Corporations, Workers, and the Public Interest

By Champlin, Dell P.; Knoedler, Janet T. | Journal of Economic Issues, June 2003 | Go to article overview

Corporations, Workers, and the Public Interest


Champlin, Dell P., Knoedler, Janet T., Journal of Economic Issues


The corporate scandals of the past year have raised profound questions regarding corporations and the public interest. As Thorstein Veblen observed, in a society dominated by pecuniary interests corporations are presumed to be operating in the public interest unless proven otherwise (1988). However, accounting records rigged to inflate profits, insider deals to promote stock sales, and excessive executive compensation in companies in or near bankruptcy are actions that cannot be construed as being in the public interest by anyone's standard. In his classic article on corporate responsibility, Milton Friedman opposed enforcing standards of socially responsible behavior on corporations because it would constitute "doing good with someone else's money" (1970). According to Friedman, businesses have a fiduciary responsibility to their stockholders to maximize profits. Seen in that context, the actions of corporations such as Enron, WorldCom, Tyco, and others disclosed over this past year are noteworthy not becaus e they represent cases of corporate misdeeds but because they violate even the most minimal standard of responsible behavior--the protection of stockholder interests.

In this paper, we examine the role of the legal system in erasing the "public interest" from official corporate duties and in relieving corporations of any responsibility to their own workers. In the first section we discuss the importance of the public interest in the early history of corporation law. We then examine the question that preoccupied John R. Commons and other progressives in the early twentieth century, namely, what is the public interest duty of corporations and government in regard to labor? More specifically, we ask, just who is included in the public interest? Recent corporate scandals have included actions that were clearly harmful to workers, including layoffs, reductions in wages and benefits, and the collapse of retirement savings held in 401(k) plans invested in worthless corporate stock. However, it is primarily activities in the latter category that have been regarded as being outside of socially accepted business practices. In other words, it is not harm to workers as employees that has provoked the outrage but, rather, harm to workers as investors. We argue in this paper that the disparate treatment of workers in regard to the public interest has its roots in the nineteenth and early years of the twentieth centuries. (1)

Corporations and the Public Interest

Unlike modern interpreters of his ideas, Adam Smith was not an ardent proponent of corporations. Given the great legal privileges extended to the joint stock companies of his day, Smith argued that the corporate form was, at best, suited only to such industries as banking, insurance, canal transportation, and public utilities and, at worst, intended to suppress competition (Smith 1937; Baldwin 1987; Korten 1995). Smith's view became the accepted view in the early United States: business enterprises could not incorporate without receiving a special charter from their state legislatures. Moreover, the public interest had to be given explicit attention: during the late eighteenth and first half of the nineteenth century, state legislatures typically held to the view that the corporate form "should not be resorted to unless the public interest was involved" (Evans 1941, 21).

Under that standard, relatively few charters were granted, with the charters typically listing the public benefits to result from the activities of a given corporation. Moreover, the corporations that received charters were kept on a tight leash: corporate charters were limited in duration, often with automatic sunset dates of twenty-five or fifty years; all investors had equal voting rights and in some cases were required to be local residents; corporations were not permitted to own other businesses; and corporations were restricted to engaging in the business activities specifically authorized in their charters (Hightower 1997; Korten 1995). …

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