ISSN 1062-7421
Vol. 12 No. 4 (April 2002) pp. 201-204.

CORPORATE IRRESPONSIBILITY: AMERICA'S NEWEST EXPORT by Lawrence E. Mitchell. New Haven: Yale University Press, 2001. 320 pp. Cloth $27.95. ISBN: 0-300-09023-4.

Reviewed by Daniel J. H. Greenwood, S. J. Quinney School of Law, University of Utah.

Corporate law generally sees a great conflict between shareholders and managers, with most scholars, especially those working in the law and economics paradigm, resolutely on the side of shareholders. The great task of corporate law, on this view, is to coerce or entice managers to acts as true agents of the shareholders. Managers, as fiduciaries, should not operate by the "morals of the market place;" rather, all "thought of self [is] to be renounced, however hard the abnegation" (Cardozo, J., in MEINHARD v. SALMON) as manager-agents should work only to enrich their principals, the shareholders. Ironically, the law and economics paradigm that so prominently emphasizes the role of managers as agents for shareholders simultaneously undermines any possibility of managers (or anyone else) renouncing thought of self. It suggests that the morals of the market place can never be escaped and that managers can only look out for themselves.

Professor Mitchell is a leading dissident from the conventional view. In this book he pulls together themes he has elucidated in several influential articles. Mitchell's central point is that managers can escape the morals of the marketplace, but not by being fiduciaries for shareholders. Where conventional theory sees the key challenge for the law as finding ways to force managers to work for shareholders, Mitchell sees the problem as precisely the opposite--managers are working for shareholders too much.

Professor Mitchell rejects the conventional assumptions that shareholder interests are necessarily aligned with social interests or that shareholders as "owners" may operate their "property" according to the morals of the market place, i.e., without regard for the interests of others. For Professor Mitchell, shareholder interests are just one among several that corporations ought to pursue. Tying managers to shareholders makes them unlikely fully to take into account the needs of those other corporate constituencies, including bondholders and other creditors, employees, neighbors of various kinds and the environment.

Shareholder-centeredness, in Professor Mitchell's analysis, is part of a wider problem of anti-social self-centeredness. American society, he tells us, is "predisposed to excessive individualism" but limits this excess by "personal moral frameworks" (p. 47). Corporate managers, however, are driven to abandon their personal moral frameworks by their roles, which push them, instead, to a "selfishness surplus" (p. 36). Interestingly, though, Professor Mitchell emphasizes not managerial selfishness-the high living at corporate expense that fills so much of pro-shareholder writing-but managerial actions on behalf of imagined shareholder

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selfishness. His image is of managers who set aside their own morality to be team players on behalf of the cause of shareholder profit maximization.

CORPORATE IRRESPONSIBILITY describes two central problems. First, shareholder-centered corporations take the selfishness and individualism that
Professor Mitchell sees as endemic in American culture to another extreme. As "perfect externalization machines," they externalize costs whenever they can, think of no one but themselves (meaning in this case, their shareholders) and treat employees, customers, neighbors and the environment as nothing but means to the corporate end of shareholder profit. Mitchell's examples include Unocal using slave labor in Thailand (p. 23), Coke firing 6000 employees in connection with an apparent overstatement of its earnings (p. 21), and General Motors using cost-benefit analysis to justify building unsafe cars (where the only cost considered was the likely tort damages exposure of the company) (p. 25).

Because of limited liability, corporations need not be fully responsible for their actions; the role morality of managers urges them as good professionals to put aside their own beliefs; shareholders by means of the vote, derivative actions and, most importantly, the market for corporate control, press managers to act on their behalf; and huge grants of stock options make it quite attractive for managers to think like selfish shareholders. Thus, corporate law and markets together press corporations to place the interests of shareholders above all other considerations. In short, if a corporation can impose costs on others--anyone other than
shareholders--in order to benefit shareholders, it will do so.

Second, shareholder-centered corporations focus too much on short-term profit. Shareholders are largely institutions that, for a variety of reasons, trade as if they were interested only in the short term even when they are long term investors. So, a shareholder-centered corporation will focus on the same short term. He offers graphic examples of managers who check their stock price many times a day (had the book come out a little later, he might have described the Enron failure as a product of managers rewarded only for short-term stock price maximization). His critique of short-termism is complex. For example, he argues both that short-term profit maximization is incompatible with long-term profit maximization (suggesting that he seeks to perfect the shareholder-centered corporation rather than
overthrow it) and that wealth itself isn't a value (suggesting that perhaps he is opposed to profit maximization of any variety). However, the bottom line is that focusing on minute by minute changes in stock prices is a bizarre way to run a company. It makes insiders (who should know something about the company and its business) set aside their own judgment in favor of outsiders (who may be reacting to all sorts of things that have nothing at all to do with the decisions a company must make to succeed).

Professor Mitchell proposes a straightforward solution to both the "externalization machine" and the short-termism problems. Since the problem is shareholders, the solution is to reduce their power--even eliminate it. At one point, Mitchell proposes eliminating shareholder election of managers altogether, although ultimately he hedges in favor of a more moderate proposal to lengthen the term between elections and reduce the frequency of mandated disclosure (pp. 121, 157).

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Professor Mitchell of course recognizes the obvious come-back-that managers not answerable to shareholders would simply be unanswerable, and might manage companies in their own interests without regard to anyone else. After all, our managers are deeply enmeshed in competitive pressures not all of which come from shareholders. His response, so far as I understand it, is largely that "most managers are good people who want very much to do good" (p. 51). Monitoring of managers is largely ineffective already (pp. 128, 204) and in any event counter-productive. what we need is greater trust and a clear message to managers that their fiduciary duties extend to the whole firm (p. 131). With shareholders ousted from their privileged position, managers would be free to view the team not as shareholders alone but as the firm or society as a whole. After all, modern corporate law has nearly eliminated enforceable fiduciary duties to shareholders and nonetheless managerial theft is not a large problem (p. 204).

I wonder, however, if the return to Eden would be so easy. If the story of the 1980s was one of managers being forced, kicking and screaming, into serving shareholders, that of the 1990s was of managers learning that, so long as shareholders were properly paid off (or even just fed misleading information that would allow them to think they would ultimately be paid off), they wouldn't raise a fuss if managers helped themselves to ever larger chunks of the corporate pie. In this new world order, where managers have accepted that the goal is to get rich and the means to that goal simple and cynical self-interest, the self-perpetuating managers Professor Mitchell proposes, it seems to me, more likely just would help themselves to still more. (Thus, self-perpetuating managers in our mutual insurance companies or non-profit hospitals, even though not answerable to shareholders, have shown great alacrity in jumping on the bonanza bandwagon in recent years). To replace the morality of the marketplace or the ethos of "surplus of selfishness" that Professor Mitchell deplores with a new concept of fiduciary responsibility for a broad spectrum of corporate interests, would require more than simply relieving the selfish of the only duty they still retain. With less accountability to shareholders and no new power to restrain them, why wouldn't managers simply take Enronism to new heights?

Mitchell also recommends new non-financial disclosure requirements, requiring companies to provide their shareholders with new managerial "evaluat[ions] in a qualitative way [of] the effect of organizational changes, ... [and] discussion[s] of community activities, environmental activities, even an ethical section ... to discuss decisions ... that management believed were ethically right" but not short term profit maximizing (p. 161). The disclosure alone, he believes would move managers
and shareholders alike towards a wider view of their responsibilities. Again, I wonder. The new information would, indeed, provide a basis for political organizing outside the corporate forum, but "King Kong with a Quotron," as Mitchell describes his hypothetical portfolio manager (p. 169), seems an unlikely candidate to redirect corporations in the directions Mitchell wants. Shareholders, as I've argued elsewhere, are institutionally driven to press for short-term profit maximization even when the human beings behind them have other values, and more information won't change that. Nor would either disclosure or managerial freedom relieve firms of the non-shareholder based pressures of the competitive marketplace. As Professor Mitchell points out, if ethics

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are expensive, ethical firms are less competitive (p. 70).

Although the subtitle of the book--America's Newest Export--suggests a central concern with American corporations abroad, in fact the book's concerns are mainly domestic. Foreign countries appear mainly as a foil. Mitchell believes that the Japanese and German corporate law systems better take into account the social responsibility that our shareholder-emphasis does not. However, he doesn't explore the foreign systems in any depth. His concern is with our system and internal reform, not with wholesale adoption of foreign systems. Nor does he explore in any detail the pressures (chiefly mobile capital) that other scholars have claimed are driving the European systems towards our own.

The book is meant for a lay audience. It is lightly footnoted and written in a refreshingly conversational voice far from the standard turgid law review style. It clearly and concisely explains both the legal background and sophisticated controversies involving the law's interactions with moral philosophy, social psychology and economic and finance theory, in a way that should make it accessible to general readers (including undergraduates not versed in those fields). In short, CORPORATE IRRESPONSIBILITY is an interesting and readable restatement of the New Corporate Law analysis of the incentives of our system, with original policy recommendations that are certain to generate further discussion.

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Copyright 2002 by the author, Daniel J. H. Greenwood.