No Safe Harbor: Killing the Corporate Person

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There’s a quip which has become almost a statement of belief in recent years, “I will believe Corporations are people when Texas executes one.” It’s a statement that makes two points. First, Texas executes a lot of people, and has the lowest barrier of doing so, and secondly, that corporations are not people, because they don’t face the same consequences that actual people do.

It captures a key essence in that corporations are people for any positive aspect, but not people for a negative one. If a company does wrong, its board isn’t liable, unless they personally instructed and/or oversaw a criminal act. Instead, just the company is, and it only gets a financial penalty. This is as it should be, because that is the very reason for forming a company.

Let’s take it down to basics. A company, when incorporated, is a limited liability company. That is its entire Raison d'être. It exists only to shield those behind a company from being liable for the company. How? Well, Anne and Bob open a shop. It sells cookers. They open it as a limited liability company, by incorporating. Charles and Denise open a shop next door, at the same time; they have a bed store. They decide not to incorporate.

The businesses run for 6 months and are just about making a profit (not an easy thing to do, since approximately 90% of businesses fail in the first year). They each buy a new delivery vehicle to help expand the business. 6 months after that, and disaster hits. A new superstore opens up just down the road, offering a wider range of both beds, AND cookers, at lower prices. They’ve been undercut and their businesses die. Both stores hang on for a month more, before going bankrupt. However, that’s where the differences start.

Anne and Bob incorporated, so their business is a legal entity. It holds the debt. The store’s lease belongs to the company, as does the loan on the delivery truck, and the money owed to their suppliers for the stock. These creditors can only pursue the company for the money. Anne and Bob’s house, their car, bank accounts, etc. are all safe. All they’ve lost, or put at risk, is what they’ve put into the company.

Charles and Denise aren’t so lucky; their company is only a partnership, which is an agreement between two people, and as such, they are responsible for the debts. Once the van and the stock has been sold off to pay what they owe, they'll have to cover any shortfall out of their own pockets. That means they could lose their house, car, savings, even their own bed, all because they didn’t incorporate.

That’s the benefit of a corporation. It becomes a legal entity that can operate as a party to contracts, including financial ones. The problem is that some people have taken that “legal entity” status, and expanded it, claiming that since people are legal entities, legal entities are therefore people. After all, companies can marry (mergers) split (spin-off), grow, sign contracts, sue, even file taxes (and maybe even pay them); they must be people, and hence we have the term “corporate personhood.”

The problem is, companies are not people. They never have been. If a person dies, that person is dead. They can’t be brought back to life, a corporation can. A person has a fixed lifespan, a company doesn’t (The Japanese hotel company Nisiyama Onsen Keiunkan is over 1300 years old, for instance). If the company breaks the law, does the company go to jail? No. At worst, it would be shut down, and very little stops the people behind that old company from just starting a new company.

The idea that people and corporations are the same thing is clearly ludicrous, and yet that’s not stopped people from trying to make it a reality. Part of the issue in the US stems from US law, which states[1] “In determining the meaning of any Act of Congress, unless the context indicates otherwise-- the words 'person' and 'whoever' include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals;”

This is extremely broad. The problem is, you can’t put a corporation in jail, or execute it, so “in context,” punishments tend not to apply. Who do you put in jail, how do you punish the company in a way that actually punishes, and while allowing it to continue operating?

Then there’s the impact of corporate personhood on natural persons. In 2010, a 5-4 decision by the US Supreme Court[2] ruled that corporate persons have a first amendment right to advertise freely for candidates and issues. While corporations can’t vote (with some exceptions, such as the election of the Lord Mayor of London), those employed by it can, and the direction taken by it, and the use of the company resources, are at the direction of the board, under nominal control of the shareholders (which are often other companies). The board not only has their own personal 1st amendment rights, and their own personal resources, but they can use the company resources to further their own personal interests.

Other issues are ones of morality, and punishment, exemplified in a document generally referred to as the Ford Pinto Memo. This was a document[3] submitted by the Ford Motor Company, to the National Highway Traffic Safety Administration – a Federal agency – amid concerns over the safety of the Ford Pinto’s fuel tank in a crash. It contained a cost-benefit analysis which laid out the cost of modification to improve the safety of the car (12,500,000 vehicles at $11 a time, for a total of $137.5 million) against the costs of paying out-of-court settlements for accidents (which worked out to $49.53 million). Thus it was cheaper to send out cars that were potentially lethal, and pay out of court settlements. Were ‘natural persons’ (you and me) to attempt to knowingly sell defective products, we would potentially be looking at an involuntary (or criminally negligent) manslaughter charge. A company faces no such charges; but is instead usually charged with liability. The corporate person, quite literally, “gets away with murder.”

Should a person’s job give you two sets of rights, one for you, and one for the company?

Clearly not, as that does not make sense. So what can we do about it?

There are at least three schools of thought on this topic. They can be described as “take the rights,” “adjusted punishments,” and “Corporate Responsibility.”

“Take the rights” is effectively ending corporate personhood as it is now. It can’t be completely done away with, as it still needs the ability to make contracts, and perform acts requiring a legal entity. Instead it specifically narrows down the rights of a corporation. It clearly delineates the boundaries between natural people (those who are Homo sapiens and lawyers) and corporate persons, and the rights they have.

The second is to adjust punishments, so that corporations pay more. Even small companies have balance sheets that dwarf most natural people. So perhaps the model of punishment used in the north-west section of Europe (Finland, Sweden, Denmark, and Germany, among others) better known as Day Fines. These are fines based on income, with formulae to work out the specific person’s fine amount-per-day, with the court sentence given in terms of days (and a minimum fine amount). Applied to a corporation, it would be a major deterrent, while punishing all companies evenly. It also avoids the current situation, where punishments are too low now to affect most corporations, while also being too high for individuals; a classic example being statutory copyright infringement damages. Set between $750 to $150,000 for willful infringement, to many companies that is not a major amount, whereas it’s beyond the ability of most natural people.

The third option is corporate responsibility. In short, the board is directly responsible for the actions of the company, because the company doesn’t have any rights, but instead shares the rights of the board of directors. The company itself has only two “rights,” that of limited liability, and that of being a legal party to contracts. Anything else, including free speech, is down to the board or employees directly responsible.

These are just possibilities, but it’s certainly something that needs to be looked at now, because companies are only getting bigger, and already the 5 biggest companies each have annual revenues bigger than the GDP of all but the top 35 countries (by IMF figures), while the biggest, Wal-Mart, would slot in at number 25, just ahead of Norway, and behind Taiwan at $421 billion/year.

While it might seem an ‘anti-corporate’ stance, the idea of corporations being “people” is not one that should be encouraged. Corporations were created to provide limited liability, and to be a single entity for contract law, nothing more. Ultimately, it comes to the following point: Slavery was about treating people as property, Corporate Personhood is about treating property as a person.

Trying to create artificial people, giving businesses advantages and no disadvantages, means they have disproportionate powers, and the bigger the company, the more power it has, until it’s too big to fail, then we just keep bailing things out, and buckling under the influence. How is that in any way right?

Of course, there is always the Texas standard, mentioned earlier, and not believe Corporate Persons exist until Texas executes one.