Sunday, April 25, 2010

Machan on Benefit Corporations

I confess some puzzlement.

In a recent column, Tibor Machan voices his dismay at the fact that “in several states across the U.S.A.—among them California, Vermont, Maryland and others—politicians have created, by legislation, “benefit corporations” in which managers may proceed to do pro bono work without having to answer to shareholders whose resources are being used for this.” He goes on:

Normally if managers mis-allocate company resources, they could be sued by the owners for malpractice but with this law they will become immune. The only recourse by shareholders will be to sell their stocks and of course these stocks will have lost a goodly portion of their value given that the company isn’t committed to making a profit any longer; nor does the management have to answer to the owners for abandoning this task.

Then, he offers a parade of horribles—doctors who ignore their patients in favor of non-paying clients, teachers who fail to grade students’ papers because they “must provide service to people in the neighborhood” and “will be in violation of the law” if they do not.

The benefit corporation as Machan has described it is a legal form available to contracting parties. Those parties can opt for this form or for a more familiar alternative. Nothing Machan says suggests either that the availability of the more familiar corporate form has been eliminated by legislation in the states he mentions or that existing corporations are being or will be transformed without investors’ knowledge or consent into benefit corporations.

Rather, it appears that, on the facts he presents, people who want to do so can choose, if they wish, to create, work for, and invest in corporations legally structured in particular ways. This seems suspiciously like what could be expected to happen in a freed market in which patterns of business association were determined not by state-created templates but by voluntary agreement.

Is attachment to a particular vision of the corporation and of investor behavior so great that the voluntary nature of the transactions contemplated here is invisible?


Kevin Carson said...

All that stuff's awful, all right. But you know what would be *really* awful? A corporation set up so shareholders can allow logrolling directors and CEOs to pay each other multi-million dollar salaries, get rich by starving and milking long-term productive capability to massage quarterly earnings and game their own bonuses, etc. Sure hope those damn collectivist libruls don't start taking us down *that* particular altruistic pinko road. Because shareholder money is so sacred, and all.

nfactor13 said...

A few ways Machan's critique is worthwhile:

If a corporation makes the change to a benefit-model, current stockholders who decide they're not interested can't avoid losing value and have no legal recourse to sue for that lost value.

Or, he could be making a slippery slope argument that means this is not necessarily illegitimate, but it's a sign of greater intervention to come that will be quite harmful; example, extra legal favors for such corporations, perhaps subsidies or loan guarantees, etc.

And a more general concern that it is another swipe at profit-making that keeps the public from understanding the true nature of and relationships between exchange, division of labor, pricing systems, and prosperity.

quasibill said...


"current stockholders who decide they're not interested can't avoid losing value and have no legal recourse to sue for that lost value."

If that is truly the point of Machan's critique, he has bigger fish to fry with the corporate model than just this "benefits" model. If you are a minority shareholder, your sentence is the day to day status quo. Majority shareholders, and to probably an even greater extent, management, has the ability to do all sorts of things that can *destroy* the minority shareholder's value, with no legal recourse available to the minority shareholder. Such is the nature of corporations...

nfactor13 said...

True enough, but then what's the purpose of the legislation? By the way, I put that first argument out there as the weakest to get it out of the way, not because I think it's the best interpretation. I think the 2nd and 3rd points are much more legitimate.

Gary Chartier said...

I take Machan to be arguing that the state is coercively imposing the “benefit corporation” model on some organizations or preparing to do so. I don’t think he's provided any evidence that this has occurred or is imminent.

He could, indeed, be making a slippery slope argument. But, if so, I don't see the evidence.

If Machan understands this as a contribution to a larger cultural conversation about corporations, so be it. Again, I don't see the evidence that that's what he's up to here; it's tough to respond to an argument he doesn't seem to be making. And, if this is the argument, I'm not convinced: creating a purely voluntary form of association—one that, in a free society, could simply be brought into being by contract—simply allows people to put alternate models of cooperation on display, leaving investors and members of the general public free to judge for themselves whether these models appear fruitful or not.

Tibor said...

Why are state governments establishing "benefit corporations"? My point is that these will gain special privileges and become immune to shareholder complaints when they fail to produce value for them. This is a development of the Corporate Social Responsibility/Stakeholder movement, not anything to do with free market operations. (See Bloomberg/Businessweek, April/May, "The Ben&Jerry's Law: Principles Before Profit," which assumes that striving to make a profit is something unprincipled!)

Gary Chartier said...

I’m relying here on your description of the corporations, and I’m sorry if I’ve misunderstood. But it seems as if the benefit corporation form would be one for which investors would be in a position to opt, or not, with both eyes open. Would you mind saying more about the special privileges you’re anticipating? And I guess I’m not clear about the immunity issue here: it seems as if shareholders would be warned in advance of the kinds of actions they were permitting by establishing a benefit corporation or converting an existing corporation into a benefit corporation. If they agreed to invest in such a corporation, what would be the basis of the kind of suit you're envisioning?