Re: Corporate accountability (was Re: Free-Market Economics)

Hagbard Celine (hagbard@ix.netcom.com)
Sat, 12 Jul 1997 22:59:53 -0400


James Rogers wrote:
>
> At 01:16 PM 7/12/97 PDT, Bobby Whalen wrote:
>
> >To give all of them protection under the Law, without they as
> >individuals being accountable - is bullshit!
>
> I disagree strongly with this line of thought for a number of reasons.
>
> First, it is simply not true. High-level officers *can* be held
> accountable for the actions of the corporatiion.

Accountable, yes. Liable, probably not.

Let's say that an airline company experienced a string of crashes.
Later, it comes to light that the CEO had ordered a cutback of
maintenance personnel. The lawsuits pour in.

The basic standard is that the director or officer must behave as a
reasonably prudent person would behave in similar circumstances. There
is no such thing as an "accommodation" or "dummy" director. If a person
sits on a board, he automatically (and non-waivably) bears the burden of
acting with due care.

However, liability for breach of the duty of due care is generally
imposed only when the director or officer behaves "recklessly" or with
"gross negligence." (Example: D, a director, fails to attend board
meetings, fails to read financial reports, fails to obtain the advice of
a lawyer or accountant even though he is on notice that the corporation
is being mismanaged taken together, these acts amount to recklessness,
and thus justify holding D liable for losses suffered by the corporation
that could have been prevented by a director who exercised reasonable
care. [Francis v. United Jersey Bank].)

This means that as a director, with a decent lawyer, you're pretty much
safe from liability in all but the most extreme cases. So with our
airline CEO, he'll probably look bad, but that's about it. That's not to
say that the airline itself can't be held liable (a whole 'nother
story).

There's also this cute little "business judgment rule" which saves many
actions from being held to be violations of the duty of due care. The
business judgment rule basically provides that a substantively-unwise
decision by a director or officer will not by itself constitute a lack
of due care. If the director or officer has no "interest" in the
transaction, has made an "informed" decision, and "rationally believed"
this decision was in the corporation's best interest, he will be
protected by the business judgement rule. So the decision does not have
to be substantively "reasonable," but it must be at least "rational"
(i.e., not totally crazy).

As a practical matter, people choose to bother with the time and expense
of chartering a full-blown corporate entity where (1) the owners want to
limit their liability; (2) where free transferability of interests is
important; (3) where centralized management is important (e.g., a large
number of owners); and (4) where continuity of existence in the face of
withdrawal or death of an owner is important. If these do not apply, by
all means go with a partnership when (1) simplicity and inexpensiveness
of creating and operating the enterprise are important; or (2) the tax
advantages are significant, such as avoiding double taxation and/or
sheltering other income.

My conclusory point on this is that without settled law, corporations
cannot exist.

> I find the "accountability" argument against the existence of corporations
> to be poor. <snip>

Me too.

> In civil cases, it makes no legal or logical sense to sue the employees of
> a company whose individual responsibilities are not justification for a
> civil suite. Many corporate civil suites are generated by situations that
> are an accumulation of actions and decisions by hundreds of people that
> were correct in their local context but not correct in the organizational
> context.

Exactly. This is why corporations are given a legal "identity" with
rights and responsibilities under law. The sum total of the collective
activity is embodied in this legal fiction to make it safer for
businesspeople to transact, and easier for tortfeasors to collect. I
don't see much of a problem with the philosophy behind it.

> <snip>
> (*NOTE: by
> legal definition of a corporate stockholder you are NOT ALLOWED to have
> direct control unless you are also an employee*).

Right. Your powers as a shareholder are limited to electing and removing
directors, amending the articles of incorporation or the bylaws, and
voting rights on fundamental changes not in the ordinary course of
business (e.g., mergers, sales of substantially all of the company's
assets, or dissolution).

> The corporate liability
> exists so that an entity can be held responsible when no individual clearly
> is.

Bingo!

Hagbard Celine

Not a clerk of the nostalgia of the declining ruling class.