False Profits: Reviving the Corporation’s Public Purpose
For much of the twentieth century, corporations pursued a simple strategy: maximize shareholder wealth. This strategy led to significant gains for shareholders, but too often came at the expense of the public. This dynamic was on display in the past two years, as high-risk financial instruments brought down the global economy. These instruments, including credit default swaps and mortgage-backed securities, offered significant profit potential, but as we now know, they also posed a serious risk to the economy. Indeed, many of these instruments failed, doomed numerous firms, and contributed to a recession. As world economies seek to rebound, the time is right to reform corporate law to address the singular focus on profits that has imperiled so many corporations and economies.
In this Essay, I propose that directors and officers reaffirm a duty to consider the public impact of corporate decisions. In doing so, they must refrain from corporate acts that impose a significant risk on the public. Aside from specific regulations, nothing in corporate law forces corporations to consider the negative macroeconomic consequences of their decisions. True to corporate law history and doctrine, I propose a corporate public duty that maintains commercial pursuits as the primary purpose of the corporation, but restrains the corporation from acts detrimental to the public. Under this conception, many of the destructive acts of recent years may have been averted.
CONCLUSION
Whether or not this formulation of the corporate public duty ever sees the light of day, its principles still have value as legislators consider reform. The notion that the corporation is merely an entity with no connection to the public interest is simply mistaken and has proven quite destructive. Too often, this conception of the corporation has resulted in activities—such as those recently undertaken by AIG, Lehman, Merrill Lynch, and others—whose repercussions extend beyond individual corporations and harm the greater economy. These acts of financial impropriety have rippled throughout the world, leaving businesses underwater and millions of people out of work and out of their homes. In the wake of the financial meltdown, imposing upon corporations a duty to consider the macroeconomic and social impact of their actions is wholly appropriate.