resources among the people." Id.).

Beyond this, Mr. Romney's remarks were useful, because he was both precisely correct, and sadly misleading.   Yet that combination of precision and sad misdirection also marks the legal framework of legal personality in the United States.  Mr. Ronmey reminds us that the issue of corporate personality remains in a state of confusion in the United States, or better put, Americans have over the last century or more, failed to arrive at any sort of consensus about corporate personality--that nature of the corporation, and develop a coherent legal architecture on the basis of that consensus.  As a consequences, Mr. Romney has merely provided a somewhat pathetic articulation both of the confusion in American policy and its significant consequences for discussion.  I take this opportunity to use my Romney's remarks as a teaching moment.

In its modern form since the beginning of the 20th century, the issue of corporate personality, the character and nature of a corporation that permits it to be constituted autonomously from shareholders, directors, employees or the state, has been hotly contested from time to time.  By the end of the 20th century, it could be argued with some confidence that three distinct views of the character of the corporation had emerged.  See, e.g.,  Larry Catá Backer, Corporate Institutionalism and Fiduciary Duty: On Professor Katsuhito Iwai's Nominalistic and Realistic Corporations Model, Law at the End of the Day, July 10, 2006 (discussing Katsuhito Iwai, "The Nature of the Business Corporation: Its Legal Structure and Economic Functions," The Japanese Economic Review, 53(3):243-273 (2002)).

1.  The corporation as autonomous institution.  Under this view, the corporation is understood to be an autonomous entity.  This means more than that it is recognized as distinct, in law, from shareholders, creditors, directors and the like.  Rather, it suggests that the corporation is as autonomous and independent of its stakeholders as the government of a state is distinct form its citizens.  As a consequence, the corporation, as institution, can be understood as a distinct "person" in the sense that it must act (through its board of directors) to maximize its own welfare and interests distinct from those of its shareholders, officers and directors.  That mandatory distinctness can be enforced through the mechanisms of corporate governance--fiduciary duty, derivative actions, control transactions and the like (I do not suggest the functional success of this view, merely its elaboration here).  An institutionalist view of the corporation can be understood in shorthand as vesting the corporation with "personhood".  The consequence, for law and policy, is a concentration on the powers and independence of the board of directors, and the preservation of the legitimacy of the board and its actions. The corporation, as a result, may acquire rights under public law in its own right, and in the United States today, may participate even in the political life of the state.  Mr. Romney, then, was right when he suggested that corporations are people, at least in the sense that in the U.S. corporations are sometimes understood as autonomous institutions capable of formulating and pursuing their own interests (and defending them) necessarily independent of those of its stakeholders, including its shareholders.

2.  The corporation as property in the hands of its shareholders. Under this view, the corporation is understood as an amalgamation of economic interest, as a convenience to the shareholders who come together to engage in profit oriented economic activity.  Whether understood in its popular variant as a"nexus of contract" or by the shorthand reference to the aggregation of rights to income, assets and control represented by an equity interest in the corporation, this view understands the corporation as nothing more than an aggregation of these contractual or property interests.  As a consequence, the corporation cannot "speak" other than to express the views of those shareholders who control the corporate machinery.  The corporation cannot exist autonomously of its stakeholders.  The segregation of corporate assets and the governance mechanisms for communal ownership of enterprises does not produce a new and separate organism; rather it produces only a collective expression of individual will.  The focus here is not on the entity but on the stakeholder (and usually principally the equity holder). The consequence, for law and policy, is to focus legal management of the firm on issues of shareholder power--shareholder democracy and participation in corporate governance.  The public law rights of this understanding of the corporation is grounded firmly in the rights of stakeholders--corporations may have rights to property because its owners are accorded those rights and the corporation itself is the sort of property the ownership of which is accorded constitutional protection to its holders (the shareholders).  Mr. Romney, then, was right to suggest that everything corporations earn ultimately goes to people, at least in the sense that U.S. corporations are sometimes understood as property in the hands of their stakeholders (and principally their shareholders).  The corporation, in this case, represents a useful vessel for the aggregation of the collective rights to income, assets and control, of a number of individuals who have come together for a joint enterprise for which the corporation serves as its vehicle.

3.  The corporation as a nexus of privileges and obligations derived from and subject to the control of the state. The oldest conception of corporate personality, and one derived from the ancient notions of corporate concession from the superior feudatory lord to inferior vassal, now constituted in the abstract (as bodies corporate, with the supreme body corporate understood as bound up in the "person" of the state) is that the corporation is merely a vassal that represents a bundle of rights, privileges and obligations derived from the state.   Corporations, in this variant, are understood as creatures of the states that have created and now regulate them.  The principal obligation of these entities is to the state, and the state's interest.  Chinese corporate law, for example, and some variants of corporate law in Europe, can be understood as grounded in this view. The interests of shareholders follow in importance that of the state. The regulatory and policy consequences of this view is to focus on the interests of the state and its management of the entity. (See, e.g., Niemietz v. Germany, Eur. Ct Hum Rights, Series A, No. 25-B, 16 E.H.R.R. 97 (1972).  Sadly, Mr. Romney failed to include a nod to the more ancient idea that the corporate form is merely the devolution of state power specified in the laws permitting and managing the corporate form.  In this sense, the corporation is a manifestation of state power that is meant to serve the political interests of the state first.  Since that interest includes promoting the welfare of individuals, the corporate form is useful for individuals, who may take advantage fo the form, but only as and to the extent permitted by the state.

In the United States over the last several decades, shifting majorities have, from time to time, more or less strongly embraced the first two views--the corporation as institution and the corporation as property.  In the field of public (and principally constitutional) law, the result can produce contradiction.
 These fundamental differences in conception were neither accidental nor evidence of confusion. They are ancient and well considered positions on the nature of the corporation that are, to some extent are both irreconcilable and give rise to substantially different constitutional and regulatory consequences. The differences, in modern form, were first well-exposed in First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978), and contested in Austin v. Michigan Chamber of Commerce, 494 U. S. 652 (1990). Citizens United has effectively recast them anew. The effect of Citizens United is thus not merely confined to issues touching on the constitutional protections of speech rights, and the form of legitimate of constitutional jurisprudence. Rather, it will have potentially significant effects on approaches to the regulation of corporations far beyond the constitutional framework in which the case was decided.(From Larry Catá Backer, What is a Corporation? : The Regulatory Effects of Different Conceptions of Corporate Personality in American Constitutional Law in Citizens United v. FEC, Law at the End of the Day, Jan. 24, 2010).
In some American jurisdictions, for example Delaware, courts and legislatures have embraced both views.  As a result, some statutes and court decisions appear to be grounded in the understanding of the corporation as property in the hands of shareholders, while other statutes and court decisions are grounded in the embrace of the notion of the corporation as autonomous entity distinct from its shareholders.   The results can be incoherent--pushing policy towards a focus on shareholder rights in some instances and toward director authority in others.  

It is in this context that Mr. Romney's remarks acquires a different completion.   Mr. Romney is correct to observe that corporations are people--to the extent he is seeking to reference the idea that corporations are institutions that exist autonomously from its stakeholders. But that is precisely NOT what Mr. Ronmey appears to mean.  Mr. Romney insists that corporations are people, that is autonomous, because everything corporations earn goes to people--in other words corporations are autonomous entities because they are property in the hands of their shareholders!  This effects a perverse conflation between two wholly inconsistent understandings of corporate character.  In effect, Mr. Romney's description is ridiculous when taken together, but each of its two parts, when considered separately, in themselves are substantially correct. Each is a reflection of equally legitimate understandings of corporate character well embedded in American law, politics and culture. Mr. Romney's confusion, of course, and his heroic efforts to perform an impossible conceptual merger, reflects the confused (or perhaps incoherent) state of American approaches to the issue of corporate character.  Mr. Romney appears to understand that corporations can be understood both as autonomous institutional actors distinct from their shareholders and as property in the hands of those shareholders.  But he doesn't understand (and here he is probably representative of many public officials) that these views are distinct and represent different sets of assumptions about the relationship between corporations, their stakeholders, society and the state.


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