When corporations gained the protections that had been written for persons in the United States, a substantial shift began in who bears what risk, resulting in an imbalance that now affects virtually all parts of the world. Most companies handle risk responsibly, but many corporations are legally allowed to avoid responsibility in ways that would never be permitted for an individual.
Risk is a matter of who suffers when something goes wrong. Corporations and their shareholders may risk loss of income or even loss of their investment, but that pales in comparison with the risks that humans share as a result of a corporate activity—such as degradation of the environment, higher rates of cancer and other diseases, job-related disfigurement or death, community and family breakdown after a factory is closed and jobs are shipped overseas, and even a life with no income or health insurance if we choose not to affiliate with a corporation.
Large companies rarely risk anything nearly that serious. They rarely undergo corporate death (charter revocation) or disfigurement. The burden of risk is unequal, and one source of this inequality is the changes in laws and regulations that happened after companies gained access to the law-making process when they were declared to share the same rights as persons.
The Nature of Risk
Risk means different things to different people, and it has meaning only in context. Sometimes creating a risk to humans—manufacturing cancer-causing chemicals or designing risky gas tanks—is a source of profit to a company. If regulations are imposed or scandals erupt from human deaths, our current system of accounting and measuring risk does not allow us to factor in the value of human life or the loss of quality of life from pollution or other consequences of corporate activity.
We have strayed far indeed from America’s founding laws in the 1700s, under which corporate behavior was suspect and tightly controlled, and the 1800s, when states exercised control of corporate behavior and could revoke a corporation’s “driver’s license” if it harmed people.
In a classic Darwinian sense, corporations have learned how to manage risks by anticipating them and doing what they can to eliminate them. There’s nothing inherently wrong with that, per se, but as William Jennings Bryan said at the 1912 Ohio Constitutional Convention, when one group is vastly larger than another so it has far more ability to bend events in its favor, the result is unfair and unequal.
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Humans are responsible for the effects of their actions. If they violate laws, they can be fined or imprisoned; if they violate the rights of another person, they can be sued. They can even be sued or prosecuted for failing to anticipate the effects of their actions. Companies too can be sued (though big corporations are rarely if ever driven out of business that way). But one group bears no responsibility whatsoever for the effects of its actions: investors have no liability for the actions they enable through their investments.
Of course, few investors, if any, mean any harm when they invest. When the United States was founded, the concept of limiting the financial liability of corporate stockholders was defined by the states in which the corporations were chartered. So too was liability for the behavior of the corporation, or of the people making decisions for the corporation. As the Supreme Court said, “The individual liability of stockholders in a corporation is always a creature of statute. It does not exist at common law.”1
It wasn’t until 1811 that New York was the first state to pass a law that put a barrier (sometimes called the corporate veil) between the behavior of corporations and the responsibilities for that behavior that may otherwise have fallen to the corporation’s stockholders.2 During the chartermongering period of the late 1800s, this became more common, although many states still reserved the right to hold stockholders, officers, directors, or managers responsible for the behaviors and the impacts of the corporations that they owned or controlled.
Different states have different laws about what corporations must and must not do to continue to exist in their states. To remedy this situation, the American Bar Association, Section of Business Law, Committee on Corporate Laws, has proposed a new set of state laws regulating corporations, called the Model Business Corporation Act (MBCA). Today seven states have laws based on the 1969 version of this, and variations on the updated version had been adopted by an additional twenty-four states as of 2009.
This proposal gives corporate shareholders no responsibility whatsoever for the acts or debts of the corporation that they own. They can invest without legal risk, only financial risk. They might lose the money itself, but if their money is used to commit crimes or to support business decisions that knowingly lead to deaths, the shareholders are considered to have nothing to do with it legally. Some question the logic of a doctrine that somebody who funds an operation should be allowed to share in its profits if it succeeds but have no responsibility for what it does or whether it harms others while getting those profits.
Under this setup it’s little wonder that shareholders rarely tell executives to behave themselves. In contrast, if shareholders carried even a small liability for the consequences of what they sponsor, it stands to reason that in their hiring and firing decisions the shareholders and the board members might take into account the ethics and the legal tendencies of the executives. But Section 6.22 of the MBCA concerns shareholder liability and explicitly says, “(b) Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”3
Where Does This Immunity Come From?
Interestingly, not all states have adopted these laws. And the Constitution does not limit shareholder liability for debt, crimes, or other acts of corporations.
Nor is there such a provision in English common law. So what happens in those other states?
In the 1965 case Fields v. Synthetic Ropes, Inc., the Delaware Supreme Court said, “A stockholder of a corporation is not personally liable for the corporate debts.”4 When attorney Dan Brannen Jr. researched this, he noted that, “The court, however, cited no statute for this proposition, and I find none in Delaware’s current corporate code.”5
Apparently, the Delaware Supreme Court isn’t the only one to have such notions. In a CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act, usually referred to as the EPA’s Superfund) case before the U.S. Supreme Court in 1998, Justice David Souter said on behalf of the unanimous Court:
It is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation...is not liable for the acts of its subsidiaries....Thus it is hornbook law that the exercise of the control which stock ownership gives to the stockholders...will not create liability beyond the assets of the subsidiary....Although this respect for corporate distinctions when the subsidiary is a polluter has been severely criticized in the literature...nothing in CERCLA purports to reject this bedrock principle, and against this venerable common law backdrop, the congressional silence is audible.6
In other words, the U.S. Supreme Court unanimously said in this decision:
- In practice, parent companies have not been held responsible for the illegal polluting acts of their subsidiaries.
- Many people have said it’s wrong (Souter said, “severely criticized in the literature”) to pretend that the subsidiary is not part of the parent company (“this respect for corporate distinctions”).
- But Congress has conspicuously done nothing about it.
- So the Court says it’s not illegal. A company can form a subsidiary that it knows is a notorious polluter, and not only are the executives legally blameless, even the parent company is completely blameless. Or the subsidiary could even be a killer, like with Halliburton subsidiary KBR in Iraq; there is no liability to Halliburton stockholders like Dick Cheney.
Reading this, I wondered what would happen if Congress were to break its silence. Certainly, the congresses of virtually every state in the union have done so at various and numerous times before 1886. Attorney Brannen’s thoughts were more blunt. He wrote to me, citing the above, “This is scary. At our country’s birth, corporations were state creations, with stockholder liability subject to state control. Today, American jurisprudence has given corporations life under the Fourteenth Amendment and [then, since that time] declared their distinctiveness to be a matter of American corporate law too basic and obvious to challenge.”
That’s especially ironic, considering that the Supreme Court did not actually give corporations such rights to life. It was an 1886 court reporter’s mistake that’s been institutionalized into law to the point where we have become accustomed to it.
Let’s look at a practical, real-world effect of this principle in today’s world, using as an example who is accountable for the risks of newly developed chemicals, in the United States and elsewhere, and what it means to our children.
The Benefits of Marketing Untested Chemicals Outweigh the Risk?
In America newly developed chemicals are usually released into the environment before there has been time to do studies on their long-term low-dose human toxicity. But what are we doing to our children and our grandchildren? Where did we get the idea that anyone (corporate or real person) has every right to market what they developed, whether or not we know what effect it has? And where did we get the idea that we can’t change that rule?
In effect, we and our children are the lab animals for modern new chemicals, as were our parents for DDT, PCBs, and lead in gasoline.* The product is put on the market, and if it turns out to be carcinogenic, everyone finds out the hard way. And the developer isn’t responsible because it was a company “regulated” by a government agency.
It wasn’t that way in the past. Whole books have been written on this subject. Here is one current example and some statistics to indicate how big the issue is:
- PCE (perchloroethylene) is an industrial solvent used for a variety of purposes ranging from dry cleaning to plastics and electronics fabrication. In 1968 it was used in pipes and glues for 650 miles of a plastic-lined concrete water main on Cape Cod, Massachusetts. Decades later clusters of cancer were discovered where the chemical had leached into the water supply. By the time the possible link was discovered, “people had been drinking contaminated water, some for as long as 10 years,” Boston University’s lead researcher Ann Aschengrau said in an interview with the Cape Cod Times.7
- The EPA classifies 3,800 chemicals as “high production volume chemicals.” A study by the Environmental Defense Fund in the late 1990s found that fewer than half of them had ever been tested for the possibility of toxic effects on humans.8
- It’s even more rare (fewer than 10 percent of those 3,800 chemicals) that we test chemicals for their impact on developing children.9
There’s Another Way: The Precautionary Principle
The alternative system—used widely in Europe—is known as the precautionary principle. It was written into the 1992 Treaty of the European Union. It moves risks from human persons to the manufacturer: a substance is considered potentially dangerous until proven beyond any reasonable doubt that it is safe, and the burden of proving its safety is with the corporation that would profit from its release, whether it’s a new chemical or a genetically modified organism. In other words, just as was the intention of our country’s Founders, a company is welcome to do business so long as the welfare of the community is respected.
Interestingly, although American business often portrays this as a fanatical idea, it’s the principle we already use in America to approve new drugs and medical devices. It was even invoked by former New Jersey governor Christine Todd Whitman, who is usually reviled by environmentalists, when in October 2000 she told the National Academy of Sciences in Washington, D.C., that “policymakers need to take a precautionary approach to environmental protection....We must acknowledge that uncertainty is inherent in managing natural resources, recognize it is usually easier to prevent environmental damage than to repair it later, and shift the burden of proof away from those advocating protection toward those proposing an action that may be harmful.”10 (Unfortunately, her actions in office rarely reflected this perspective.)
But the precautionary principle is not law in the United States. In the United States, a company is entitled to calculate risks, assess the economic risk of potential casualties without considering any impact on humans, and decide solely on that basis.
Unequal Risk of Lawsuit
The Fourteenth Amendment was written to ensure equal protection under the law for people, including the ability to sue for these protections. In practice, however, it has turned out to give humans very little protection against wealthy corporations that wish to shut them up.
SLAPP suits are defined in Black’s Law Dictionary as: “abbr. A strategic lawsuit against public participation—that is, a suit brought by a developer, corporate executive, or elected official to stifle those who protest against some type of high-dollar initiative or who take an adverse position on a public-interest issue (often involving the environment).”11
SLAPP suits started out as suits by polluters, toxic-waste sites, nuclear facilities, and the like, against people who get up in public venues like town meetings or public hearings and offer anti-pollution or anti-nuclear opinions. The next thing they know, they’re SLAPPed—having to spend thousands of dollars in legal fees to defend themselves for having exercised what they thought was their First Amendment right of free speech—and it often shuts people up in a hurry.
This variety of lawsuit has expanded over the years beyond just public hearings, and the suing corporations usually charge slander, libel, harassment, or interference with contract. Now that the Patriot Act has defined “interfering with commerce” as a criterion for a “terrorist act,” corporations have even used the force of criminal law to assert that public-interest groups like Greenpeace and PETA are “terrorists.”
The bottom line is that the corporation initiating the lawsuit is usually not suing to win in court; they’re just working to shut people up or wipe them out by forcing them to pay huge legal bills to defend themselves. In the eyes of the law, since 1886, a corporate person with billions of dollars and a human person who works for a living are entitled to equal protection under the law. But the people across America who have been SLAPPed certainly could not intimidate a corporation by threatening to drive it bankrupt with legal bills.
Further irony is that under the most recent tax laws, the corporation could deduct from its income taxes the cost of its lawyer to SLAPP-sue an individual, counting it as an ordinary cost of doing business. A working person, however, though legally equal, cannot deduct the costs of defending himself. As Delphin M. Delmas so eloquently pointed out in his pleadings before the Supreme Court in the 1886 Santa Clara case, the law has come to “a position ridiculous to the extreme.”
In a Democracy...
So we see that there are some very unequal risks here. Corporations risk profits but rarely anything else, while humans risk much more.
At the moment the world’s largest corporations are able to influence— and, in most cases today, even write—legislation that benefits them because their personhood gives them the constitutionally protected right of free speech, assembly, and to meet with “their” elected representatives.
If we were to return to the idea that only humans are persons, perhaps our human legislators would drift back to supporting the communities they represent. It would be a first step toward equaling the now very unequal risks between corporations and humans.
DDT, or dichlorodiphenyltrichloroethane, is toxic to human beings and animals when swallowed or absorbed through the skin. It was widely used in the mid-twentieth century and has been banned in the United States for most uses since 1972. PCBs, or polychlorinated biphenyls, are a class of organic compounds and an environmental pollutant associated with birth defects and cancer. The 1975 Toxic Substances Control Act required that the production of PCBs be phased out within three years.
9. From a Bill Moyers documentary on the chemical industry titled Trade Secrets. A tran- script is available at http://www.pbs.org/tradesecrets.
10. David Appell, “The New Uncertainly Principle: For Complex Environmental Issues, Science Learns to Take a Backseat to Political Precaution,” Scientific American, January 2001, http://www.scientificamerican.com/article.cfm?id=the-new-uncertainty-princ.
This material is not covered under Creative Commons license and cannot be published without the permission of the author and Berrett-Koehler Publishers.
Copyright Thom Hartmann and Mythical Research, Inc.