Individual Rights, Social Responsibilities,
by Dr. Edward Younkins
Professor of Accountancy and Business Administration at Wheeling Jesuit University in West Virginia and author of Capitalism and Commerce.
The concept of corporate social responsibility can be traced to actions taken and pronouncements made by American business leaders as strategic responses to anti-business sentiments that developed during the late 1800s and early 1900s. The goal of these business leaders was to promote corporations as forces for the social good and thereby lessen the threat of government intervention and regulation. For example, the writings of Carnegie and other intellectual defenders of business espoused the charity and stewardship principles and argued that although a corporation must pursue profits, its wealth should be used for the benefit of the community.
While the intended purpose of undertaking socially responsible actions and issuing moral pronouncements was to appease reformers calling for legislation to control businesses, the actual result was to strengthen the power of the adversaries of business by acknowledging the social nature of the corporation. The idea of corporate social responsibility gained wide acceptance over the subsequent years as diverse groups and social activists used the concept as a rallying cry in their demands for changes in the purposes of American businesses. Increasingly, managers were urged to view themselves as trustees of the public interest who should act in the interest of all those who could influence or be influenced by a company's actions.
Academicians and other corporate critics, realizing the need for a "moral sanction" to underpin the idea of corporate social responsibility, began proclaiming the doctrine that corporations are possessions and servants of society that are created through the permission of the state which itself owes its existence to society. Consequently, managers have been told that they should weigh and balance the multiple claims and interests of conflicting stakeholder groups throughout society. By so removing management decisions from their connections to the search for profit and the enhancement of stockholder value, managers have been assigned the impossible task of balancing competing claims of a variety of stakeholders.
This paper challenges the belief that corporations are common property and creatures of society that require state permission for their existence and that are obliged to serve the "public interest." The tenets of a more realistic and compelling theory are presented. This opposing theory rests on the principles of choice, consent, voluntary association, contractual authorization, and individual rights (including property rights).
The Corporation as Common Property: A Flawed Doctrine
It is interesting to note that when corporate critics refer to the public interest or the common good, they are frequently actually referring to the interest or the good of some individual or group of individuals intent on imposing their own views or goals upon others. Since the corporation only exists because of social permission, "society" is said to be able to legitimately demand that a corporation perform certain activities that the owners and managers do not wish to perform. During the 20th century, "society" has been reassessing its expectations of corporations and has pressured them to balance profit-making with social responsibility. Social crusaders believe that corporations should be socially responsible both out of gratitude for their existence and a moral sense of reciprocation for benefits received from society, including the purchase of their goods and services and the access to, and use of, public goods. In essence, the corporation is viewed as more like common property than as private property. Some critics even propose that the corporation be brought under government control to ensure the common good.
From this erroneous point of view, the corporation is a fictitious person. The state controls its birth and its death, and corporate powers are exercised as a matter of concession and privilege rather than of right. The corporation is a purely artificial creature of the state, strictly accountable for the limited functions that it is granted. As a legal entity, distinct from its owners, the corporation, through its charter, gains privileges which the government confers. Thus, corporateness is conferred by public act rather than through private agreements, and, as a result, the corporation is highly vulnerable to regulation by the state. If corporations are created by the state, then the state can tell them what to do. This theory holds that corporations owe their existence and gain their authority from the government, which itself acquires its authority from the people. It follows that corporations are created for the benefit of society and must therefore serve the public interest. Under this flawed view, corporations are creatures of the law, established by the government, and endowed with special legal privileges including the most important one-limited liability.
Proponents of this view tend to suffer from the misconception that a society has a concrete existence apart from the individuals who comprise that society. To use an abstract term such as society is simply to refer to a collection of individuals with innumerable projects, needs, and wants of their own. There is no such thing as the general will or group welfare apart from the wills and welfare possessed by each individual. A corporation cannot be created by, and responsible to, an abstraction. A corporation is created by, owned by, and operated by a freely constituted group of individuals. The state merely recognizes and records the formation of corporations it does not bring them into existence. This action by the state in no way binds the corporation to the service of the public interest.
The Corporation Properly Understood: Private Property and Voluntary Association
A corporation is a community of people voluntarily working together for common and/or compatible goals and having, in varying degrees, shared values and concerns. It follows that people tend to join, stay, and succeed with one corporation rather than another because of the extent of their agreement with the goals and values of the corporation's stockholders, directors, officers, and employees.
A corporation, man's voluntary approach to achieving economic competence, is created through the exercise of individual rights (i.e., freedom of association and freedom of contract). Men have an inherent right to form a corporation by contract for their own benefit and in their mutual self-interest. Based upon a consciousness of common interests, the corporation is an association of individuals who engage in a particular type of contractual relationship with one another in order to pursue common business objectives, is governed by rules of the individuals' own making, and is said to be able to assert rights and assume obligations. When rights and obligations are imputed to a corporation, what is really being referred to are the rights and obligations of its members who create and sustain it (i.e., the stockholders, directors, officers, employees, etc.).
Corporations are properly viewed as voluntary associations and as private property. Arising from individual contracts, corporations are not the creation of the state the state simply recognizes and records their creation in a similar fashion as it does with births, marriages, sales of real estate, etc. The corporate charter is merely the articles of incorporation which are not related to state authority and do not obligate the corporation to serve the public interest. Since corporations are not created by the state, the government has no authority to tell them what to do.
The state grants a charter as a legal technicality and neither creates nor changes the essence of these voluntary associations whose success depends upon the social bonds that unite their members and upon the human need for group membership. The state may choose to recognize these units but in so doing it simply acknowledges that which already exists. Corporateness is a right common to all persons.
The social contract is a fiction. Corporations are expressions of individual freedom, do not derive their power from society, and need only respect individuals' natural rights and adhere to government regulations.
The unique features of the corporation can be explained in terms of its contractual origins rather than as special privileges. For example, limited liability is not a privilege that is guaranteed to a corporation a would-be creditor can decline credit to a corporation unless one or more of its stockholders assume personal liability for the obligation. Limited liability is therefore the product of a contract between shareholders and creditors who find the provision acceptable.
True Corporate Responsibility: Respect for Natural Rights
The social responsibility of the corporation, through its directors, managers, and other employees, is simply to respect the natural rights of individuals. Individuals in a corporation have the legally enforceable responsibility or duty to respect the moral agency, space, or autonomy of persons. This involves the basic principle of the non-initiation of physical force and includes: the obligation to honor a corporation's contracts with its managers, employees, customers, suppliers, and others; duties not to engage in deception, fraud, force, threats, theft, or coercion against others; and the responsibility to honor representations made to the local community.
Customers, employers, suppliers, and others autonomously negotiate for and agree to contract with the corporation. If managers were to break an agreement with the shareholders to maximize profits in order to give one or more groups more benefits than they freely agreed upon, they would not only be violating the rights of the owners, but also would not be respecting the autonomy of individuals within other groups. Corporations and their managers are obligated to respect the rights of individuals within each group, but the rights are limited to the rights of parties in market transactions. The social responsibility of corporations is limited to respecting the natural rights of all individual parties.
Managers are Agents of the Stockholders
In an individualistic society all contracts are entered into voluntarily. Each person is free to associate with others for their own mutually agreeable purposes. The corporation is a form of property created by individuals in the exercise of their natural rights. The corporation is thus the result of a contract between individuals who wish to combine their resources and, if desired, delegate a portion of the authority and responsibility for managing and using these resources. Managers therefore have the obligation to use the shareholders' money for specifically authorized shareholder purposes which can range from the pursuit of profit to the expenditure of funds for social purposes. If managers use this money for activities not authorized by the shareholders, they would be guilty of spending others' money without their consent, failing in their contractual obligation to the owners, and, therefore, violating the rights of the shareholders.
Owners have a property right in the corporation and a correlative right to engage in profit-making, if so desired. It follows that those who act in their behalf (i.e., the managers) have a duty to carry out the wishes of the owners, who usually invest to make a profit.
Managers are employees of the shareholders and have a contractual and hence moral responsibility to fulfill the wishes of the shareholders. As a corporate executive, the manager is an agent of the owners of the corporation and has a fiduciary responsibility to them. Corporate social responsibility may be permitted within the limits of prior contractual agreements with the shareholders. This occurs when individuals organize corporations for reasons other than, or in addition to, profit. Also, socially responsible actions such as charitable contributions may be acceptable when the manager makes these in anticipation of effects that, in the long run, will be beneficial to business.
As an individual, a manager may have other obligations that he should voluntarily assume by using his own money, time, and resources not those of his employers. However, when functioning in his corporate capacity, he has a duty not to divert corporate funds from stockholders' authorized purposes. Discontented shareholders may theoretically bring suit against the directors and managers when they spend the shareholders' money on unauthorized social responsibility projects that are not in the owners' interest. However, it is more likely that they will vote against such directors, attempt to remove the managers, or simply sell their shares.