What are corporations, really?
A speech that was never delivered (thank you, Covid) on Aristotle, Hobbes, and the many imperfect ideas of the modern business enterprise.
Introduction
I am going to talk about corporations, in particular about business corporations. In the United States these are often called companies; among economists they are often known as firms. To give you a rough idea, I am thinking about enterprises (a more generic term) such as Verizon, Facebook, or Ford. I want to discuss what these entities (an even more generic term) actually are, what is the central “thing” about them. In the language of the Aristotelian philosophical tradition, I am looking for the fundamental definition, essence, ideal type, idea, or nature of corporations.
Why does finding a definition or essence matter? Well, corporations are important actors in our societies. They organise much of our labour, produce much of what we consume, own significant portion of our property, and shape or reinforce many of our social attitudes. Unless we understand their true nature, we cannot tell how they should and should not go about all those economically crucial and socially important activities. A wrong understanding will allow them to avoid the responsibilities that come with their nature.
A familiar starting point for the enquiry into the nature of corporations might be the letters which typically come after corporate names in various countries: I-N-C in the United States, L-T-D in Britain (large companies now have PLC, but the ‘L’ is carried over from the old set), S-A in France and A-G in Germany. Each of these abbreviations discloses something about these entities.
The American Inc. is an abbreviation for incorporated. In-corporate means “made into a corpus”, corpus being the Latin word for “body”. Incorporation tells us that each corporation is legally a single entity. In particular, a corporation is legally a “person” who, or perhaps which, can sign valid contracts.
The British Ltd stands for Limited, which is in turn short for “limited liability”. This refers to a financial-legal exchange between the legal corporation and what are known as its “shareholders”. The shareholders provide the corporation with money (or occasionally property or ideas which could be sold for money). In exchange, they receive “shares” in the corporation. These shares represent an ongoing collection of entitlements, responsibilities, and non-responsibilities. The “limited” in Ltd. refers to the crucial shareholder non-responsibility: of not being liable to repay debts taken on by the corporation.
The French SA are the initials of Société Anonyme, or anonymous society. It is the shareholders who are anonymous, as their names are kept separate from the corporation’s name. This distance is one of the shareholders’ principal entitlements, along with the right to elect some or all members of the boards of directors which governs the corporation, and the right to collect payments (dividends) under certain conditions.
Finally, AG or Aktiengesellschaft, is an organisation (Gesellschaft) with legal documents (Aktien, or shares). Gesellschaft, like société, can also be translated as “society” in the sense of the Stamp Collectors’ Society, so the German initial suggests that corporations meld the legal with the social. That hint will become very significant later in this talk, but the crucial addition of AG to the other initials is the idea that shares distinguish corporations from other types of societies.
Taken together, the four sets of national letters suggest that a corporation is : a) a legal entity, which is b) considered a person in the law, and c) has money-contributing shareholders, who d) are never required to put more money into the venture after their original investment.
So far, so good, but that definition does not satisfy my quest for a single corporate essence. For one thing, the relations of the four features are too unclear for this list to describe what all corporations have in common. Also, I want to talk only about fairly substantial business corporations, but the initials and the four-part definition also apply, in some jurisdictions, to other entities, such as purely financial arrangements and even self-employed people. (In one of my other lives, I am the sole shareholder, director, and employee of Edward Hadas Ltd.).
There are more significantly gaps in this legal-monetary approach, but I will postpone discussing them. First, I want to provide some philosophical background.
Philosophy
The philosophical issue I wish to look at is not obviously related to the shareholders and money that define the corporation legally. My concern is social or societal. Business corporations are societies, as the French and German legal initials recognise. They are social organisations, entities which bring people together in various ways and for various purposes. Corporations unite people as workers inside them, as customers and suppliers who deal with them, and as neighbours or citizens who are in some way affected by them. This sociability is at a centre of my argument, so perhaps a spoiler will be helpful here. I think corporations essentially are entities through which and in which people labour together for economic purposes, purposes that should be in accord with the common good.
Leaving asides essences for the moment, I want to ask a basic philosophical question, one that should be asked about all social groups: why do people form them? I will present two extreme answers, each of which I will associate, perhaps a little unfairly, with a single famous philosopher.
On one side stands Aristotle, who lived in the fourth century BC in what is now Greece. At the beginning of his Politics, he explains that humans live, work and deliberate together because the human being is a “political animal” [an alternative translation is “a social living-thing”]. Further, “it is the special property of man …that he alone has perception of good and bad and right and wrong and the other moral qualities, and it is partnership in …[the perception of good and bad] that makes a household and a city-state.” (Politics 1253a17-19, my emphasis; [the Greek word translated as “in partnership” can also mean “in a community” or even “in an organised group of people”).
Aristotle’s precise meaning is much-debated, but his basic drift is clear. People form and are formed by organisations and groups because people are social and organised by nature. They belong together, in organised groups. Aristotle even says that a person who is not joined with other people in some sort of community or communities cannot be fully human (or is somehow superhuman).
The scale of these inevitable human communities varies. For Aristotle, they start with the smallest households and culminate with the largest city-states. There was nothing much like the modern corporation in ancient Athens, but such organisations would belong somewhere in the middle of that scale, between the smallest family and the most extensive political authority. So, if Aristotle is right about human nature, then modern business corporations naturally help people be what they are, that is political animals or social living-things.
On the other extreme from Aristotle’s sociable creatures are the selfish individualists of Thomas Hobbes. The 17th century English political theorist explained that “men have no pleasure (but on the contrary a great deal of grief) in keeping company, where there is no power able to over-awe them all.…There Is always war of every one against every one”. (Leviathan, Chapter 13, my emphasis)
For Hobbes, people are by nature the opposite of “political animals”. He explains that our human nature ensures that each of us is always persuaded of his or her own superiority over everyone else. That nature also ensures that we are all greedy for the same things. As we self-righteously claim them for our own, we cannot help but “become enemies…and …endeavour to destroy, or subdue one another”. (ibid) The inevitable result is the war of each against all.
The postulated natural hostility creates a problem for Hobbes. He has to explain why we do not actually live in anything like this perpetual and universal war. He solves the problem by another claim about human nature, that our natural desire to survive is even stronger than our mutual hostility. This survival “instinct”, as later writers have called it, leads people to agree to submit to political rulers. The authorities should not try to make humans more sociable, for that is against their very nature. In Hobbes’ understanding. Ggovernments can only strive to keep the peace by restraining people’s unchangeable unsociability.
In effect, Hobbes claims that government is the result of a sort of calculation. People decide to transfer some of their valuable freedom to what he calls a Common Wealth, because in return they receive something even more valuable than this lost freedom – the longer lives and greater prosperity which the Commonwealth protects.
Hobbes argues that this contract does not create a political authority that is separated from its subjects. Rather, the contract unites all the people, so they are “made one person”, a constructed person which he calls the sovereign. This creates another problem. Although the people as a whole are sovereign, they cannot possibly act as one, because they are still divided by their natural hostility. This problem is solved, according to Hobbes, by delegating all political power to an absolute monarch, who can also be considered the sovereign over the people with whom he is united.
Hobbes wrote in the 1640s, when the pre-modern corporation was a fairly new idea. The first English business corporation, the East India Company, had been chartered in 1600. There is a great similarity between Hobbes’ political idea and the newly developed corporate logic. In the former, otherwise hostile people’s calculations lead them to unite as subjects of a political entity that takes on a life and power of its own. In the latter, otherwise rivalrous rich strangers’ calculations lead them to unite as shareholders of an economic entity that takes on a sort of life and power of its own.
Like Hobbes’s sovereign, this corporation is an artificial person created by the willing decisions of “natural persons” to become part of a new entity. Like the signers of Hobbes’ social contract, these corporate shareholders calculate that they will gain by giving up something valuable, some of their money, in exchange for a promise of something more valuable, more money over time.
Hobbes and Aristotle are, in this oversimplified telling, polar opposites. Where Aristotle sees people naturally living in various sorts of communities, participating in relationships that are for the most part mutually supportive, Hobbes sees individuals who naturally feel destructive enmity to each other unenthusiastically gathered together in relationships that are artificial and essentially unwanted.
Aristotle sees social unities such as corporations as excellent and inseparable from human nature, while Hobbes sees them as useful but basically contrary to human nature. Corporations are natural and liberating for Aristotle, unnatural and enslaving for Hobbes. There are intermediate positions between the two, but I think that this extreme philosophical division sheds light on the six different understandings of corporate nature and purpose that I will discuss: the already mentioned legal one, plus neoclassical economic, neoliberal economic, bureaucratic, communitarian, and “stakeholder”.
1) Legal
First comes the already mentioned legal understanding. The features I mentioned earlier can all be considered legal: a single legal entity, a legal person able to sign contracts, a legally determined relationship between shareholders and the corporation, and the legal limit to shareholders’ monetary liabilities.
Before my philosophical interruption, I promised to describe some large omissions in this multi-part understanding. The list of omissions is long. Indeed, the laws by which corporations are constituted as legal persons basically ignore most of what business corporations actually do.
Those laws do not mention: employees, customers, vendors, production facilities, products, advertising, research, patents, knowhow, taxes, accounting, the use and abuse of the natural environment, lobbying legislators, and sponsoring cultural and educational activities. They do not mention power-relations, either within the corporation or with other parts of society. The German and French initials provide reminders that corporations are societies, but the laws never mandate any corporate social roles.
Money is mentioned in the legal descriptions, but only the money of shareholders. The money from customers is not dealt with, Lenders are also ignored, even though they often keep providing money to corporations long after the fruits of the money contributed by shareholders have been consumed.
The legal definition has several other problems, but time is short. The list of omissions is already long enough to show that the legal approach is far too narrow to describe the corporate essence.
2) Neoclassical economics
The second approach to essence of the corporation comes from neoclassical microeconomics, which is still probably the dominant theoretical framework for professional economists. The social philosophy of Hobbes helps illuminate this way of thinking. In his antisocial view of human nature, any economic arrangement other than enmity needs an explanation. We will only consent to work together and depend on each other if that collaboration produces better results than the natural state of conflict and the psychologically more desirable alternative of total independence.
This Hobbesian social psychology is taken for granted in neoclassical economics, an assumption which explains that school of thinking’s enthusiasm for both free competitive markets and contracts negotiated between hostile parties, as well as its vision of strife as natural and of cooperation as something that must be justified. The neoclassical presupposition about antisocial human nature is so strong that the theory ignores charitable and non-profit organisations, even when they are legally constituted as corporations. The only alternative to markets that it recognises is the government, which is assumed to be a Hobbesian sovereign – arbitrary, unfree, and coercive.
Neoclassical economists have a problem with corporations which is similar to Hobbes’s problem with actual human relations. Neither correspond with their idea of human nature. In and around corporations, as in and around most other parts of society, people mostly do work cooperatively with each other, not in hostility against each other. Professional relationships are generally open-ended and largely mutually supportive, not based on mistrustfully negotiated contracts. The corporations are mostly structured around extensive bureaucracies (I will explain that shortly), systems that bear almost no resemblance to conflictual and contractual markets.
Neoclassical economists often do not notice the gap between their theory and reality. Instead, they take literally the corporation’s legal personhood, saying merely that “firms compete”, without worrying about what unifies the people within each of the competing firms. Such an oblivious approach cannot describe the corporate essence, which is the subject of this talk.
There is, though, one neoclassical theory that does claim to explain why most people override their assumed Hobbesian individualistic nature to work in organisations where internal contracts are rare and labour is largely collaborative. The theory was first articulated in a 1937 article, “The Nature of the Firm”. The author was Ronald Coase, a British economist who taught at the University of Chicago.
Coase accepted the Hobbesian argument that while hostility is natural, it is not always beneficial. He explained that corporations were unities which reduced what he called transaction costs, the expenses of negotiating the market contracts which would otherwise be preferable. I do not want to be unfair to Coase, who won a Noble Prize in economics, basically for this insight. Transaction costs are a real thing, and by separating these frictions of operations from the direct costs of production, Coase opened up some fruitful lines of research and management effort.
However, anyone with even a halfway-Aristotelian understanding of social organisations will be repelled by the hard-core Hobbesian starting point of his argument. From the Aristotelian perspective, there is nothing to explain. Workers and managers will naturally prefer the institutional and organisational unity of corporations to the intense competition and continuous stream of contracts which Coase and other neoclassical economists postulate as theoretically optimal.
Is Coase on the right track, or are people really more Aristotelian? Job advertisements are one sort of evidence. They mostly support the Aristotelian case. It is common these days for corporation to lure potential workers with social slogans such as “join a great team to help create a better world”. It is unusual to see something in the Hobbes-Coase tradition, along the lines of “make lots of money and exercise lots of power with minimal infringement on your individual freedom”.
Such evidence is certainly not conclusive, but I admit to being too Aristotelian to accept that idea that corporations exist essentially to reduce transaction costs.
3) Neoliberal economics
Like the transaction-cost-reduction approach, the third view of the corporation is often adopted by conventional economists, but this view does not actually emerge out of economic theory. Rather, it springs from a strained interpretation of the legal definition of corporations.
By definition, shareholders own shares. A group of academics – I will call them corporate neoliberals – claim that shareholders own more than the entitlements, responsibilities and non-responsibilities legally assigned to their shares. In fact, the neoliberals say, shareholders own the entire corporation. Actually, they go even further than that. They claim that in exactly the same way that the Hobbesian sovereign somehow is the whole state, shareholders somehow are the whole corporation.
Hobbes says that the “multitude” of people “are made one person” through being “represented” by the sovereign. In neoliberal thinking, the multitude of corporate parts, from the workers and factories down to the contributions to the local symphony orchestra, are united into the shareholders’ sovereign will.
Unlike Hobbes’s sovereign, who is usually one person, there are usually many shareholders. However, neoliberals typically assume that they all want only one thing from “their” corporation, the maximisation of the shareholders’ monetary gains.
The argument was presented with alarmingly radical clarity by Milton Friedman, like Coase an economics professor at the University of Chicago. In a 1970 New York Times article, he declared that the sole responsibility of “corporate executives…is to conduct the business in accordance with …[the shareholders’] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society.” In other words, the essence or nature of the corporation is to maximise what came to be called “shareholder value”.
The Friedman quote mentions “conforming” to society’s “basic rules”, which might suggest a broader set of responsibilities. However, Friedman’s idea of social rules was minimalist, as befits his Hobbesian view of humanity. He meant only that shareholders are subject to the same ultimate sovereignty as everyone else, the rule of law established by political governments.
The concept of the shareholder-value corporation is wrongheaded. Its weaknesses are legal, economic, social, empirical, and conceptual.
Legally, the absolutist claim for shareholders’ control has no support. The laws determining the entitlements of shareholders are based on the arbitrary will of legislatures, not on some pre-determined Aristotelian corporate nature. These laws can be and have been changed. Many jurisdictions now explicitly instruct boards of directors not to give total pre-eminence to the interests of shareholders.
Economically, shareholders of successful corporations do not deserve much control over these enterprises. Little or none of any current economic success can be credited to shareholders’ money, which was generally spent long ago. Even companies which issue new shares generally generate most of the money they invest from current operations, not directly from shareholders. Current corporate flourishing has at most an indirect relationship with shareholders’ money. The direct sources of success are today’s workers, technology and so forth.
Socially, corporations do not obviously need a Hobbesian absolute monarch to keep them in order. On the contrary, corporations look much more like the Aristotelian political communities. These engage in shared activities for common purposes and their members are expected to work together in mutually respectful ways. They need structures of authority and responsibility, but not an omnipotent shareholder-dictator, let alone a totally selfish one.
Empirically, governments, the genuine political sovereign, strictly limit the power of shareholders over corporations. Numerous laws, regulations and approval processes ensure that even a shareholder who owns every share of a corporation cannot simply fire its workers, order the construction of a new factory, or decree the sale a new product.
Owners of shares of corporations that are traded on stock markets have even less sovereignty. These ‘financial investors’ are legally classified as “outsiders”, a status which strictly limits what information can be disclosed to them. It is like owning a book but only being allowed to read the table of contents.
Further, these shareholders’ ill-informed desires must be mediated through a board of directors. Technically, the shareholders elect many or all of the board’s members, but in practice the existing members almost always choose their own successors. Generally, only the largest and most active shareholders have any influence on the boards’ decisions.
Perhaps the most telling argument against Friedman’s vision of corporations as shareholders’ property is conceptual. People are at the centre of the operations of business corporations, and since slavery is illegal, people cannot be property.
4) Bureaucratic
My fourth way to understand corporations is as essentially bureaucratic structures. This approach is inspired by two observations, that people are central to all business corporations and that these corporations organise people in extensive bureaucracies. In broad terms, everyone is assigned a “position” or job title, with responsibilities and positions arranged in a carefully defined hierarchy.
The corporate reliance on bureaucracies is sensible, since these “ordered professional structures” get things done. According to the early 20th century German sociologist Max Weber, they offer the “optimum point” of “[p]recision, speed, unambiguity, knowledge of the files, continuity, discretion, unity, strict subordination, reduction of friction and of material and personal costs”. (Economy and Society p. 973) Weber was discussing modern governments, but bureaucracies may be even more central to corporations, which are not controlled by non-bureaucratic legislatures.
In a simple sense, corporations are not simply bureaucracies. The bureaucrats are only there to serve the corporation’s actual organs of procurement, production and distribution: the factories, warehouses, call centres, manual workers, retail outlets, monetary systems, and so forth. However, all of the non-office corporate action is organised by, totally integrated with, and completely dependent on the corporation’s various bureaucratic structures, so much so that corporations can reasonably be thought of as something like extended or embodied bureaucracies.
They can be thought of that way, but is that what corporations essentially, in their nature, really are? Extended bureaucracies are much closer to the corporate essence than are the legal definitions, transaction-cost optimisation, and shareholders’ will that I have already discussed. However, corporations, at least successful ones, are always something more than embodiments of what Weber called the “rationality” of bureaucratic order and professionalism.
To thrive, corporations must also be infused through and through with a distinctly non-bureaucratic force of unity and ambition. This “spirit” can be seen in a “corporate culture” or “brand values”, in deeply felt loyalty, or even in rule-breaking ambitions to bring unexpected innovations and excellences into the life of a particular corporation.
Corporations need some of this spirit to thrive. Without it, they stagnate in steady times and fail to meet challenges when times are tough. The need for something distinctly different from bureaucratic efficiency shows that corporations cannot be reduced to the sum of their rather interchangeable bureaucratic parts. Their essence must be something more or deeper.
Before suggesting what that something is, I would like to discuss where corporate bureaucracies fit in the Aristotle-Hobbes debate. Critics of corporations often see a Hobbesian hellscape. They describe business bureaucrats as people whose personalities and virtues have been crushed by signing up with the amoral forces of the sovereign corporate order. These rule-following drones have sacrificed their freedom and integrity for the sake of a good job and the chance of promotions. Even worse, according to some of these critics, the Hobbesian drives continue in the form of a vicious bureaucratic war of all against all. The soul-stripping and the battles, they say, are waged in successful and struggling corporations alike.
Weber had a different view. He said a good bureaucracy is “a highly qualified intellectual workforce of specialists …a workforce which maintains its commitment to integrity through a highly developed sense of professional honour” (“Politics as a Vocation”, p. 16, my translation). In other words, bureaucracies are best understood as a particularly skilled and especially honourable way for people to live as “political animals”, through what we might call inculturation into virtue-seeking Aristotelian professional communities.
5) Communitarian
The fifth approach to corporations, the communitarian, is even more fully Aristotelian than Weber’s understanding of bureaucracies. “Communitarian” obviously refers to communities, groups of people who are connected with each other and have something substantial in common. These are the organisations in which Aristotle’s “political animals” engage in their natural social activities.
All substantial human groupings, including business corporations, have some features in common. They are fundamentally co-operative, despite frequent internal conflicts. They aim to be long-lasting. Their members have both assigned roles and some freedom to challenge and change those roles. They and their members are supposed to strive to promote the good of the group and of the members. They are supposed to treat their own good as less important than the broader good of the societies and nations in which they operate. The “supposed to” in the last two sentences is important. No community ever lives up fully to these agreed standards.
Besides these universal traits of social groups, business corporations also have some distinct features of their own. As the name suggests, they are oriented to business, in the broad sense of using labour to produce goods and services. Also, as I just suggested, they are predominantly bureaucratic. Finally, money typically plays a much larger role in business corporations than in most types of community.
Each corporation is one unified community, but is made up of many other overlapping sub-communities. There are corporate sub-communities of labour – the various groups of employees. Other sub-communities are centred around particular tasks, organising various intellectual and physical tools of production. Yet others share knowledge and expertise. Corporations also often are parts of sub-communities which cross the corporation’s own legal borders. In these, the unified corporation is tied to outsiders with such common interests as industrial standards, regulation, environmental protection, and civic responsibilities.
Money’s role in corporations deserves a special mention, as it is so deeply misrepresented by neoclassicals and neoliberals, who describe some variety of “making money” to be the central corporate goal. In the communitarian analysis, money and monetary instruments such as shares and loans are much less important. These monetary things are crude but powerful tools for modulating the corporation’s human and institutional relationships. Shares are a distinctly corporate monetary instrument, but their importance to the corporate community as a whole should be analysed objectively, not simply postulated as crucial.
I have lingered on the communitarian understanding of the corporation because, in my judgement, it answers my initial question. The business corporation is, in its essence or nature, a disciplined and unified community of people who share a commitment to promote economic and social goods. The corporation is a special kind of Aristotelian partnership.
I am happy with this description, but it has been subject to three quite sharp criticisms.
First, critics say that this communitarian approach inappropriately ignores the actual legal structure of corporations. The neglect is unfair, they say, because laws are absolutely necessary for corporations to exist. The critics are particularly dismissive of the communitarian demotion of shareholders from Hobbesian sovereign to mere Aristotelian co-operators.
The critics are partly right. They accurately identify a significant difference between the communitarian understanding of corporations and their current legal structure. Further, the communitarian approach does treat shareholders with something like disdain.
However, it is in the law and its interpretation, not the communitarian understanding, which are distant from the reality of corporations. The wide gap between corporate law and corporate reality should not be surprising. The current legal form of corporations has not changed much since it was developed about 150 years ago. Business corporations, on the other hand, have changed dramatically – in the way they are managed and organised, in the scale and scope of their internal and external relationships and responsibilities, and in the importance of the founding shareholders’ money to ongoing operations. In all those domains, the trend has been towards more communitarianism.
The change in corporate economics includes a sharp decline in the importance of shareholders. When the current legal structure was established, it could be argued that the factories that the shareholders’ money paid for were typically the primary source of ongoing corporate revenues and success. In the contemporary economy, however, the importance of the things originally paid for with the shareholders’ money rapidly withers away. Even for quite young corporations, current revenues and profits are almost all generated by employees’ skills and by equipment paid for with money provided by operations or by lenders, not by shareholders.
The second objection to my conclusion is that corporations cannot be communitarian because human nature is too Hobbesian to support large and long-lasting communities built on cooperation and joint striving for excellence.
Once again, the critics are at least partly right. Many self-styled communitarian projects do rely on a dangerously unrealistic expectation of squelching all or almost all selfishness, greed and excessive foolishness. That degree of optimism almost always leads to business failure, sooner or later, because collaboration and trust need to be protected by the discipline of ordered decision-making and firmly enforced rules.
The use of rules, discipline, and ethical expectations is fully communitarian. They are found in the communal organisations of families, churches, universities, and charitable ventures. Indeed, all of those have been organised as legal corporations in some times in some jurisdictions. Business corporations belong on that list. Their communities must be ordered with special care, since the people they bring together are mostly strangers whose collaboration requires dense bureaucratic rules and hierarchies.
The third and final objection to the communitarian essence of corporations is a variation of the second. Even if it is possible for corporations to be communitarian, the critics say, in reality they are nothing of the sort.
As before, the critics are partly right. It is all too easy to find examples of corporate practices that are not very collaborative or do not serve any definition of common good. I have already mentioned the distinctly anti-communitarian acceptance of “shareholder value” as a corporate goal. I could also cite ridiculously high executive pay, frequent environmental neglect, the frequent abuse of customers’ trust, and the manipulation of the venality and foolishness of politicians.
At this point, I want to remind you of something I said at the beginning of this lecture: the accurate understanding what corporations are in their nature helps set expectations for appropriate corporate behaviour. That converse of that statement is also true. When people declare that a corporation is not behaving as it should, they reveal their understanding of what a corporation is when it does act according to its nature or essence.
Following this logic, the condemnation of anti-communitarian activity suggests that corporations are indeed understood as being communitarian by nature. After all, if corporations are really legal or bureaucratic entities that are morally neutral, if they are neoclassical efficiency-machines, if they are engaged in a Hobbesian, neo-liberal pursuit of shareholder value, indeed if corporations are anything other than communitarian, then none of the behaviour I just mentioned is ethically problematic.
I believe that the communitarian understanding of corporations is empirically realistic as well as ethically and conceptually sound. In other words, I claim that corporate behaviour is far more cooperative and oriented to the common good than the reverse. The claim cannot be proven, but it is certainly plausible, at least from an Aristotelian perspective. If people are indeed social, organised, and basically ethical, then their organisations will only thrive when they too are social, organised and basically ethical. Business corporations are certainly thriving in contemporary society, as I pointed out in the beginning of this lecture. It makes sense that, even with their many weaknesses, their nature really is Aristotelian.
6) Stakeholders
I was tempted to close this lecture with the communitarian understanding of corporations, not only because I am persuaded that it is the correct one, but also because it is the most ambitious description, whether considered intellectually, practically, ethically or, in a certain sense, spiritually. However, such a lecture-ending would be unfair to the current academic, business and political debate about corporations, in which communitarian ideas receive little attention, and little of what they do receive is favourable.
The stakeholder understanding of the corporation is discussed more often and more positively. Since it can be considered a weak version of communitarian thinking, it provides a suitable conclusion.
Some business people and commentators were complaining about the excessive orientation of business corporations to the interests of shareholders as far back as the 1950s. However, the concept of companies having several specific stakeholders was first popularised in the 1980s, largely in response to the then rising creed of shareholder value.
The standard list of these stakeholders includes employees, customers, suppliers, affected communities, various governments, the environment, and financial investors, including shareholders. However, there is no stakeholder to claim that corporations should aim at the common good. That is a serious omission, because corporations are social organisations and all social organisation have a broad social responsibility. The larger the corporation, the greater is the overall social responsibility.
The lack of an organisational commitment to the common or social good hints at the most fundamental weakness of the stakeholder perspective. Of course, the durable flourishing of any business corporation obviously requires at least some flourishing of many of these stakeholders, but the stakeholder understanding sees no unity in those disparate flourishings.
Rather, in this view the essence or nature of corporations is found in balancing the interests of all stakeholders. The corporations should help each group: provide fair pay for workers, fair prices for products, fair payments of taxes, fair returns to financial investors, and due (or fair) respect to the environment. There is no sense of how those benefits should be balanced, let alone unified.
Economically, socially, and morally, the communitarian feeling which pervades the stakeholder understanding of corporations ensures that it is clearly preferable to the shareholder-value alternative. Corporate law need not be hostile to a stakeholder perspective, despite the desperate pleading of shareholder-value advocates. As I mentioned earlier, the legal codes of several jurisdictions, including the United Kingdom, now permit or even mandate boards of directors to take the interests of non-shareholders into account in their decision-making.
The communitarian and stakeholder approaches are similar, but they diverge in their judgement of the Aristotle-Hobbles debate. For communitarians, organisations are Aristotelian. The many people involved inside and outside the corporation share an underlying commitment to working together for agreed common goods. There will be conflicts, because people are morally weak and never fully informed, but for a corporation to be successful, the mutual opposition has to be weaker than the community’s shared understanding of the corporation’s missions.
In contrast, stakeholders are often portrayed as inherently conflicted Hobbesian actors. Labour against capital, customers against the environment, shareholders against the government – the different groups are thought to be engaged in Hobbesian struggles for superiority on the battlefield of the corporation.
This conflictual understanding puts the managers and directors in an impossible position. To appease all the stakeholders, they need all of them to “buy into” rules for evaluating the priority of their different claims. Durable agreement on such rules, however, is almost impossible unless the various stakeholders share something like an underlying communitarian commitment to the common corporate good. In short, the stakeholder understanding is only correct to the extent that it presents the sheep of Aristotelian communitarianism dressed up as a wolf of Hobbesian conflict.
A brief conclusion
I will close with two related and critical comments about economists and corporations. First, I want to criticise their neglect. The corporation has played a prominent role in industrial economies for more than a century, a prominence which has increased and spread since the fall of communism three decades ago. Also, the corporate influence on politics, lifestyles, technology and social trends is tremendous and has probably increased over the years.
Despite all this, economic theory pays little attention to corporations. In the models taught to students and used by most professionals, corporations are almost always either assumed away, explained in dubious ways, or portrayed through some tremendously inaccurate oversimplification. There is work to be done, starting with a revival of what used to be called institutional economics.
My second comment is more general. It is about Aristotle and Hobbes. Since the beginning of the modern study of economics in the late 18th century, the profession has been far too influenced by the Hobbesian vision of individualism, selfishness and intrinsic conflict. Today, the influence is so pervasive that even economists who self-identify as heterodox – for example Marxists, behavioural economists, feminists, and the few remaining institutionalists – almost unthinkingly adopt conflictual Hobbesian presuppositions. Their training and models make it very hard for them to think differently.
These intellectual blinders are unhelpful in many ways, but they create particularly severe distortions for the profession’s vision of corporations. Hobbesians will inevitably struggle to see that corporations naturally unify rather than divide, reflect human virtue more than human vice, and embody the orderly hierarchies of bureaucracy, for worse but mostly for better.
If I could make one suggestion to economists interested in corporations, it is to forget Hobbes and embrace the Aristotelian tradition.