[In]Securities GUEST BLOG: Walk Like a Man by Aegis Frumento, Esq

September 5, 2019

Walk Like a Man

Back in 2012, Mitt Romney was widely derided for saying that "corporations are people too."  Mitt's flat delivery made a fairly anodyne comment politically toxic. Legally, corporations really are considered persons, with most of the same rights as humans. And also, corporations are just a group of people working together. Corporations are people all the way down.

And people think odd things. One of the oddest is the question no dog has ever pondered: What is my purpose? A dog will teach by example that one's only purpose is to experience existence to the full. Our purpose is to pursue personal fulfillment. 

Aristotle observed that humans cannot reach fulfillment in isolation. To avoid a nasty, brutish and short life, we need to belong. We are political animals, he said; we are human only to the extent that we live in a "polis," a community. According to Aristotle, only an animal or a god, but no man, is an island.

Membership confers benefits, rights and privileges. But the cost of membership is to foreswear some of our power to act in the world, and to take on obligations that ensure the welfare of the community as a whole, for the sake of our neighbors as well as ourselves. Those obligations are mostly moral. A few of the more important are legally enforced, but we could never enforce every single "ought." A good society is largely self-policed.

All the people who compose a corporation know this. But what of the corporation itself, if it too is a person? In the corporate reform era of the early 20th Century, a number of thinkers converged on the idea that if a corporation is conceptually a person separate from its owners, then it too should assume the obligations of life in the polis, lest it become an animal or a god. The most influential voice in explaining the role of a modern corporation was Adolf Berle's.

In 1932, Berle and Gardiner Means co-authored The Modern Corporation and Private Property. They demonstrated how the wide dispersion of stockholders in modern corporations made the concept of "ownership" meaningless. The modern corporation concentrates so much economic power that it is comparable to the church in the Middle Ages or a state in the modern era. A modern corporation "involves the interrelation of a wide diversity of economic interests, -- those of the ‘owners' who supply capital, those of workers who ‘create,' those of consumers who give value to the products of the enterprise, and above all those of the control who wield power." And with stockholders being so many, so diffuse and so transient, management wielded "powers which are absolute and not limited by any implied obligation with respect to their use." Their conclusions were radical: The passive stockholders, by relinquishing effective control over management, surrendered any claim that the corporation should serve their profit interests alone. As a result, "They have placed the community in a position to demand that the modern corporation serve not alone the owners or the control [that is, management] but all society." That idea caught on and became a linchpin of New Deal corporate regulation that remade corporate governance in the mid-20th Century.

All this was encapsulated in one of the first corporate mission statements in 1943, by Robert Wood Johnson, whose foundation today funds all sorts of PBS broadcasts, but who back then ran Johnson & Johnson.  Johnson wrote a Credo. In it, he set out a list of obligations for his still-private corporation, in four short paragraphs, in this order. First, to provide high quality products to customers at a fair price; Second (by far the longest of the four paragraphs), to ensure the "health and well-being" of its employees (using language that could have come out of an Elizabeth Warren position paper); Third, to support "the communities in which we live and work and to the world community as well;" and fourth -- and most decidedly last -- to profit the stockholders. To run it all, the Credo says, "We must provide highly capable leaders and their actions must be just and ethical." In other words, the professional manager, who came to called the Organization Man.

Johnson & Johnson claims to live by that Credo still. https://www.jnj.com/credo/. Not without hiccups, to be sure. https://www.wsj.com/articles/j-j-shares-buoyed-by-opioid-judgement-seen-as-light-11566937015

But in the 1970s, Milton Friedman and the Chicago school of economics threw all that aside, and famously announced that the sole purpose of a corporation was to generate profits for its shareholders -- society, in effect, be damned. From the 80s on, short-term corporate profits became the key test of good corporate citizenship. The Organization Man was replaced by The Transaction Man, for whom everything is a deal and profit is the only goal. See https://www.newyorker.com/magazine/2012/10/01/transaction-man. In elevating deal-making to an art, finance overwhelmed industry and we have returned to robber baron days. CEO pay went from about 30 times the pay of the median worker in 1975 to over 300 times today. The top 1% of the population went from earning less than 10% of the country's total income to over 20% today. See https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality.

In their book Unequal Gains, Peter Lindert and Jeffrey Williamson showed that 20% share of income to be a marker -- that was the share of income that flowed to the 1% in Britain and America before the Revolution, to the planters and merchants of the new Republic before the Civil War, and to the great industrialists before the Depression.  In each case, the 1%'s share got knocked down to about 10%, and then rose again to 20%. In a democracy, it seems that's when the 99% get fed up and hammer away at the 1%'s advantages -- 20% of income seems to be when the torches and pitchforks come out.

No doubt sensing this, on August 19, the Business Roundtable, comprising the leaders of America's largest corporations adopted a new Statement of Purpose of a Corporationhttps://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans. Read it after reading Johnson's Credo and you'll know where it came from. The ordering obligations are all there: first, to customers; second, to employees; third, to suppliers (Johnson included "business partners" among his first point); fourth, to communities; and last, to shareholders.

The Business Roundtable drew a quick rebuke -- like, within a few hours -- from the Council of Institutional Investors. https://www.cii.org/aug19_brt_response. The Council represents pension funds and other supposedly long-term shareholders, and their main beef is that corporate management is simply trying to entrench itself. "If ‘stakeholder governance' and ‘sustainability' become hiding places for poor management, or for stalling needed change, the economy more generally will lose out."

Putting the Roundtable's Statement and the Council's rebuttal next to one another, you can't help nodding "you're right" to each in turn. But the Council lost me when it said this: "It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value." John Dewy called statements like this "the philosopher's fallacy," the tendency of academics to say abstract things that have no relationship to the real world. Government should shoulder a responsibility? When and in what galaxy?

I don't think so. We who would live in decent communities should shoulder the responsibility to create them. And that includes each of us who works through an organization, be it a roundtable, a council, or a corporation. A person whose only goal is to make money is a sociopath. The Council's response to the Roundtable is not entirely wrong, but we need a better answer than to encourage corporate sociopaths. A corporation that would be a man must be made to walk like one.



Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.