12/07/2018 Should Corporations Serve Shareholders or Society?

: The Origins of the Debate - Corporations and Health

Corporations and Health

UNCATEGORIZED

SHOULD CORPORATIONS SERVE

SHAREHOLDERS OR SOCIETY?: THE
ORIGINS OF THE DEBATE
APRIL 6, 2011 | ADMIN

Discussions about corporations’ influence on health often implicitly or explicitly raise the following
question: if the law allows corporations to amass money and consequent power, then why doesn’t
the law require corporations to protect, and not harm, health?   This simple question has been
asked, in various forms, for at least a century.

The debate surrounding this question involves two competing ver‐

Adolph A Berle
sions of the corporation.[1] In the first version, the corporation is
viewed as the property of the individuals who purchased its shares—
the stockholders or owners.  According to this view, “the corporation’s purpose is to advance the
purposes of these owners (predominantly to increase their wealth), and the function of its directors,
as agents of the owners, is faithfully to advance the financial interests of the owners.”[2] Those
who adhere to this view argue that corporate law should govern “little more than the private rela‐
tions between the shareholders of the corporation and management.”[3] In the second version, the
corporation is viewed “as a social institution.”[4] Proponents of this view believe that corporate law
should be “deliberately responsive to public interest concerns,”[5] which includes health and safety
considerations.

While federal and state courts have heard many legal challenges over the fundamental nature of a
corporation, commentators trace the debate’s formal origin to two articles published in the Harvard
Law Reviewin the early 1930s.[6] In 1931, Adolf A. Berle, a professor at Columbia Law School,
wrote Corporate Powers as Powers in Trust.  In this article, he argued that “all powers granted to a
corporation or the management of a corporation . . . are necessarily and at all times exercisable
only for the ratable benefit of all the shareholders as their interest appears.”[7] Berle believed that
corporations were simply vehicles for advancing and protecting shareholders’ interests and that
corporate law should be interpreted to reflect this principle.  He suggested that any other account
of corporations’ function and purpose would “defeat the very object and nature of the corporation
itself.”[8]

http://www.corporationsandhealth.org/2011/04/06/should-corporations-serve-shareholders-or-society-the-origins-of-the-debate/ 1/5
12/07/2018 Should Corporations Serve Shareholders or Society?: The Origins of the Debate - Corporations and Health

One year later, E. Merrick Dodd, a professor at Harvard Law School, challenged Berle’s position
in For Whom are Corporate Managers Trustees.  Dodd suggested that, “there is in fact a growing
feeling not only that business has responsibilities to the community but that our corporate man‐
agers who control business should voluntarily and without waiting for legal compulsion manage it
in such a way as to fulfill those responsibilities.”[9] He quoted the heads of several major corpora‐
tions, such as General Electric, to argue that business leaders had come to recognize that corpo‐
rate managers needed to consider social responsibility when running their companies. 

Dodd provided several interpretations of this view relative

to the requirements of corporate law.  First, he explained
that if “social responsibility” meant that corporate man‐
agers paid more attention to the needs of their employ‐
ees and consumers, this would ultimately benefit share‐
holders.  Dodd supported this argument by noting that
"If we recognize that the attitude of law and public
employee satisfaction leads to greater productivity and
opinion toward business is changing, we may then ultimately increased profits.  By this logic, managers
properly modify our ideas as to the nature of such could actually increase profits by focusing on the needs
a business institution as the corporation and
hence as to the considerations which may properly
of groups other than shareholders.[10] Next, Dodd ar‐
influence the conduct of those who direct its activi‐ gued that courts had provided great latitude to corporate
ties." - E. Merrick Dodd, Jr. managers, allowing them “a wide range of discretion as
to what policies will best promote the interests of the
stockholders . . .”[11] For example, Dodd suggested that corporate charitable giving, while not im‐
mediately increasing shareholder wealth, could generate good will in the community.[12] Such
good will could benefit shareholders, since consumers would be more likely to think favorably of
the corporation and buy its products.

For Dodd, these arguments meant that corporations are “affected not only by the laws which regu‐
late business but by the attitude of public and business opinion as to the social obligations of busi‐
ness.”[13] He claimed that society’s view of the corporation as a purely private enterprise was shift‐
ing, and that corporate managers should “recognize that the attitude of law and public opinion to‐
ward business [was] changing . . .”[14] By arguing that corporate law should reflect shifts in public
opinion about the purpose of corporations, Dodd paved the way for those who would later argue
that corporations can and should act to benefit constituencies beyond their shareholders.[15] The
echoes of Dodd’s argument are often heard among those who champion corporate social respon‐
sibility and responsible business practices.

Commentators continue to mention the Berle/Dodd debate, encapsulated by their Harvard Law Re‐
view articles, when contemplating how corporations should function within society.[16] Today, vari‐
ations of this debate surface each time advocates challenge corporate practices that have harmed
or may harm the public’s health.  The debate arises whenever policy-makers contemplate regula‐
tions that would require corporations to engage in behaviors that would protect the public’s health. 
And, the debate over corporations’ fundamental purpose will continue for years to come, as new
corporate practices come to light and new regulations are proposed.

http://www.corporationsandhealth.org/2011/04/06/should-corporations-serve-shareholders-or-society-the-origins-of-the-debate/ 2/5
12/07/2018 Should Corporations Serve Shareholders or Society?: The Origins of the Debate - Corporations and Health

Interestingly, the Berle/Dodd debate did resolve, but with an unexpected

twist.  In 1954, Berle, who had espoused the view that corporations should
be run exclusively to advance their shareholders’ interests, published The
20th Century Capitalist Revolution.  In this book, he mentioned his debate
with Dodd and stated that “[t]he argument has been settled (at least for the
time being) squarely in favor of Professor Dodd’s contention.”[17] Twenty
years after articulating his original position, Berle conceded that the law had
supported Dodd, in that it did allow directors some discretion to consider
stakeholders other than a corporation’s shareholders.

Berle’s book was published one year after the New Jersey Supreme Court
decided A.P. Smith Manufacturing Company v. Barlow (1953), which definitively established corpo‐
rations’ ability to make philanthropic donations and offered support to Dodd’s arguments.  In all
likelihood, this decision convinced Berle that even if corporations must be run with their sharehold‐
ers’ best interests in mind, the law gives corporations some opportunities to consider other stake‐
holders.  For those who act to protect and promote the public’s health, this nuanced understanding
of a corporation’s purpose is key.

References

[1] Kerr JE. Sustainability means profitability: the convenient truth of how the business judgment
rule protects a board’s decision to engage in social entrepreneurship. Cardozo Law
Rev. 2007;29:623-668, at 660.

[2] Allen WT. Our schizophrenic concept of the business corporation. Cardozo Law

Rev. 1992;14:261-281, at 264-265.

[3] Millon D. Theories of the corporation. Duke Law J. 1990;1990:201-262, at 201.

[4] Allen WT. Our schizophrenic concept of the business corporation. Cardozo Law

Rev. 1992;14:261-281, at 265.

[5] Millon D. Theories of the corporation. Duke Law J. 1990;1990:201-262, at 201.

[6] Schwartz DE. Defining the corporate objective: section 2.01of the ALI’s Principles. George
Washington Law Rev.  1984;52:511-533, at 522.

[7] Berle AA. Corporate powers as powers in trust. Harvard Law Rev. 1931;44:1049-1074, at 1049.

[8] Berle AA. Corporate powers as powers in trust. Harvard Law Rev. 1931;44:1049-1074, at 1074.

http://www.corporationsandhealth.org/2011/04/06/should-corporations-serve-shareholders-or-society-the-origins-of-the-debate/ 3/5
12/07/2018 Should Corporations Serve Shareholders or Society?: The Origins of the Debate - Corporations and Health

[9] Dodd EM. For whom are corporate managers trustees. Harvard Law Rev. 1932;45:1145-1163.

[10] Dodd EM. For whom are corporate managers trustees. Harvard Law Rev. 1932;45:1145-1163,
at 1156.

[11] Dodd EM. For whom are corporate managers trustees. Harvard Law Rev. 1932;45:1145-1163,
at 1157.

[12] Dodd EM. For whom are corporate managers trustees. Harvard Law Rev. 1932;45:1145-1163,
at 1159.

[13] Dodd EM. For whom are corporate managers trustees. Harvard Law Rev. 1932;45:1145-1163,
at 1161.

[14] Dodd EM. For whom are corporate managers trustees. Harvard Law Rev. 1932;45:1145-1163,
at 1163.

[15] Velasco J. The fundamental rights of the shareholder. U.C. Davis Law Rev. 2006;40:407-467.

[16] Matheson JH, Olson BA. Corporate cooperation, relationship management, and the trialogical
imperative for corporate law. Minnesota Law Rev. 1994;78:1443-1491, at 1485.

[17] Berle AA. The 20th Century Capitalist Revolution. New York: Harcourt, Brace and Co; 1954, at
169.

Photo Credits:

1.     Columbia University

2.     Harvard Law Review

3.     Amazon

CHW Related Posts:

New Danone Public Benefit Corporation: Wave of the Future…

http://www.corporationsandhealth.org/2011/04/06/should-corporations-serve-shareholders-or-society-the-origins-of-the-debate/ 4/5
12/07/2018 Should Corporations Serve Shareholders or Society?: The Origins of the Debate - Corporations and Health

How do Americans rate the fairness of US corporate…

Is Exxon the new tobacco?

The New Corporate Social Responsibility: Accountability or…

SHARE:

      More

LAINIE RUTKOW

http://www.corporationsandhealth.org/2011/04/06/should-corporations-serve-shareholders-or-society-the-origins-of-the-debate/ 5/5