Daniel J.H. Greenwood

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Enronitis: Why Good Corporations Go Bad

by Daniel J.H. Greenwood (1)
2004 Columbia Business Law Review 773-848 (2004). No reproduction without permission of author and Colum. Bus. L. Rev.

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The Enron problem - managers becoming extraordinarily wealthy while misleading shareholders, creditors and employees about the company's prospects and even driving it into the ground - is widely understood to be the result of too weak a legal mandate supporting the share-centered paradigm of corporate law. Paradoxically, it is also the predictable result of too strong a share-centered view of the public corporation. Share-centered corporate law creates the very problems it is meant to police. The single-valued profit maximization ethos of the share-centered corporation demands that managers teach themselves to exploit everyone around them: it is inevitable that some will learn this lesson so well that they will exploit even those for whose benefit they are supposed to be exploiting. Moreover, the very underpinnings of profit in a corporation require cooperation and mutuality, relationships that are threatened by the arms-length competitive market ethos of the share-centered view. Progress will require a more political, multi-valued understanding of the public corporation as a site in which we struggle over and create our collective existences.

I. Introduction

We begin with a proposed definition of Enronitis:

Eronitis.(n, neologism derived from Enron, a large company that went bankrupt amid allegations of market manipulation, phony accounting, looting, and other corporate misbehavior):

1. A malfunction of corporate governance in which top managers become extraordinarily wealthy while misleading shareholders, creditors, employees and the general public about the company's prospects and practices, eventually resulting in share price collapse, loss of jobs and, in extreme cases, the corporation's bankruptcy. Thought to have characterized a non-trivial portion of the American corporate economy in the "bubble economy" around the turn of the twenty-first century. Often accompanied by sudden collapse of the reputations of seemingly upstanding corporate citizens who turn out to have been routinely lying, not only to shareholders, but to their own board members, employees, tax authorities, etc.

The Enron problem is widely understood to be the result of too weak a legal mandate supporting the share-centered paradigm of corporate law. Paradoxically, however, it is the predictable result of too strong a share-centered view of the public corporation. (2) The single-valued profit maximization ethos of the share-centered corporation demands that managers teach themselves to exploit everyone around them: it is inevitable that some will learn this lesson so well that they will exploit even those for whose benefit they are supposed to be exploiting.

Corporate law demands that managers simultaneously be selfless servants and selfish masters. On the one hand, it directs managers to be faithful agents, setting aside their own interests entirely in order to act only on behalf of their principals, the shares. But on the other hand, in the service of this extreme altruism, they must ruthlessly exploit everyone around them, projecting on to the shares an extreme selfishness that takes no account of any interests but the shares themselves, narrowly understood. Having maximally exploited their fellow human corporate participants, managers are then expected to selflessly hand over their gains, ill and justly gotten, to the faceless legal abstraction of the fictional shareholder. Altruism and rationally self-interested exploitation are extreme and radically opposed positions, psychologically and politically. The managerial role is deeply unstable and unlikely to hold.

For managers, one easy resolution of these tensions is a simple, cynical, selfishness in which managers see themselves as entitled, and perhaps even required, to exploit shareholders as ruthlessly as they understand the law to require them to exploit everyone else. Another likely resolution conveniently switches between market and fiduciary norms to allow managers to view themselves - in good faith - as underpaid and exploited even as they increase their pay to previously unheard of levels. Enronitis, thus, is the result of the very share-centered paradigm current reform seeks to strengthen.

The damage caused by the share-centered paradigm goes beyond the share-manager conflict, however. On the simplest level, the share-centered view encourages managers to see their job as requiring them to ignore all political, moral and human values but one: profit. This paradigm urges managers to see the world in purely instrumental terms. But this makes managers, doing their job in good faith as we tell them to, into one-sided, anti-social outsiders to civil society. Citizens don't treat fellow citizens as mere strangers and tools. Our corporate law, paradoxically, tells managers that to be good managers they must be bad citizens.

Internally, the share-centered paradigm is just as self-destructive. Corporations succeed because they are not markets and do not follow market norms of behavior. Rather, they operate under fiduciary norms as a matter of law and team norms as a matter of sociology. However, the share-centered paradigm of corporate law teaches managers to treat employees as outsiders and tools to corporate ends with no intrinsic value. Just as managers are unlikely to learn simultaneously to be selfish maximizers and selfless altruists, they are unlikely to be simultaneously cooperative team players and self-interested defectors. Double agents often become triple agents as well. Thus, the share-centered view undermines the prerequisite to operating the firm in the interests of shareholders. Share-centeredness can both accentuate the pathologies of teams - especially the tendency to disregard the interests of non-team members in an excess of we/them competitiveness - and undermine the mutual solidarity that is vital to maintain the team's advantages.

A story about Enron's CEO Jeffrey Skilling epitomizes the problem so well it seems too good to be true:

As a [Harvard Business School] student, Jeffrey Skilling was asked what he would do if his company were producing a product that might cause harm - or even death - to the customers that used it... Skilling replied, "I'd keep making and selling the product. My job as a businessman is to be a profit center and to maximize return to the shareholders. It's the government's job to step in if a product is dangerous." (3)

Skilling's statement foreshadows both the internal corporate law and external regulatory perversities of Enronitis. On the one hand, even as a student he had fully internalized the share-centered view that role morality requires managers to ignore ordinary responsibility for their fellows in favor of pursuit of profit. On the other hand, the extraordinary distortions that view creates (even within its own narrow framework) are already apparent: how likely is it that murdering your customers could be profit maximizing?

What is needed is a new paradigm for understanding corporate law, one that emphasizes the collective, corporate nature of the public corporation without falling into the trap of assuming that easy professionalism can resolve difficult value choices. Corporations are governance structures as complex as any other and deserve to be analyzed as such. Reforms emanating from a new understanding of the public corporation as polis are more likely to ameliorate the dangers of Enronitis and other corporate dysfunctions.

***

This Essay proceeds as follows. Part II reviews a few of the recent scandals and some of the reforms proposed in response. Part III sets out the basic theoretical framework of the share-centered corporation and the fictional shareholder as applied to the problem of managerial incentives and loyalty: managers are directed to work for fictional shareholders who are, in turn, imagined to have no relationships with the rest of us. The law teaches managers to act as if they were fiduciaries for foreigners interested only in using us and our world, not as fellow citizens in a common enterprise. Instead of acting as the representatives of a major part of our collective governance system, they are told to treat us much as a not-too-benevolent colonial power might: as tools for a stranger's projects.

Part IV applies and expands this framework in the contexts of both internal corporate law and external regulatory law. First, corporate law creates an oasis of agency or fiduciary law using norms appropriate to co-adventures, within a greater environment of disinterested arms-length market relations. The fictional shareholder is an unsatisfactory partner or principal in the fiduciary oasis because it is incapable of the loyalty or mutuality such relationships demand. The usual attempt to rescue the special relationship with shares is a metaphor of ownership: because the fictional shareholders "own" the firm they are entitled to special consideration and rights as the end, rather than the means, of the corporate enterprise. This metaphor, however, is not powerful enough to do the work demanded of it in the share-centered corporation: shares do not have enough of the usual attributes of ownership to plausibly appear (or demand treatment as) corporate ends. Moreover, even as shares are called "owners," they are simultaneously viewed as factors of production like all other means to corporate ends.

Second, managerial attempts to resolve the tensions of the share-centered view can lead to a series of corporate malfunctions: not only corporate betrayal of shareholders, but also

Part V briefly considers some of the proposed reforms intended to strengthen the share-centered framework. It concludes that although they are likely to be helpful in barring a repeat of the current scandals, any reform that leaves the basic incentive structure in place is likely to result in corporate managers finding creative, new and unexpected routes to scandal.

Finally, Part VI outlines a new conceptual framework - the corporation as polis - that would allow us to think of corporate managers as explicitly political participants in an explicitly political conflict over public values and private money. The dominant share-centered view seeks to pretend corporations are apolitical by claiming that values, safety and citizenship are, as Skilling said, "the government's job." (4) Its historic opponent, benevolent managerialism, is equally obfuscatory, pretending that professional ethics will suffice to resolve genuine value conflicts. Corporation as polis, in contrast, seeks to frankly acknowledge the multiple value conflicts inherent in any corporate enterprise. By taking the corporation seriously as a locus of both value debate and interest group conflict over scarce resources, we will be better able to tie our most powerful economic engines to private wealth generation, social good and the public interest.

II. The Problem: Corporate Failure

We live in an age of corporate scandal. Publicly traded corporations are the core of our economy, essential building blocks of our society, and centers of our individual and collective lives. They provide nearly half of our non-governmental jobs (5) and probably account for a larger portion of our GNP. (6) The largest operate on every continent, (7) a new form of empire on which "the sun never sets." (8) We work for them, buy from them, listen to them, depend on them and glorify them. Yet we seem unable to control them satisfactorily: Our major corporations violate law and civility on a routine basis.

Often we sharply distinguish two types of corporate scandal. On the one hand are scandals of corporate law proper, in which internal corporate law norms are violated. Generally, these involve managers who help themselves instead of the corporation, or help themselves at the expense of the corporation. In a familiar pattern, stock prices rise and then collapse based on information that later turns out to be false or distorted, managers get rich, the company goes bankrupt, employees lose their jobs and pensions, and customers and suppliers must struggle to pick up the pieces in disrupted markets. In the aftermath of the late 1990's stock market rise, one giant company after another (along with plenty of small ones) had stock price collapses, allegations of funny accounting or dishonest managers, questions raised about directors asleep at the wheel or managers paid enormous sums while profits disappeared. (9)

The second, often more important, type are the regulatory scandals, in which corporations take actions that harm those around them in violation of regulatory law or societal norms that ought to restrain predatory or negligent behavior. These include corporations that produce dangerous products either without adequate testing or in the face of known safety concerns, such as asbestos, tobacco, l-tryptophan, ephedra, the Ford Pinto exploding gas tank, or SUVs. They include abuse of the environment by routine pollution in large or small scale, from global warming to low mileage, and environmental disasters classified as accidents, such as Bhopal or Exxon Valdiz. They include human rights violations, such as Enron's complicity in police suppression of dissidence in connection with its Dabhol project, or Unocal's alleged benefitting from slave labor on its Yadama gas pipeline in Burma. (10) Of most importance to this Essay, the regulatory scandals include numerous instances where corporate managers felt constrained to do things they knew were wrong because of their belief that they were obligated to pursue profit at all costs.

Corporate law scandals, my central focus here, are generally understood to be failures of the corporate profit norm: managers have put their own gain ahead of the corporation's. Regulatory scandals, in contrast, are generally understood as resulting from too strong a pursuit of profit: the corporation has put its profit ahead of law, morality, safety, the environment or the social good.

The distinction is overdrawn. As we shall see, corporate law scandals stem from the same underlying weaknesses in corporate law and organization as regulatory scandals. Therefore, paradoxical as it may seem, corporate law reforms that seek to tame self-interested managers by increasing the power of the share-centered profit norm ultimately will worsen the problem rather than solving it. As managers teach themselves to treat the law, morality and their fellow citizens as mere costs of doing business, some will learn this lesson so well that they will exploit even those for whose benefit they are supposed to be exploiting.

A. Enron and Enronitis

Perhaps the best known of the turn of the century corporate law scandals was Enron. (11) In the 1990's, Enron was a model of the new economy, deeply involved in the deregulatory agenda and symbolizing the efficiency of markets while making itself and those around it rich. (12) The nation's seventh largest company by stock market capitalization, it was run by pillars of respectability, charitable and political leaders, friends of the President. Suddenly, seemingly overnight, it collapsed amid disclosures of off-balance sheet transactions creating hundreds of millions of dollars of reported income that apparently never existed in fact. (13) Its bankruptcy was the second largest in US history, taking with it 10,000 jobs and over $1 billion in retirement savings. (14) In the last year before the collapse, meanwhile, the two senior managers sold Enron stock worth over $150 million. (15)

Enron's economic innovations, praised one day in the business press, became headline examples of fraud and excess the next. Two years of investigations are leading to a series of indictments, guilty pleas and multi-million dollar fines. (16) No doubt more will follow: as I write the investigation has not reached all the top executives and prosecutors have said nothing public about the company's use of its political connections during its heyday or after.

If Exxon's Valdez, (17) Ford's Pinto, (18) the asbestos bankruptcies and the tobacco industry symbolize corporate abuse of customers and other outsiders, Enron stands for the same lack of concern for corporate shareholders and employees. Other corporate law scandals followed the Enron model more or less closely. In Tyco, for example, the company had forthrightly announced its willingness to go to extraordinary lengths to avoid its civic responsibilities, even reincorporating in a foreign tax haven to avoid corporate income taxes; its collapse was precipitated by discovery that its CEO had been evading state sales taxes as well, followed rapidly by allegations that top managers had been using corporate assets for personal expenses and that reported profits were non-existent. CEO Dennis Kozlowski was charged with stealing $400 million from the company. (19) In Aldephia, the CEO and controlling shareholders are accused of looting the company for personal interests. Nine billion dollars of WorldCom's reported profits turned out to be non-existent-the result of simple accounting fraud and manipulation known to many members of its internal accounting department, but its top executives' $100 million gains were real enough. (20) HealthSouth allegedly cooked its books to the tune of $2.5 billion. In other instances, in a variant on an old scam memorialized in the joke about trading a $1million cat for a $1million dog, major telecommunications firms and internet start-ups sold "capacity" (and then bought essentially identical capacity back), or sold expensive advertisements (and bought equal and offsetting ones), reporting the sale as income even though nothing of substance had happened, and, in the more egregious cases, even finding ways to conceal the associated expense.

The drama of these headliners should not hide from view the many other companies that overpaid their executives during the boom or re-stated earnings (or should have done so) after the bubble's collapse. (21) Some of these companies may have been within the letter of the law, but still clearly acting less than honestly. For example, scores of major and minor publicly traded firms granted executives stock options without reporting any associated expense. Although apparently legal, this accounting treatment is clearly dishonest, since it allows the company to give away value without reporting any expense. (22) Similarly, apparently many publicly traded companies now routinely report higher profits to the public than to the IRS. This practice of keeping double books, once thought to be a paradigm of dishonesty, necessarily means that corporations are being less candid or honest in one or the other set of their books and in particular in their public disclosures: any investor would surely consider it material information that the company changes its profits based on what it wants its audience to hear and would want the information necessary to assess whether the company is lying to the taxpayers or to its shareholders. (23)

As purely anecdotal indications of the extent of the scandals, they have supplied enough "bad guys" to fill up at least two competing sets of playing cards imitating the military's Iraq deck. (24) Indeed, by September 2002, Business Week thought it news worthy of a cover story that they had found six examples of "The Good CEO." (25) Executive honesty was entering the ranks of "man bites dog."

Enron, in short, exemplified an era. At its peak, it was celebrated as a new and better way of doing business, making shareholders and employees money by the bushel while increasing the efficiency of our energy markets to everyone's benefit. Enron seemed to demonstrate the power of the market to overcome the inefficiencies of government regulation and internal corporate bureaucracy alike. In retrospect, its economic successes appear to have been mostly smoke and mirrors, with just enough reality to allow a handful of top managers to become seriously rich, apparently simply by lightening the pockets of consumers, shareholders and employees alike. It is only slightly unfair, then, to name the general phenomenon after its one of its most flagrant practitioners.

Treating Enron as the symbolic center is appropriate, as well, because Enron's misbehavior was not restricted to corporate law violations. If Enron's economic successes were mainly illusions, unfortunately its successes in evading the regulatory power of government that was supposed to restrain its pursuit of profit, were all too real. Not only did Jeffrey Skilling leave "step[ping] in if a product is dangerous" to the government, his firm excelled at convincing (or misleading) the government not to object to danger either.

Thus, Enron was involved in classic regulatory corporate scandals - most famously, manipulating the California energy market in ways that appear to have cost the California rate- and taxpayers huge sums and former California Governor Grey his job. The Senate Committee on Governmental Affairs blamed regulatory failure, but it clearly saw the problem as at least as much the other side: "what Committee staff for the majority found was an agency that was no match for a determined Enron." The report goes on to detail extensive, deliberate violation of clear rules and norms by Enron, including a possible $1billion transfer from ratepayers to Enron just before its bankruptcy, market manipulation, illegal trades and so on. (26) Other investigators implicated Enron in other scandals, including major human rights violations abroad. (27)

Finally, Enron was famous for its political connections, which it used, possibly legally but clearly in violation of basic republican principles of a self-governing democracy, to win favors for itself and its favored politicians, and, of course, to reduce the likelihood of the government "step[ping] in." (28) The House Committee on Governance Reform minority staff reports that, "Enron Corporation was President George W. Bush's number-one career patron. Since 1993, Enron and its employees gave the President $736,800 in political and related contributions." (29) Even without White House cooperation, that report was able to document at least 40 direct contacts between Enron and White House officials in 2001, over $3 million spent on 36 outside registered lobbyists at 14 lobbying firms, 73 allegedly personal contacts between the Army Secretary and Enron officials, and other close connections between the company and the upper reaches of the Bush Administration, including deep influence on the Vice-President's Task Force on Energy Policy.

But the President was far from Enron's only protégé or patron. The last report the Enron Political Action Committee filed with the Federal Elections Commission is 967 pages long. (30) The FEC, of course, regulates only direct electoral intervention, not conventional lobbying, so this is only the tip of the iceberg.

Enron, as Skilling's student era quote foreshadows, was acting in the interest of its profit, not the public. Or so one might conclude from a different staff report created for Rep. Waxman. (31) Some of the regulatory failure may yet turn out to be the crude result of pressure from Enron's friends in high places. More seems to have been the result of a climate of businesses-can-do-no-wrong that it, and other companies like it, helped to create and finance. As the Senate Committee staff reported, "Enron was very aggressive about using ... the regulatory process to advance its own strategic business goals and protect its own economic interests [regardless of the public good]," and FERC and other regulators were not equipped to redirect that pressure in social useful directions. (32) Representative Waxman's staff prepared a 13 page listing of regulatory events that contributed to Enron's failure, nearly all of which are instances in which Enron successfully lobbied for a particular rule or result that later turned out not to be in the public interest (in the staff's assessment). Although that report blames "lax regulation" for the problems, surely primary responsibility lies with the malefactor not the regulator, Enron not the government. (33)

So we can add to the definition of Enronitis:

2. A malfunction of corporate governance in which corporations in the pursuit of profit: manipulate markets, deceive consumers, create unsafe or polluting conditions, lobby to change the regulations meant to keep them operating in socially productive ways, commit human rights violations abroad or otherwise act in anti-social, dangerous or socially inefficient manners. Particularly referring to instances in which corporate actors justify the firm's anti-social behavior or anti-republican political interventions by appealing to the norm of profit maximization.

Corporate law, in its share-centered version, teaches that the sole responsibility of the corporate manager is to increase returns to shares. Not only is it "the government's job to step in if a product is dangerous," (34) but the firm, acting in the imagined interests of its fictional shareholders, should view itself as justified in taking any possible action to deflect, distract or avoid the government. We have set the strong forces of the market at war with the weak ones of regulation.

Skilling's statement clearly epitomizes the share-centered view. Managers have one responsibility, and one alone. On this view, managers serve the market, and government makes the market serve the people. But markets are powerful and regulators generally are weak. If we tell our corporate managers that they should pursue profit by any means they can get away with - they are likely to do it, and to get away with it.

B. Reform, Regulation and Repression

In the wake of the 2000 stock market collapse, numerous corporate reform proposals have been made. While it appears that little will change in state corporate law on the books, practice is already different. Corporations are adding "independent" directors; the British norm of separating the CEO from the Chairman of the Board is receiving additional attention; and companies are scrambling to adopt new and presumably more accurate accounting standards. At the Federal level, the Sarbanes-Oxley Act dramatically changes disclosure responsibilities and imposes new obligations on managers. (35) The stock exchanges have enacted some mandatory changes and urged others. (36) The accounting profession's self-regulatory body FASB, which with solid political backing decisively rejected expensing stock option grants in 1994 on the multiple (and contradictory) grounds that they are too difficult to value, that they are already fully disclosed, that they are not really expenses, and that expensing them would hurt reported profits too much, has discovered that the undoubted difficulties of valuation are not a reason to ignore them after all. (37) Many other proposals to increase the power, responsibility or independence of "gatekeepers" such as accountants, stock analysts, lawyers and the SEC are on the table. (38) It is even possible that reforms of the tax code or IRS procedures will prevent future instances of the IRS discovering misleading SEC disclosures and taking no action, or will align tax and securities income accounting. (39)

These reforms are important, widely debated and even possibly still under-analyzed. (40) This Essay, however, approaches the reforms from a more abstract or theoretical perspective.

To date, the Enronitis problem has been diagnosed as a disease of managers who are insufficiently attentive to the interests of shareholders. (41) The medicine has flowed from the diagnosis: the proposed remedies are intended to tie managers more closely to the needs of the stock market. (42) If the Enron problem is the result of too weak a legal mandate supporting the share-centered paradigm of corporate law, the law should step in to support that paradigm. There is much truth to this diagnosis, and the reforms may well mitigate the symptoms, particularly in the short run. Thus, the reforms will make directors more independent so that they can ensure that managers work for the market; shares will be allowed to vote on managerial equity compensation so that compensation plans will be more closely tied to the will of the market; accounting will be more transparent and disclosure more accurate primarily to help the financial markets control managers.

Paradoxically however, and less widely recognized, Enronitis is also the predictable result of too strong a share-centered view of the corporation. The single-valued profit maximization ethos of the conventional share-centered corporation demands that managers teach themselves to exploit everyone around them. It is inevitable that some will learn this lesson so well that they will exploit ever those for whose benefit they are supposed to be exploiting. The more we reform to ensure that managers serve only the profit-maximization ethos, the more we will can expect to see managers who will hunt for new ways to evade the reforms. The share-centered view of the corporation makes the corporation into a machine, efficiently promoting one value at the expense of all others, even when the humans involved would long ago have decided that the interests of the nation, individuals, the environment, legality or simple human decency should prevail. (43) And the power of strong market incentives assures that, all too often, the pressures we are creating to act badly will overcome the will (and enforcement powers) to act in society's interests. (44)

III. The Share-Centered Paradigm: Mutual Assured Exploitation

A. Shares, Not Shareholders

According to the share-centered view of the corporation, the corporation has only one legitimate goal: maximization of share value. (45) Standard terminology states that corporate directors and managers have a fiduciary obligation to act in the interests of the shareholders. In fact, however, the only interests that are considered are those of the role of shareholder, not of the people who own shares. It is a dangerously essentializing fiction to pretend that a human shareholder is necessarily better off if her shares increase in price, regardless of the impact of the company's share-value maximizing behavior on other aspects of her life. The phrase "maximization of shareholder value" misleadingly suggests that share prices are the only values that human shareholders hold. But people have many interests, often conflicting, and few people will consider their interest in maximizing share value to be the most important of all their goals at all times. The share-centered view of the corporation excludes all those other shareholder views: corporations are directed to pursue their shareholders' interests only insofar as they are the interests of shareholders, not bond investors, employees, customers, consumers, neighbors, family members, citizens, carriers of particular cultures, or inhabitants of a limited earth with limited pollution absorption ability. Financial and non-financial interests shareholders might have outside their role in the firm are simply ignored.

Indeed, the share-centered view directs managers to limits their consideration still further. Shareholders investing according to modern portfolio theory are likely to be highly diversified and, as a result, their interests even as shareholders (of many companies) may diverge from the goal of the share centered corporation. If a firm increases its market share and profits at the expense of a competitor (with some benefits to consumers), a pure shareholder who owns shares of both firms will be worse off to the extent that consumers are better off. Only rarely do proponents of the share-centered view of the corporation suggest that corporate managers take into account this type of shareholder interest, perhaps because this shareholder interest in anti-competitive collusion is so obviously opposed to any social interest that might justify allowing publicly held corporations to limit themselves to considering share interests alone. (46)

The share-centered view, in short, models shareholders as if they were aliens, with no connection to the corporation, its participants or their fellow citizens except as undiversified stockholders. The shareholders of the share-centered corporation are not people but legal fictions, roles rather than realities. To emphasize the narrow view of shareholder interests taken by firms seeking to maximize share value, I will speak of share-centeredness, 11pt">share value and share democracy rather than the more euphonious, but seriously misleading term, "shareholder" interests. (47)

B. From Share-Centeredness to Enronitis

In the conventional view, the legitimate function of corporate directors and managers is to work for the shares. (48) All other goals and participants in the firm should be considered as mere tools towards this end: in particular, professional managers acting as the share value norm directs them to, should consider all firm participants (other than the shares) as outsiders, with respect to whom one should decide to cooperate, defect or exploit according to a rational analysis of which practice will maximize share value.

Even when the decision is to cooperate, however, the relationship is basically exploitative. The only reason a manager acting in good faith as a professional dedicated to share value maximization would give anything to any corporate participant (other than the shares) is because he or she believes that doing so will result in more profits for the firm's shares. (49)

The share-centered view of the corporation, thus, directs managers to take an essentially amoral, instrumental view of the relationships in which they are enmeshed. On this view, all relationships are for an ulterior purpose and when they cease to serve that purpose, they should be abandoned. Indeed, the share-centered profit maximization view suggests that a manager who treats corporate participants in any other way is acting wrongfully, violating role morality and perhaps even the law (although the business judgment rule will make enforcement rather difficult.) For example, it is improper - a violation of role morality - to view employees or suppliers as members of a team to whom long term commitments have been made: managers are expected to treat all of the firm's relationships as arms-length bargaining between competitors.

The short trek from the conventional share-centered view of the managerial role to Enronitis is over-determined. Several independent aspects link the two. But the central theme that ties together the routes to Enronitis is the paradox of the managerial role in a share-centered corporation.

Corporate law demands that managers simultaneously be selfless servants and selfish masters. On the one hand, it directs managers to be faithful agents, setting aside their own interests entirely in order to act only on behalf of their principals, the shares. But on the other hand, in the service of this extreme altruism, they must ruthlessly exploit everyone around them, projecting on to the shares an extreme selfishness that takes no account of any interests but the shares themselves, narrowly understood. Having maximally exploited their fellow human corporate participants, managers are then expected to selflessly hand over their gains, ill and justly gotten, to the faceless legal abstraction of the fictional shareholder. Altruism and rationally self-interested exploitation are extreme and radically opposed positions, psychologically and politically. The managerial role is deeply unstable and unlikely to hold.

C. Selfish Shares

In acting altruistically in the interests of their principals (the shares), the manager-agents are directed to ignore the actual human beings who own (often indirectly) the shares. (50) In actual fact, many publically held shares are held by pension funds representing the very employees (and their predecessors) whom managers are directed to treat as arms-length opponents in a competitive negotiating game. More generally, shareholders are the citizenry, or at least the richer half of it: roughly half the shares of publicly-traded corporations are held by institutions that, in turn, represent roughly the top half of the American income distribution.

For most of these indirect shareholders, shareholdings are only a small portion of their wealth (most of which is, rather, their future earning capacity). (51) Thus, actions that are in their interests in their shareholder role are likely to often be in conflict with other, more important, interests. If a firm increases share value by $1 per share by shading its environmental standards or reducing employee benefits, a shareholder holding 100 shares would lose value if she cares more than $100 worth about the environmental damage or the benefits, or as is often the case, is one of those employees. Thus, maximization of share value may or may not maximize value to the human shareholders, depending on the relative importance of the individual shareholder's shares as opposed to his or her other relationships with the firm.

Even if maximization of share value were in a particular human shareholder's financial interests, real human beings have other interests beyond their finances. Few real people are as disconnected from social relationships as the fiction that drives the share value maximization model. It is virtually inconceivable that the entire half of America that holds shares would agree on how to balance their desire for profits in the stock market, on the one hand, with their desires for the many political goods that may conflict with profit, on the other.

Although it may not be immediately obvious in a market centered politics, sooner or later nearly every human value will conflict with profit, and nearly everyone will find some value that is more important than profit at some point. Thus:

Managers are required to ignore these human complexities, instead imagining their shareholders to be essentialized, fictionalized, one-dimensional investors with no commitments, values or relationships beyond the desire that their shares increase in value. (52) Thus, managers are directed to de-humanize even the one group they are not explicitly directed to treat as exploitable resources. Thinking of shareholders as if they were no more than shares -- thin fictions interested in nothing but increasing the value of a particular stockholding at any cost to other moral, political or even financial values -- managers step out of relationship even with their alleged beneficiaries.

Different people will have different lists, but surely everyone can find something that is profitable but nonetheless aesthetically, morally or politically unattractive. Maximum profit for particular companies inevitably will require efforts that will conflict with particular values of individual investors. Shares as constructed by corporate law, in contrast, value nothing but increasing the present discounted value of their long term cash flows (future dividends and final period payment). They represent the selfish gene, the single-minded money maximizer of introductory economic theory, anti-social monomania, all taken to the logical extreme. The people, cultures, and ideas we value are, to shares and their fictional shareholders, just resources to be maximally exploited, never values in themselves. If these shares were people, we'd ostracize them, lock them up - or fight a Revolutionary War of Independence against them.

For, with apologies for this efflorescence of metaphors, the fictional shareholder resembles nothing more than a classic imperialist oppressor. The fiction we have created treats us as if we were a colonized people - to be befriended, used or discarded only according to the interests of the colonizing power. But the colonizer is us and it is we ourselves we are colonizing. Our needs and interests should count for more to us than mere means to the profit-maximization end. Managers serving this imaginary role serve no human being.

IV. Applications: Perverse Results

A. Market v. Agency; Strangers in the Bazaar or Fellow Citizens of the Republic

To better understand how decent Americans working in fine institutions can end up treating their fellow citizens as colonized aliens to be maximally exploited, or as mere means to the end of profit, let us step back to examine some unexpected aspects of the well-known legal norms by which we live. American law, and American culture generally, present at least two radically different norms for treating others; corporate law attempts to mediate the irreconcilable conflicts between them.

1. Market

The market norm is deeply impersonal, individualistic and competitive. In the market, each person can expect to be able to buy or sell on the same terms as everyone else, without regard for personal relationships or personal characteristics. My money is as green is yours; all sumptuary laws, caste privileges, or guild restrictions are presumptively improper in a capitalist market. All that counts is the product that is offered for sale and the money that is offered to purchase it.

At the limit, a fully competitive market, like our stock market, should be anonymous. Since personal characteristics, even personal identity, are irrelevant and should not affect the bargains struck, there is no legitimate reason to know with whom you are doing business.

Of course, sometimes the product being sold is inseparable from the person selling it - there is no way for me to sell my labor skills or expertise or team-building abilities anonymously. But even where anonymity is impossible, market norms seek to exclude personal relationships and personal characteristics to the extent possible, creating a notion of "merit" that is independent of the personal characteristics of the market participant. For this reason, nepotism is illegal in the public sector and questionable if not disreputable in the private one. Discrimination - allowing irrelevant personal or status characteristics to influence a market transaction - is presumptively improper. The market should be not only color-blind, but blind to all irrelevant characteristics. In the market, only skills and cash count; the person carrying them should not. (53)

In short, the market is the world of Sir Henry Maine's contract, in which status, and even relationship, has no place. (54) Similarly, it is the world of Burke's "sophisters, economists, and calculators" with no room for sentiment, tradition or

sensibility of principle, that chastity of honor which felt a stain like a wound, which inspired courage whilst it mitigated ferocity, which ennobled whatever it touched, and under which vice itself lost half its evil by losing all its grossness. (55)

Market is not only impersonal but self-interested. In this sphere, it is acceptable -- even commendable -- for persons with superior information to act on it to the detriment of their trading counterparts. If, for example, I recognize that the painting in the flea market is a Rembrandt, I'm entitled to the coup of buying it for the price of a remnant. In the world of the market, people are imagined to be isolated monads, strangers interested only in getting ahead, with no interest in others except as instruments to their own good. (56)

2. Agency

In contrast, the agency norm is relationship- (and status-) based, altruistic and cooperative. Even abstractly, an agent cannot be imagined to be an isolated individual making contact with other people only to trade anonymously. Nor can the law of agency be imagined to be limited only to policing theft and deceit.

Rather, an agent exists only in relationship to her principal, as someone who has agreed to act for, and under the direction of, the principal. As the Restatement defines it:

Agency is the fiduciary relationship which results from the manifestation of consent by one person to another that t he other shall act on his behalf and subject to his control, and consent by the other so to act. (57)

Moreover, in contrast to the arms-length market relation, agency is a fiduciary relationship. (58) Agents are expected to set aside their own interests and work "solely for the benefit of the principal in all matters connected with [their] agency." (59) While a market participant is expected to bargain hard and to profit maximize at the expense of his counter-party, an agent "who makes a profit in connection with transactions conducted by [the agent] on behalf of the principal is under a duty to give such profit to the principal." (60)

If the market often seems to rely on an image of Robinson Crusoe-like individuals selling their products in an anonymous market, agency relies on more homely, communal pictures. (61) Here the metaphor is of friends sharing, parents and children sacrificing for one another, patriots working for the common good, or the Three Musketeers declaring "one for all and all for one." (62)

Far from anonymous, this sphere is intensely particular and intensely conscious of the differences between otherwise similar people. Relationships are all that count. The agent must treat different people differently. A mother who treated her child and an outsider indifferently would be acting grossly improperly; so would a friend who treated a friend like a stranger, or a citizen who refused to distinguish between compatriots and aliens. In relationships, nepotism is not scandalous but required. Similarly, an agent must always distinguish between the principal for whom she is a fiduciary and selflessly works, and strangers, with whom she, or her principal, remains at market arms-length. Market is a world of strangers ruled by disinterested justice blind to person; agency is a relationship closer to friendship, in which persons are all-important. Self-interested rational maximizers have no place here.

3. Corporate Law's Mediation

Corporate law constructs the corporation as an oasis of agency law in the market. In the market, employees are arms-length contractors each out for their own self-interested good; as contracting opposites, they and their employers are competitors, entitled (within the rules of a fair battle) to fight for themselves as hard as they are capable. But in the firm, they are agents, required to set aside their own interests to work for their principal, the firm itself. As Cardozo put it in Meinhard v. Salmon,

copartners owe to one another... the duty of the finest loyalty. [F]orms of conduct permissible in a workaday world for those acting at arm's length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone but the punctilio of an honor the most sensitive ... Loyalty and comradeship are not so easily abjured. (63)

The agency rules and the market rules obviously conflict, and much of the interest of corporate law concerns the problems that result from the dual role of employees as simultaneously self-interested market capitalists and altruistic, self-less, agents. We sign on as employees in the world of the self-interested, impersonal, arms-length market, but once employed, switch to the altruistic fiduciary world of agency.

But the share value maximization principle disrupts the delicate balance (or churning conflict) of corporate law. It commands managers, in their role as self-less agents, to treat all their fellow agents according to the workaday norms of self-interested arms length conduct in a competitive market place while simultaneously demanding that employees and managers alike act selflessly. As explicated below, this is an impossible task.

4. Creating Cooperation: The Pre-conditions to Agency

In the long run, people learn to cooperate only with those who cooperate back. Only fools or romantic lovers will continue to selflessly sacrifice for someone once they realize that the object of their sacrifice will uninhibitedly take advantage of their self-lessness as if they were arms-length competitors. (64) But few people fall in love with their employers. Therefore, to be successful, a firm must convince their employees to work for it (rather than for themselves) by convincing them that their sacrifices will generate responses in kind. Were they to figure out that the firm sees them purely instrumentally, employees treated by the firm at arms length would treat it in the same way, whatever the law may say about the obligations of agents. Thus, managers who openly treat firm members like arms-length competitors destroy the plausibility of the agency role and violate their own duty to act in the best interest of the corporation.

Managers therefore live a lie. They must attempt to convince employees that the firm will respond to employee sacrifice with cooperation of its own, as if it saw them as partners in a common enterprise bound by mutual responsibilities of agency. But while doing this, managers must always remember that their own fiduciary duty to the firm requires them to be prepared to sacrifice employee interests whenever a rational calculation indicates that defection will gain the firm more than cooperation. The image of mutuality they must project to employees always remains an illusion, because the share value maximization principle requires that employees, like all firm participants other than shares, be treated as mere means to the end of profit-maximization, tools to be exploited rather than partners in a cooperative enterprise.

Managers constructing the firm as a tool to the end of share value maximization treat the people with whom they work as means, not ends. Because they see themselves as competitors with the people with whom they are working, they learn as part of their ordinary life to break ordinary social solidarity. Learning to exploit ruthlessly is surprisingly difficult. This we learned in the first wave of the 1980s LBO boom, when a generation of managers fought bitterly in opposition to the new dispensation of abandoning ordinary social norms in order to get extraordinarily rich. But cynicism can be learned, and managers subjected to the powerful incentives of the share value maximization principle do eventually learn it. Successful managers learn to project solidarity while watching, always, for the chance to defect.

This training, however, surely creates cynics, not faithful agents. As a rule, one does not learn to be a saint by daily sinning. (65) A manager whose lived experience is a pretense of selflessness (with respect to employees, customers and business partners) covering real disinterested exploitation (on behalf of shares), is unlikely to suddenly see himself as "in a position in which thought of self was to be renounced, however hard the abnegation" (66) and voluntarily hand over these hard-won gains of competitive practice to his principal. If you can - quite properly - lie to your subordinates, why not your superior as well? Learning to be a rational maximizer is simply incompatible with being a faithful, selfless agent.

In the end, the cynicism of the share value maximization view must eat itself alive. The principle commands managers to abandon the ordinary ties of human solidarity: to maximize profit, they must be prepared to sacrifice their co-workers, their suppliers, the cities or communities they operate in. Successful managers learn to live in a world in which there is no loyalty and all relationships are purely instrumental, lasting only so long as they remain mutually beneficial. Only the share relationship is said to be different. But there is no good explanation for why loyalty to shares should be real when loyalty to all people is illusory. The rootless, commitment-less, value-less, manager is unlikely to suddenly become loyal, rooted and spiritual just because shares are at stake.

The share value maximization principle teaches managers that they are acting properly only if they treat the people around them as mere tools, to be used or discarded as needed to fulfill the firm's share value maximization ends. But if it is permissible, even required, to treat all the human participants in a firm as tools, why are shares different? Why not exploit them as well? This key route from share value maximization to Enronitis, then, is straightforwardly psychological. The profit principle is incompatible with the selfless sacrifice for shares that it demands.

B. Corporate Finance and the Specialness of Shares

The psychological difficulty of maintaining an extreme lack of commitment in every aspect of professional life except with regard to shares, of treating every corporate participant but shares as a mere tool, and of competing at arms length with every corporate participant but shares, is compounded by the problem that managers are also taught that shares are identical to all those corporate participants from which they are supposed to be different. Modern corporate finance theory -- part of every MBA curriculum -- teaches that shares, like every other firm participant, are simply fungible inputs. In particular, it implicitly contradicts naive theories of shares as "owners" of the firm which might, were they plausible, give managers some justification for treating shares differently from other factors of production.

1. Shares as Factors of Production

Start with the Dodge v. Ford view that shares are different. In ordinary usage, the share-centered view of the firm is conflated with the claim that the corporation should profit maximize. Accounting conventions derive from and reinforce this view by treating benefits to shares as profit while benefits to all other corporate participants are treated as costs (with the anomalous exception of stock option grants to employees). As the accountants portray the firm, payments to shares (i.e., dividends) - unlike payment to any other factor of production - do not reduce profits. Moreover - in stark contrast to the legal reality - accounting conventions portray shares as having the sole claim on whatever is left over after other firm claimants are paid ("shareholders' equity").

Corporate finance teaches that this picture is false, in a way that resonates with the experience of any big company manager. (67) From the publicly traded firm's perspective, capital is just one factor of production like all others. Firms need to pay to obtain raw materials, they need to pay to obtain labor, and they need to pay to obtain capital. To buy (or rent) capital, they must pay either interest or dividends. On this view, dividends are an expense and sales of shares are simply a way of raising money, to a large extent fungible with other methods of raising capital (such as retained earnings or borrowing). Part of the job of the top managers of the firm is to obtain capital in the cheapest way possible, by shifting between retained earnings, bank borrowing, bond sales and equity sales according to the relative pricing of those funding sources, in pursuit of the usual goal of maximizing the returns to the firm.

This view, which is common in corporate finance circles and is likely a daily part of most CFOs' decision-making process, conflicts at the most fundamental level with the share centered view, because it treats shares as a cost like all others. Just as all other inputs to the firm should be given as little as possible, so too shares. Indeed, for a manager who is accustomed to financing the firm in the cheapest way possible, offering gifts to shares may seem like a violation of the profit maximization principle itself.

From the perspective of corporate managers and the bankers who advise them, shares are fundamentally a way of raising capital, largely interchangeable with the other ways of raising capital -- borrowing money or retaining earnings (i.e., paying the various factors of production of the firm less than the revenues from sale of their product). On this "nexus of contracts" view of the firm, shares are merely one role among many that make up the firm. To be sure, shareholders who purchase their shares in an IPO contribute cash and some risk bearing services, accepting returns that are closely tied to the success of the company. (68) But bond buyers also contribute cash to the firm, and the value and returns of junk bonds fluctuate in close connection with the fortunes of the company. Similarly, employees, especially if they have developed company based skills or commitment not easily marketable or transferable elsewhere, if they have significant retirement savings in the company's stock, if they are compensated based on company-seniority, or if they are paid in part in options or stock, also find their fortunes closely tied to the company's and bear much of its risk. Indeed, whenever labor markets are not perfectly flexible, employees are likely to be the most closely tied to the company of all: unlike either shareholders or bondholders, they cannot diversify.

The largest source of investment capital in modern large firms is retained earnings, not share or bond issuance. If the firm is able to retain earnings, by definition it must be paying its various factors of production less than it is able to sell its product for. This suggests, however, that all the factors of production have contributed to the firm's retained surplus: not only have shares foregone dividends, but employees have foregone raises, creditors have foregone higher rates, citizen-taxpayers have foregone higher taxes, and customers have foregone lower prices.

On the corporate finance view of the firm as a nexus of contracts, there is no moral or economic reason to assume that one of these factors has a stronger claim on the surplus than the others. Neither the Marxist view that all value is contributed by the employees or the obverse claim, sometimes made in shareholder circles, that the shareholders are the sole source of profits, makes much sense. The corporate product is a joint effort of all the factors of production, each one of which is likely to be a but-for cause of the company's success.

Still, common sense suggests that shares usually will have the weakest economic claim to the corporate surplus on corporate finance or nexus of contracts views. Public shareholders, after all, are perfectly fungible providers of a perfectly fungible commodity (cash) in a quite competitive market. Of all the various contributors to the final corporate product, they are the most easily replaced. It is hard to see why an arms-length contractor would ever pay them more than the market price - that is, a normal return to capital.

If shares are just factors of production, the share value maximization norm implodes. That norm teaches managers to treat factors of production as tools to be exploited, or at least given no more than necessary in arms length negotiation. Predictably, some managers will apply precisely the same logic to the shares themselves. What is sauce for the goose is sauce for the gander. If investors have agreed to buy shares that have no legal right to a dividend, why should they get one? To give them one would be a free gift, and the maximization principle teaches managers that they should not give gifts.

2. Managerial Agency in the Corporate Finance World

At this point, the situation gets even worse. If managers have learned to be maximizers, but reject the argument that they must sacrifice themselves for the shares, for whom will they maximize? The cynic's answer must be correct: share value maximization produces cynics, and cynics work only for themselves. All bonds of loyalty and mutual respect having been broken, nothing is left for managers but to maximize their own individual wealth before their (always imminent) retirement (or firing) date. This is the logic of corruption well known to students of failed governments: steal as much as possible before the next group of reformers (or aspiring corruptionists) push you out to do the same. For the cynic trained in share value maximization, even the only value permitted by that norm, the only loyalty left, will soon seem just a tool. The new rule will be: maximize share value only to the extent that it is useful for personal pocket lining.

Often, of course, increasing share value will be the best way for managers to line their own pockets. It is easier to take a big piece of pie when the pie is big and growing. Similarly, often the most cynical and instrumental of managers will find that it is instrumentally useful to create a quality product or have happy employees. But there is no necessary connection: an illusion of a quality product will often do just as well as an actual one, particularly in the short term, and similarly, illusions of profits will often do just as well for a while. (69) In the long run, of course, illusions tend to be exposed; but top managers rarely have a long run, and chances are excellent they will be gone before the fictions are apparent even to their authors.

3. The Ownership Metaphor

If shares are not different because they make a contribution to the firm that is different in kind than other factors of production, perhaps they are entitled to be the special objects of managerial concern for another reason. The traditional claim is that the shares "own" the firm and therefore are entitled to have it be run for them. Unfortunately, the reason shares need the ownership metaphor to justify their claim to the corporate surplus is precisely because, unlike owners, they lack the power to take it on their own.

The ownership metaphor, meant to differentiate shares from other corporate roles, is deeply implausible. In a public firm, shareholders own their shares. But they have few of the legal rights of owners of the firm, do not act like firm owners and do not have the normal significance of owners in the firm as a sociological entity. (70)

An owner of a fee simple absolute in real estate or the holder of title to chattel has the rights (subject to general legal regulation such as zoning or environmental laws) to decide to what use her property shall be put, has the right to refuse to use it in profit-maximizing ways or even to destroy it, may consume it or save it, apply it to good works or the opposite. Neither a home-owner nor a closely-held business owner has any duty to anyone to act in a way that an economist would recognize as economically rational.

In contrast, shares have none of these rights with respect to public corporations (so long as the company remains public). Our system of corporate law and securities markets has no mechanism by which a majority of shareholders could direct (or authorize) the directors to change the use of the corporation's property, place another value ahead of share value maximization or even pursue profit in a particular way. Rather, shares have only the rights to a pro rata share of any distributions the corporate board chooses to make; the right to vote for that board; and the right to approve or reject certain changes in their rights proposed by the board, without, however, the right to initiate such decisions.

Not only do shares lack the rights of individual owners, they lack even most collective rights. In practice, board members are nominated by incumbent management and usually elected without opposition. On the rare occasions where opposition appears, the rules are anything but democratic: management's candidates have full access to corporate resources while opponents are on their own. Even if they elect a board, shares have no right to have the board act according to the wishes of the majority of the shares or shareholders. Rather, board members have a fiduciary obligation to act in the best interests of the shares as constructed by the courts without regard for the expressed desires of the shareholders, and that duty is enforceable by even a single share.

Only if shares act with one voice, unanimously, so that there is no plaintiff to enforce fiduciary duties and the board may be disregarded, do shares have the rights of owners. Accordingly, the one serious ownership right that public shareholders have is the potential to sell their shares to a single buyer, that is, to take the company private. But since the development of the poison pill and its statutory equivalents, shares no longer have the right even to sell the company unilaterally: prior board approval is required for sale of all the shares just as it always was for sale of the company.

Far from being owners, then, in the usual course shares are just another input into the firm. As we saw above, they are largely fungible with other financing sources. It is thus hard to see why they should get something that others do not.

Owners in a capitalist society justify their rights by their function: as holders of the right to decide how property should be used, they are potentially entrepreneurial decision-makers. If there is anything that the shareholders of a public firm are not, it is that. Indeed, the closest equivalent to the entrepreneur in the public firm is the top managers themselves, who are the ones to decide what risks to take. It is a short ideological step, and an almost inevitable psychological one, for managers who act like owners to begin to view themselves as the owners in fact. Again, the strain on the share-centered agency view of the managerial role, in which managers are supposed to set aside their own interests in favor of the shares - now seen as nothing more than fully fungible inputs to the firm - seems impossible to sustain.

4. The Diversification Problem

Additional pressure on the share-centered view of managerial duty comes from another aspect of corporate finance. Shareholders in a modern publicly held firm typically are diversified portfolios, the interests of which are often contrary to the interests of individual firms in a competitive market. (Diversified portfolios do not benefit when a portfolio company out-competes another portfolio company, particularly if the competition results, as it is supposed to, in collateral benefit to non-publicly traded consumers.)

Moreover, while shareholders do not own the corporation in any meaningful sense, they do have most of the usual panoply of ownership rights with respect to their shares. Shareholders, that is, actually own shares. It is shares that they buy and sell - often with considerations other than the interests of the company represented by the shares they are trading. Every shareholder who buys or sells based on a view that the market has temporarily misvalued a firm's securities is acting in a way that is not congruent with the interests of the company itself.

Shareholders do not consistently act as if they have the interests of the company at heart. Purely fungible providers of a purely fungible commodity, inputs like every other corporate participant, lacking the usual attributes of entrepreneurship or ownership including legal rights to use and control the assets, dehumanized and deracinated by the market and the legal demands of best interest analysis, the shares don't look like the company or behave as if they had its interests at heart. No wonder it is difficult for company managers to maintain the fiction that the shares are the company.

C. The Highly Paid Executive Problem

As is well known, top manager pay packages have soared in the last several decades, reaching astronomical levels previously enjoyed only by entrepreneurial owner/founders and their descendants. (71) By the logic of the share value maximization model, this high pay suggests that CEOs are more important and more deserving of high pay than ever before. For when CEOs are seen as outsiders - factors of production and arm-length market participants to be negotiated with according to the norms of the marketplace - there are only two possibilities: any time they do not deserve to be fired, they deserve a raise. The reasoning is slightly paradoxical but psychologically clear.

Under the share value maximization principle, managers are directed to view themselves as selfless agents acting only on behalf of the shares. In their mission to maximize share value, they should treat all employees, including themselves, as mere means to that overriding end: they - like all corporate participants - are valued not for themselves or as ends or values in themselves but merely as tools to increase share value. Perversely, the view of managers as obligated to exploit themselves can lead to an enormous over-valuation of managers.

A profit maximizing firm treating employees purely instrumentally will always seek to pay employees less than they contribute to the firm. Managers act as fiduciaries for the firm. At the same time, they are employees and tools to the end of firm profit maximization. Thus, in their fiduciary roles, managers are directed to treat themselves in their employee role as tools.

As fiduciaries, the only reason that can justify managers' decision to pay any employee (including themselves) anything at all is that the employee contributes more to the firm than the pay. So if manager-fiduciaries are doing their jobs, they are paying manager-employees less than they are contributing to the firm.

But this basic pay principle works both directions. In a market relationship, any party to the bargain is entitled to attempt to obtain full value for their contribution. At equilibrium, indeed, the price of each firm input (including managers) should equal its marginal contribution. So manager-employees are entitled to demand they be paid their full contribution to the firm.

Combining the two roles, it follows that either managers are not doing their jobs, or they are paid less than they contribute to the firm. Which is to say, either they should be fired, or they deserve a raise. Always. Either the CEO is contributing more to the firm than he (rarely she) is taking from it, in which case the firm is exploiting him and he is fulfilling his fiduciary obligation (in his role as an agent of the firm) but clearly is entitled to demand a raise (in his personal capacity as a free-market free agent). Or, he is not pulling his weight, he is exploiting the firm, and he is not merely presumptively incompetent and overpaid, but also dishonest - in breach of his duty as an agent and a professional. In short, he should be fired summarily. The logical conclusion is simple: if the CEO does not deserve to be fired, he deserves to be paid more.

Presumably, ordinary processes of cognitive dissonance will prevent most CEOs from concluding that they deserve to be fired; instead, they will conclude that they deserve an ever increasing share of the corporate pie. The same processes of cognitive dissonance will lead boards to the same conclusion: if they are not making a major mistake or even breaching their own fiduciary duty, then they have chosen a CEO who is contributing more than his pay. Either he (and the board which failed by hiring and retaining him) should be removed, or he deserves the raise he is requesting.

The model here is similar to but more dramatic than the well-understood way in which the reform of having CEO salaries set by independent committees employing independent consultants led to rapid increases in CEO salaries. Any board that hires a mediocrity to run its company is surely derelict in its duty. By the logic of cognitive dissonance, it follows that boards must believe that the CEO they employ is not mediocre: otherwise they would be obliged to fire him (rarely her). But if he is not mediocre, it would be insulting to pay him a mediocre salary. Similarly, in times of transition, offering a mediocre salary to the newcomer suggests that the board is seeking mediocrity, which would be a dereliction of duty. Accordingly, board members who wish to believe that they are acting in good faith appear to have only three choices: pay the CEO an above average salary, fire the CEO, or resign. When all boards seek to pay their CEO an above average salary, inflation is a highly predictable result.

Thus, the share value maximization model invites CEOs, acting in good faith on behalf of the firm, to see themselves as underpaid. Simultaneously, it invites directors to see themselves as required to pay above average salaries to top managers. At the same time again, it tells CEOs, in their personal capacities, that their personal interests are, and should be, opposed to the firm's. They, after all, are mere factors of production that the firm should exploit. But that also means that as contracting parties they are entitled to exploit the firm if they can get away with it. In most firms, I imagine, the former processes are enough to make CEOs rich beyond imagination. In a few, apparently including WorldCom and Enron, the latter encourages outright theft.

D. Share Centeredness Opposed to Team Spirit

The share value maximization ethos treats all the people with whom managers have day-to-day relations as competitive opponents. On this view -- given its clearest academic representation in the metaphor of the firm as a "moment in the market" -- the firm is imagined to be composed of self-interested market participants whose only interest in other human beings is to use them to maximize their own wealth. Perhaps it is an exaggeration to say that "in the groves of their academy, at the end of every vista, you see nothing but the gallows." (72) But certainly in these groves, there are no office romances. Not even friendships.

Contrary to this individualist ideology of mutual exploitation, firms in fact have many team-like and communitarian aspects, and, indeed, successful firms generally are quite unlike moments in the market. While this is not the place to argue the point, if the key to success were to be market-like, firms would be out-competed by real markets, which are always more market-like than the most market-like firm. (73)

Most Americans spend a good part of their waking day at work; workplaces, therefore, are likely to be major sources of our social lives, relationship building and communities. Not all capitalist labor is alienated, notwithstanding Marx, the share value maximization principle and the best efforts of many human resources departments. (74) Many of us make friends at work, see our fellow workers as team members engaged in a common enterprise, and identify with the common project as our own project. All this is natural, normal and usually for the best: human beings are social animals who seem to seek out opportunities for community building.

Most often, team spirit and community are also helpful to the success of the firm. When people believe they are part of a team, they work harder, demand less in return and enjoy themselves more. Members of a team pull together for the common goal, setting aside individual egos and needs (at least outside of NBA basketball) in order to focus their cooperation in competing with the other side. Soldiers, perhaps the quintessential team members, risk their own lives to protect fellow team members (most personally, their squad members; more abstractly, their fellow countrymen). In risking their lives, they show the highest form of altruism within the team -- no profit maximizer would ever be willing to give up life itself for someone else's benefit.

1. Team Competitiveness

At the same time, the internal altruism of the team is usually accompanied by intense competition with non-team members, generally seen as opponents in a zero-sum game. Soldiers and football players alike use their intra-group cooperation and altruism in order to attack the enemy, often dehumanized or devalued into gooks, wogs or simply those jerks on the other side of the stadium. Nationalists combine love of the nation with hatred, or at least intolerance, of non-nationals; patriots are willing to sacrifice for the good of the country, but understand that good to be in competition with the good of the neighbors. We should all pull together, to pull ahead of them.

In the corporate world, team competitiveness is reflected in the war-like metaphors of salesmen and the takeover world - hostile takeovers, barbarians at the gate, white knights, scorched earth and poison pill defense - as well as the zero-sum games of market share competition and the fundamental market rule of 'exploit thy business partner' or take advantages when the opportunity offers.

2. Team Pathology

Team spirit is a good so powerful that team players with strong communities seem to live longer and healthier lives. (75) Yet it can easily become pathological: good citizenship easily moves from patriotism to nationalism to xenophobia or worse. Intra-group solidarity and mutual aid can often be accompanied by extreme disregard of larger norms or the claims and humanity of non-group members. In the corporate context, team pathology is common enough, manifesting itself in cheating and law violation. Corporate team members can become so concerned about winning for the team that they disregard external norms requiring solidarity with larger groups of people: driven to win, corporate players begin to feel corporate solidarity justifies cheating customers, evading national taxes, regulatory schemes, or environmental laws. Playing dirty, in short.

Some observers have not discerned much team spirit at Enron itself. The "rank and yank" system of ranking all employees every six months and then firing the bottom 15% led to a good deal of internal backstabbing and corruption. (76) Nevertheless, much of Enronitis, and corporate malfeasance at more typical firms, seems to relate to this pathology of competitive team spirit: outsiders don't count; rules are made to be broken; winning is all that matters. One may disregard the interests of Californians, because the mission is to promote the interests of Enron.

3. In Praise of Teams

Human communities, the teams I've referred to above, often couple extreme altruism and mutual concern within the group with a striking lack of concern or hostility to those outside the group. The two processes, altruism on the one hand and competitive hostility or arms-length indifference on the other, seem tightly linked in our psychology. Many people have fond memories of war (or a peace movement) as a time when ordinary people came together in a common enterprise for the common good, escaping the alienating individuality of ordinary times -- even though the common enterprise was hostility to some other group. (77)

In the corporate context, forming the team is one of the key advantages of firms over markets. Markets price better, can incorporate more information than any plan, and have obvious and precise motivators. Firms generally blur and dull those mechanisms and incentives -- for example by delinking pay from direct measures of productivity, quality or demand for the individual's products. (78) Team spirit, with its solidarity and internal altruism combined with aggressive competition with outsiders, can be the tool that overcomes the inherent limitations of command and control market displacement, allowing firms to out-compete spot markets.

4. The Instability of Teams in the Share Value Maximization World

The importance of intra-group team spirit in corporate enterprise is no news: it is a commonplace of managerial training. But the share value maximization principle puts a strange twist on team spirit. It teaches managers that the humans who work for the corporation are not its team but rather the opponents.

Managers who accept the commonplace that team spirit works and also accept that their job is to maximize share value, are bound to live a double life. In order to maximize share value, they must convince their fellow employees that they are all in the game together, part of a common enterprise, sacrificing for a common goal. But the game and the goal is to extract the most value out of the supposed team members and give it away to someone else, a fictional bystander not even present at the game. At the same time that managers are building team spirit, they are required to be looking around for opportunities to shaft their fellow team members.

The key advantage of team spirit for rational managers is that team players are not rational maximizers. Team members give towards the common goal without expecting precise compensation for every act. They are motivated not by self-interest but by community feeling -- positive towards fellow community members and negative towards outsiders. But this very altruism opens them to exploitation by a supposed team member who is really an opponent. When someone is giving their all, they are particularly open to being taken all the way.

Managers, then, are caught in a double game. The share value maximization principle tells them that their real team is the shares: they are meant to compete with everyone else in order to win one for the shares. To serve their true masters, they must convince their fellow employees, customers and suppliers that they are all on the same team -- that is, that they are engaged in a common enterprise for a common goal. Or, in other words, that they, as managers, are not serving their true masters. Then, they must betray them. Surely only the most extreme of cynics can succeed in this role.

But a manager who has learned to betray those he or she works with every day, pretending to be their teammate while constantly seeking opportunities to exploit their communal good feeling, is a manager who has learned to be dishonest, a dissembler, a traitor to his small community, a breaker of trust. Why, having betrayed his trust to the team that he works with every day, should he remain loyal to a fictional shareholder that doesn't even exist except as a legal abstraction or an investment portfolio?

The share value maximization scheme teaches managers to betray the people with whom they have relationships in order to serve their ultimate master. It should be no surprise that some learn this lesson well enough to betray the master as well. Double agents, in the end, work only for themselves.

In short, share value maximization teaches that the real team is the shares and their servants the managers; but enterprise success depends on creating a team composed of employees and often customers and suppliers as well. The two team notions are incompatible. While the latter requires mutual concern and trust, the former constructs members of the firm as opponents, to be treated somewhere between arms-length according to the norms of the market, in which mutual concern is absent, and active competitive hostility, in a zero sum game in which every gain for one side is a loss for the other. The one requires trust; the other bars it.

Enronitis is a predictable pathological result. The team breaks down into a one-on-one competition of every man to himself and the devil take the hindmost. All that remains of the team spirit is the disregard of rules, the desire to win at all costs, and the depersonalization of opponents, now understood as everyone.

V. Policing Share-Centeredness: The Reforms

Many of the proposed post-Enron reforms are steps in the right direction, although taken as a whole they seem unlikely to solve the problem. A few, however, may well accentuate the pathology, much as the independent compensation committee and tax-law insistence that salaries over $1 million be performance-based worsened the problem of overpaid executives.

A. Disclosure

First, improved disclosure is a good thing, if not necessarily for the reasons usually given.

The prices of publicly traded stocks are related to the profits of the underlying corporation, but as anyone who followed the market on its way up and down in the last few years is aware, the connection can be very loose. Stock markets often price shares based on expected earnings (or on expected price gains resulting from expectations of expected earnings), placing greater weight on trends and patterns than on the current absolute numbers and increasing or decreasing stock prices disproportionately for changes in trends. This provides cynical managers a great incentive to massage the numbers or even lie: a few well timed disclosures can cause a terrific price increase (or avoid a decrease) allowing top managers, who are nearly always near the end of their employment, to cash out before the truth emerges.

Moreover, even managers who have not succumbed to ultimate cynicism may convince themselves that they are doing their jobs by managing reported earnings. The share value maximization ideology perversely suggests that corporations ought to manage their disclosures in the way that maximizes market valuation of their securities, rather than in the way that most accurately reflects their underlying condition: if the goal is to increase the value of shares, and any means will do, why not deceive shareholders for their own good? (Of course, deception cannot be to the good of actual shareholders as a group, but it can effectively increase share price for some period of time, and the latter may be the more salient effect even to managers still trying to act as good faith agents. (79))

Much market behavior seems to be the result of this perverse incentive. Because the market is quite sensitive to changes in disclosure, companies find that they can affect stock price as much by manipulating disclosure as by the more difficult task of out-competing their competition. If reported earnings can be increased or reported debt decreased by changes in financing or reporting or strategic acquisitions, the share value maximization ideology suggests that managers ought to do so, even if there is no real economic justification for the action.

The basic problem is managing the company according to the whims and prejudices of the stock market; reforming accounting rules or forcing CEOs to swear that they have not lied will not change that. But accounting anomalies make a bad problem worse. If companies can create reported earnings by "round trip" trades, they will waste social resources and distort their reported earnings by making round trip trades. If executive stock options have no effect on the company's reported financials, they will be used more. If accounting for merger rules allow the combined company to have higher reported earnings than did the parts of which it was made, companies will combine even when no efficiencies result.

The reforms, of course, will create new and sometimes odd market incentives. If stock options are reported as an expense at the time of issuance based on their Black-Scholes value, and then companies correct the accounting when they are actually cashed in, the effect may be to smooth earnings oddly: when stock prices are down, options will expire unused, and the company will be able to report "earnings" resulting from reversing the too-high estimate of the cost of the options. Marking to market periodically would lessen the jumps in earnings but not change the effect of generating "earnings" for no reason other than stock price drops.

But overall, surely, honesty is better than deception. The fierce resistence to disclosing options suggests that executives, at least, believe that the market responds to the reported bottom line numbers rather than the underlying reality or even the total information publicly available (which these disclosure reforms will not change), and it seems most likely that they are right.

Moreover, the end-stages of Enronitis involve deliberate deception and outright fabrication. Reforms that seek to increase the independence of auditors, demand stronger audit committees, require rotation of audit partners, separate auditors from consultants, and the like, seem quite likely to catch more fraud and perhaps even limit some of the semi-bad faith game playing. Increasing nominal criminal penalties seems less likely to have any effect. These reforms do not, however, change the underlying incentives to cheat, so we should expect that as we close up some obvious routes, clever cynics will find others.

More disclosure than is currently on the table might help even more. For example, apparently some public companies report one set of earnings to the SEC for public disclosure, showing high profits, and another different set of books to the Internal Revenue Service, showing low profits, for tax reasons, which the IRS does not make fully public. (80) Under this system, managers serving the share value maximization norm predictably will stretch accounting conventions as far as possible in both fora, with only the good faith of managers and the limited resources of the governmental agencies standing in the way of powerful incentives to outright fraud. Private market incentives to exaggerate are limited only by governmental enforcement.

Reversing the rule would reverse the incentives and produce better results. If the IRS revealed the numbers submitted to it, or if the SEC ruled that double bookkeeping is prima facie evidence of a fraud on the market place, companies might have some reason to seek a single set of numbers that accurately represented the economic functioning of the firm. Even if that is too optimistic, at a minimum managers would seek to present a single set of profit numbers defensible in both fora. Instead of pushing to the limits of the law, companies might seek to live by the spirit of at least one of the two systems.

Finally, disclosure is important well beyond the narrow conceptions of securities law. Market for lemons often prevent profit-maximizing companies from acting in socially valuable ways even when consumers would be willing to pay private fees for public goods. Thus, companies might well be able to charge higher prices for products with lower associated pollution or fewer social externalities. Not all consumers free ride all the time. But consumers are unlikely to decide to voluntarily contribute towards maintaining the commons if they cannot even tell if the higher price is associated with greater social responsibility. Companies required to disclose the pollution associated with a product on its label, or to explain the testing they've done or not done, or to detail the externalities associated with their processes, or to state the wages they pay in their factories abroad, might well find that the consumer markets would reward efforts to behave in more socially acceptable ways. Especially if a securities-like private right of action gave companies and consumers some assurance that false disclosures stand a good chance of being quickly and punitively disclosed.

In short, corporate disclosure and transparency is important well beyond the stock market. Corporations are part of our collective governance structure. As citizens, we must know what they are up to if we are to intelligently evaluate how to control them - both externally through regulation and internally through corporate law and market processes. Not only the stock market but t he consumer markets and the general political process depend on full disclosure. (81)

B. Independent Directors

There has been a good deal of discussion of continuing and accentuating the reforms of the last decade, primarily by increasing the number of independent directors; marginally tightening the definition of independence to exclude some former employees, contractual beneficiaries of the company or relatives who might be considered independent today; and by increasing the number of consultants used by audit, hiring and compensation committees. (82)

The model outlined in this Essay suggests that these reforms are unlikely to work as expected. If independent directors and their consultants view themselves as working for the shares or fictional shareholders, they will simply increase the perversities of the share value maximization model. By demanding that managers conform to the model, they will accentuate its incoherence. Managers will be driven to exploit their corporate team members even more, thus leading former team members to see themselves instead as free agents. Top managers attempting selfless selfishness will sink into self-interested cynicism. Corporations attempting to maximize share value will still find that often the easiest way to do that is to show Wall Street what it wants to see, regardless of whether it is what otherwise would make business sense. Top managers will, after a brief slowdown during the current scandals, continue to increase their share of the take, as the ineluctable logic of Lake Wobegon drives consultants and independent directors to conclude that they must pay above-average employees above-average salaries, and the agency principle requires that they convince themselves that their overpaid executives are contributing ever more to the firm as they take more from it.

The reality is that most independent directors are not particularly independent, and that seems unlikely to change. For good reason, consultants and incumbent managers alike are likely to look for, basically, other CEOs. No one else, after all, is likely to have the expertise to police managers. But CEOs sitting on each others boards are unlikely to criticize their peers too stringently. In any event, even if they had the inclination, directors rarely have the time or information necessary for serious review of company managers (and this problem is likely to be even worse for directors who are not themselves senior managers elsewhere). Thus, directors, nominally independent or not, are not likely to stand in the way of any but the most egregious managerial abuses.

But the point of this Essay is that truly independent directors, if they are or view themselves as answerable to the portfolios or fictional shares, will just make the problems worse. Enronitis ends in betrayal of the shares, but it begins in share-centeredness itself. Increasing share-centeredness will not cure this disease.

VI. Reconceptualizing Corporate Law: Making Space For Citizens

A more effective reform program must begin by recognizing the perversity of the share value maximization model and offering an alternative ideology of corporate governance. But it cannot end there. The selfish share may be a legally constructed fiction, but the law and our stock market have given it enormous market power to enforce its fictionalized, constructed will. Directors and managers have only limited ability to unilaterally reject the demands of the share value centered model before the market, as currently regulated, will oust them. Moreover, the easiest reforms -- shifting power from the market to managers or boards they effectively dominate -- are more likely to empower the truly cynical among managers, the solo players who have lost all social constraints, than they are to create a more desirable corporate ethos. If we free managers from shares, the most likely immediate result is that they will steal more freely.

A. Corporation as Polis: An Alternative Ideology of Corporate Governance

For a start, we need an alternative metaphor to the corporation as its shares, and a different explanation of the purpose and reality of public corporations, one that does not invite a destructive war of all against all. Hobbes proposed to end his war of all against all by characterizing the state as a corporation. (83) I propose to reverse the process, and recharacterize the corporation as a polis, a community of all its human affiliates, not the shares.

The advantages of the metaphor of the corporation as a quasi-municipality or quasi-state go well beyond the probability that it would induce law faculties to seek political theorists or moral philosophers rather than law-&-economists to staff their corporate law curriculum.

1. Polis to Politicians

Principally, the polis metaphor, like earlier "managerialist" understandings of the public corporation, emphasizes the common enterprise of the various corporate participants. Corporate managers instead of conceiving of themselves as selfless, unsituated rational maximizers could rather see themselves as statesmen, promoting the common good of all corporate participants, and, in our multiple-sovereigned system, as participants in the American governance system required to promote the good of all citizens.

On this model, it is clear that the corporate team extends well beyond the shares. It would, therefore, offer a rationale for acting for the good of corporate participants as ends in themselves, rather than simply because treating them in an apparently good way is the best way to extract more out of them. But given the vague limits to "corporate stakeholders" in a firm that, understood as a nexus of contracts and externalities, lacks determinate or firm boundaries, the polis metaphor offers a rationale for managers to consider the public good generally, even beyond the narrower interests of corporate participants.

This broader conception of the managerial/director role is not an unmitigated good. Statesmanship is difficult. Many aspirants to the title have been cynical charlatans or self-interested deluders (even self-deluders). No doubt many managers will be able to explain to their own satisfaction why the common good requires precisely their private good. Moreover, the public good is often controversial, and there is no reason whatsoever to think that unelected corporate managers, or directors nominally elected by shares on a basis of one dollar one vote, will reflect in their views the divisions of the citizenry as a whole. Managerialism is a poor substitute for democracy. Still, unlike the reigning share centered ideology, working for the good of all corporate participants does not require managers to take inconsistent positions, play cynical double games, or deliberately lull people into trusting them when they know they will be required to take advantage of whatever trust they achieve.

2. The Struggle Over Surplus

Second, the corporation as polis emphasizes the open-endedness of the struggle over corporate surplus. In this way, it is quite different from the older managerial views, which often seemed to conceal the possibility of conflicts within the corporation under a veneer of professionalism. The polis metaphor is meant to emphasize that there is no "scientific," neutral or professional objective solution to the problem faced by managers. The issues are value laden, not professional: what kind of society we wish to be or how to mediate our conflicting values, not efficient administration.

Share-centered models define profit as what is left over after all corporate factors other than shares have been paid, and insist that all those corporate factors be paid as little as possible. The corporation as polis matches economic reality more closely. In the polis model, corporations can out-compete markets only when the combined contributions of all the corporate factors of production (including labor as well as investment capital, whether in the form of debt, equity or retained earnings) produce more in cooperation than they would in market competition. That excess is the corporate surplus, and it is available to be given to any factor of production, none of which has an a priori exclusive claim to it.

On this understanding of corporate surplus, the surplus is called profit if it is retained by the corporation or paid out to shares. If it is paid out to bondholders, it is called attractive interest rates; if it is paid out to employees, it is called decent working conditions, good benefits, competitive wages/salary or hard-earned executive stock options; if it is paid out to consumers, it is called every day low pricing; to the government, taxes; to suppliers, high prices; to stockholders of other companies, investment bankers and lawyers, acquisition costs; to architects and builders, a landmark headquarters; to the eco-system, ecological responsibility. Like the apocryphal Aleut languages with 35 words for snow, we have many words for corporate surplus. For political and economic purposes, however, the distinctions are not as important as the commonality. This is money that is available for someone to take and no one "owns" it until the struggle to allocate it has concluded.

3. Politics Not Administration

Third, the political metaphor emphasizes the political nature of the decisions that must be made. Corporations are not only about increasing share value. They are also about creating jobs for employees and suppliers, and those jobs consist not only of paychecks but also of quality of life and quality of work issues: relationships, individual empowerment, self-improvement and education, health and safety, hours that allow for families, movement and stability in our various communities, support in sickness and old age and for dependents. Corporations also exist to beautify our cities, to provide products for consumers, to support charities, to enhance and not merely destroy our environment.

The share-centered view tells managers that these concerns are illegitimate except when they are illusions. Thus, on the share-centered view, corporate charity is improper unless it is really advertising designed to increase share returns rather than to accomplish a charitable purpose. (84) Working conditions, wages and retirement benefits are just costs to the corporation, justifiable only if they induce workers to work harder or stick around longer and that in turn increases returns to shares. Even lawabidingness is defensible mainly because it is instrumentally useful in maximizing profit. As Friedman famously put it, "the business of business is business." Nothing else. All other values must be imposed forcibly on business by enforceable regulation.

In contrast, on the polis view, the inhuman and uncivil claims of selfish shares can easily be rejected inside the firm. Improving working conditions is a good thing because it is a good thing, not because it is a subterfuge to extract more out of employees. Managers who cause their corporations to contribute to social needs are fulfilling their roles as trustees for major accumulations of social wealth, not stealing from shares. To be sure, firms can do none of these things unless they generate enough income to cover the expenses, but there is a difference between a constraint and a goal. (85) The share-centered vision has the world backwards: far from all of us existing to make shares worth more, the only reason a decent capitalist society allows some shareholders to become indecently rich is because the market is a critical part of improving working conditions and fulfilling social needs. Those are not the means, they are the ends; it is not us who are the tools but the shares.

B. The Democratic Deficit in Corporate Governance

Finally, the view of corporation as polis places front and center the democratic deficit of our current corporate governance system. Externally, corporate governance law largely comes from Delaware, not even formally approved by the citizens whom it governs, few of whom vote in Delaware. Internally, corporations are governed by managers who are answerable to boards elected, formally at least, by shares on a basis of dollar proportionality. This is, in political terms, a "herrendemocracy" in which the "herren" -- the elite group that adopts democratic norms among its own members while exploiting non-voting inhabitants -- are not even people but dollars. (86)

Managers who are expected to manage on behalf of the entire corporation and possibly the public at large, not just its shares, ought to be answerable to the entire corporation and the public at large, not just its shares.

Bringing the public at large into the corporate governance system may be the easier part. First, it requires ending the bizarre choice of law regime under which managers (with share approval) get to choose the corporate law that will govern them. Instead, we should have a genuinely federalist system, in which different states govern corporations under their jurisdiction in substantially different ways -- and no state purports to govern corporations that exist primarily outside its borders. Corporations should be governed by the law of the states in which they operate; if the laws appear to cause conflicting regulation, trans-jurisdictional (i.e., national or multi-national) corporations should create legally separate subsidiaries to hold assets in different states, as European corporations long did.

Second, corporate boards should include board members whose portfolio is specifically to represent the public and to promote the interest of the public at large -- understood as citizens rather than shareholders, consumers or employees -- and who are selected, directly or indirectly, by the public or its representatives.

Third, the fiduciary duty of board members should be clarified to be a duty to the corporation as a whole, understood to include all the people whom it affects, and not (as in the more extreme versions of the share-centered ideology) as a mere duty to shares or fictional shareholders.

In order for this broader duty to function as something more than a defense to shareholders' derivative actions, it must be enforceable by someone other than representatives of the shares -- perhaps a public official, if staffing can be found, or perhaps private attorneys general. The courts, no doubt, will continue to emphasize good faith, procedural safeguards and lack of direct personal conflicts of interest, permitting boards great discretion under the business judgment rule. Given the current leniency of judicial review of board action, I do not think that the more amorphous duties of a trustee for the corporation as polis would generate radically different judicially imposed limitations on firm behavior. Rather, its advantage is that it seems likely to put a significantly different cast on the deliberations of directors attempting to act in good faith, without much affecting those who are not.

Finally, corporate intervention into the general political debate ought to be restricted. As I have argued elsewhere, corporations, particularly when they are governed in accordance with the share value maximization model, are not legitimate participants in democratic debate. (87) At a minimum, direct corporate intervention into campaigns should be restricted well beyond historical norms or the limits of current Supreme Court doctrine. (88) More broadly, we need to find effective ways of limiting corporate lobbying or placing it under the control of all the citizens concerned, not merely managers and their purported beneficiaries the fictional shareholders.

Indeed, the image of corporations as polis emphasizes that in general corporations ought to be seen as on the state side of the great liberal divide between state and society. We need to be protected from them far more than they need protection from our collective will. Current constitutional law, which for over a century has granted corporations the rights of citizens against governmental agencies, is precisely backwards. Instead, citizens ought to have rights against these government-like entities. And we should be as unrestrained in using other governmental entities to regulate them as we are in using state law to regulate municipal corporations or federal law to regulate administrative agencies. (89)

Representing more defined corporate constituencies inside the firm is a more difficult problem and I have only preliminary thoughts on it. The model of the corporation I have used, like the nexus of contracts model from which it borrows, tends to blur the edges of the corporation: this firm is anything but firm. Are consumers, or suppliers, or municipal hosts, members of the corporate team or not? For purposes of corporate governance, and in light of the unexpected results likely from radical changes, I am inclined to take the conservative position that such people, although undoubtably dependent on the firm and necessary for its success, probably should be classified as members of the public at large and represented as discussed above.

In contrast, employees who spend significant parts of their waking lives working for and at the corporation must have some form of representation in the corporate governance structure if the team or polis concept is to be anything other than yet another cynical tool to delude marks into thinking they are being befriended rather than taken for another ride. For all its problems, democracy remains a far superior alternative to autocracy, kleptocracy or Enronitis. In 1776 we rejected Parliament's claim to virtually represent the American colonies. The claims of public corporations to represent the public -- or even the corporate team -- while granting the vote only to shares are even weaker.

1. ©Daniel J.H. Greenwood, Prof., S.J. Quinney College of Law, University of Utah; J.D. Yale; A.B. Harvard. Http://law.hofstra.edu/greenwood. Special thanks to Martha Fineman and the participants in the 2002 Cornell Law School Feminism and Corporate Law Project Conference at Osgoode Hall, Toronto; to Linda Bosniak and the participants at the Rutgers (Camden) Law School Faculty Colloquium; to Timothy Lytton and the participants at the Albany Law School Faculty Colloquium; to Peter Spiro; and to my colleagues Darren Bush, Martha Ertman, John Flynn, Laura Kessler, Mitchel Lasser, Alex Skibine, John Tehranian and Manuel Utset for helpful comments. I am also grateful for the comments and I received and discussions I benefitted from in presenting related work to the Sloane Program for the Study of Business in Society-George Washington University summer corporate law retreat. The paper is much improved as a result.

2. Much confusion in our law results from the unfortunate fact that we use the same term to refer to public corporations and closely-held ones. In closely held corporations, a controlling shareholder (or small group of shareholders) has most of the rights of an "owner" in the normal sense of the world; in public corporations, shareholders have such rights only in potential, and the potential is only as real as the takeover market is free, uninhibited and vibrant. This Essay discusses only public corporations; most of its analytic framework is inapplicable to firms with human owners.

3. Peter C. Fusaro & Ross M. Miller, What Went Wrong At Enron: Everyone's Guide to The Largest Bankruptcy In U.S. History 28 (2002).

4. See supra, n. 2.

5. Of the 110 million Americans employed by private industry in 1999, just under half were employed by enterprises with 500 or more employees. Statistical Abstract of the United States Table 716 (2002). It is safe to assume that virtually all these large private employers are publicly traded corporations.

6. Precisely what portion of the economy is publicly traded firms turns out to be surprisingly difficult to determine. That it is large is clear: total stock market c