This dissertation will discuss several interrelated conundrums involving the modern corporation. While the business enterprise has evolved into a corporation, one that serves man and has a legitimate economic purpose because it can promote social welfare, it also, as a social institution, creates significant social injury that requires constraint or control. Can the public continue to benefit from this great provider of wealth, employment and social welfare, while reducing the degree to which corporations cause social injury? Should the corporation in its present form be allowed to continue to serve man, or should it be repaired, severely constrained, or destroyed?

This dissertation will attempt to answer these questions, and it will do so with an interdisciplinary approach, inter-weaving several related disciplines, including history, finance, political science, corporate law, economics, and philosophy. This focus is necessitated by the fact that the corporation as a government-created social institution has greatly impacted our country’s history, its economy, and its financial and political institutions.

The challenge is to create social arrangements that are able to control the corporation in a way that reliably prevents harm or social injury, while at the same time promoting corporate practices which benefit the economy, the public and civil society. I believe that the corporation has strayed from its original purpose of providing both private and public benefits and has gained such economic and political power that it now exerts such power to politically dominate the state, continues to engage in socially injurious practices, and by its conduct may undermine democratic institutions and its very own existence.

Corporations were originally created by government to serve public interests represented by the state. Government allowed corporations to enrich owners and managers in return for serving the public by creating employment, revenue for the government and overall community wealth. In addition to conducting business for private materialistic gain, there was a clear public purpose which often was embedded in the company’s charter or articles of incorporation.

Inevitably, in addition to normal business conduct, corporations create social costs by producing social injury or harm. Certainly, some social injury can be avoided by the corporation, some can be prohibited or mitigated by the state enacting laws and regulations if it is able to adequately provide comprehensive oversight to properly monitor corporate conduct. By the same token, stakeholders, acting as shareholders, can encourage agents or corporate management to prevent social injury by adopting minimum baselines or standards for certain corporate conduct in an effort to avoid some social injury.

Corporations share a common institutional structure defined by law. The existence and capacity to operate depend upon laws written by living, breathing human beings. The corporate structure can be changed by law or eliminated entirely and replaced by another structure. Internally, corporate fiduciaries can adopt and change charters, bylaws and articles of incorporation and stakeholders as shareholders can also legally amend corporate bylaws and advise their agents.

This dissertation will specifically focus on large capitalized publicly-traded corporations operating in the United States pursuant to federal law, regulations and judicial rulings as well as primarily operating under Delaware state law. Other transnational corporations, however, may be similarly structured and operate pursuant to equivalent laws and regulations enacted by other national and/or state jurisdictions.

In the United States, the transnational corporation is a ubiquitous social institution. It has had and continues to have a profound influence on the history of many countries throughout the world. While it was not created in the United States, it migrated and evolved in many ways as uniquely American, well suited to manipulate and eventually dominate a decentralized republican government created by an American revolution based upon a distrust of a powerful government and centralized authority.

Many of the U.S. founding fathers were small merchants, tradesmen, and farmers; industrious, independent and religious. They were not only suspicious of large government, but of large government-chartered monopolies controlling markets.

Ironically, in the twenty-first century, large publicly traded corporations, mostly oligopolies, dominate almost every sector of the economy as most Americans take them for granted while others recognize them as icons; from McDonalds representing fast food to Wal-Mart representing retail. Throughout the global economy these giant corporations are often recognized as symbols of American culture and prosperity.

These mega-enterprises are creatures of government originally created to serve both public and private goals. As a social institution legally constituted by the state, the corporation has been extremely successful in creating great private wealth, employment, additional small business opportunities and tax revenue for the public sector. The multiplier effect of business enterprise development and corporate economies of scale have resulted in the most efficient and effective method of organizing the production, marketing and distribution of goods and services, providing minimum standards widely accepted in capitalist as well as non-capitalist countries.

The corporate structure, providing limited liability, the flexibility of raising equity and debt capital, unrestrained by legal responsibility on the part of owners, has allowed the corporation to raise unlimited amounts of money from multiple institutional and individual sources. Corporate perpetual life or immortality, coupled with the ability to spend vast sums of money on productivity generating technology, research and development, and a vast liquid secondary market for easy and inexpensive transfers of ownership, have created some of the largest economic entities in the world. By 2010, 42 of the 100 largest economic entities, and 59% of 150 largest, were corporations. The revenue of Wal-Mart alone exceeds the GDP of 174 countries combined.

Early corporations in the United States were limited to a fixed number of years by state-enacted charters for specific public purposes. These charters were often not renewed and could be revoked by legislative bodies, based upon whether or not these legal entities served a public purpose. By 1800 only about 200 corporate charters had been granted by the states, but by the 1870s all charters had disappeared as corporate lawyers and lobbyists were successful in convincing legislatures that there should be no limit to corporate registration in order to operate for any lawful purpose.

As the corporation evolved, ownership became separated from control and professional managers replaced owners as the dominant decision makers in guiding corporate policy and conduct. This structural evolution of the separation of ownership from control was reinforced by the increasingly executive supremacy relative to the ability of management to manipulate internal bylaw and charter revisions to increase their dominance over board fiduciaries as agents of relatively powerless owners or principals. This ascendancy by corporate officers combined with their surrogate lawyers’ and lobbyists’ abilities to weaken state and federal corporate oversight, allowed management to gain nearly absolute power over the corporation.

The growth of corporations was a natural outcome of business expansion and the need for larger enterprises to expand either horizontally of vertically or both in an effort to initially compete with similar growing private social institutions, and later in an attempt to control or dominate national and global markets. There was also competition between corporations and government, representing civil society for natural resources, including land, water, timber and other extractive commodities and valuable resources.

The evolution of the corporation, especially in the early 20th century, generally served human purposes and presented society with optimal outcomes by maximizing both corporate profits and public benefits by producing economic development, employment and tax revenue. Civil society and government saw these public benefits provided by business enterprises as socially beneficial and social institutions not only worth preserving, but also worth subsidizing with government funds, tax expenditures and public sector market opportunities. These subsidies included special tax benefits (exemptions, exclusions and tax credits), access to discounted state and federal government debt financing, as well as providing private sector access to government infrastructure, health, welfare, defense and other projects normally or originally funded by government which frequently led to the privatization of public services.

According to the Federal Joint Committee on Taxation, in 2013 there was $154 billion in special federal corporate tax breaks combined in 135 individual provisions of the U.S. tax code. This does not include in excess of another $50 billion of state and local government incentives provided corporations every year.

As the relationship between government and corporations evolved in the United States, and the competition for resources grew, corporations began to need government as customers or suppliers, and government began to need corporations to provide specific products and services. While this symbiotic relationship grew between government and powerful corporations as social organizations, it was not necessarily equal. Often, the government is the sole source of a commodity(ies) and/or often the corporation or group of corporations (i.e., oligopolies) are the sole source(s) of products or services. On the other hand, however, both social institutions often gain advantages, but not necessarily are both advantaged equally at all times.

Extractive industries require access to raw materials, as construction companies require access to timber for lumber products; both are available on public lands. The same is true of companies involved in the search for oil and natural gas and other commodities, including natural resources, which are also available on public lands. Conversely, the public sector requires products and services, including those necessary for national security, from private industry, businesses and large corporations. In both cases, the relationship may be mutually advantageous. Some of the first private monopolies were created and approved by government to be mutually beneficial to both the public and private sectors, including transportation and energy.

In the late 18th century, business enterprises were lauded for the positive unintentional consequences of their operations by one of the most admired and famous of early moral philosophers, Adam Smith (1723-1790), who clearly articulated that materialistic self-interest of businessmen may unintentionally benefit the public:
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very few words need be employed in dissuading them from it.

Smith, in his lifetime, saw great advantages for business enterprises and a market economy under capitalism. He believed that businesses as social institutions often promoted well-being and that there was a rationale for allowing business to have the freedom from government or outside constraint to enable them to maximize economic benefits for the public.

By 1939, however, it was apparent that the corporation in America in almost every field it had entered had grown and become partially or wholly dominant, and that almost all economic activity by then was carried on under the corporate form.

While Smith could not have foreseen the undeniable economic growth and power of the corporation by the mid-20th century, he did recognize that businessmen would often engage in activities to advance their own materialistic self-interest while ignoring the public interest. He acknowledged that “ . . . man, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppose the public, and who accordingly have upon many occasions, both deceived and oppressed it.”

While Smith believed that materialistic self-interest of businessmen can unintentionally benefit the public, it is not unlikely that such materialistic self-interest can also unintentionally harm the public or cause social injury.

As human beings evolved in nature and interacted with each other within society, two often conflicting concepts of individual morality developed: one that is personal, interdependent and benevolent and one that is impersonal, independent and self-interested. Personal morality is most often benevolent, compassionate, and sympathetic; usually consisting of relationships between familiar individuals in a community setting where mutual benefits prevail and there is a sharing of similar values and ideals. Normally this kind of morality reinforces a sense of community, shared responsibilities, duties and obligations, where frequently there is emotional bonding between family and community members, as well as between colleagues sharing similar goals and objectives based upon trust.

The impersonal morality of self-interest, on the other hand, is based on independence and individualism, and if excessive, can lead to egoism, selfishness, and self-love. Extreme self-interest has been identified with man’s passion for being concerned excessively with oneself, primarily at the expense or sacrifice of someone else. Self-interest is inherent in human nature, often being considered virtuous, and should not be presumed selfish unless it leads to harm or neglect of others. There is a natural tension, however, between individualistic self-interest, which can easily become excessive, or selfish, and a morality based upon benevolence, compassion for others and a concern for the common good. While it will be argued that self-interested action may serve others when there is no intent to do so, it is also possible that self-interested actions may unintentionally harm others in society.

There is a natural tension between the concern for oneself and the concern for others. In this regard, individuals may often choose their own self-interest over the welfare of others. Our material well-being and those that are close to us, while having no greater intrinsic importance than the well-being of others, our own moral conceptions can also recognize that we unobjectively view the world from the perspective of our own interests, which are given special consideration.

Self-interest is often identified with materialistic self-interest, related to unfamiliar individuals or organizations involved in economic transactions or business relationships. Materialistic self-interest on many occasions may be in conflict with the individual morality of benevolence, duty and obligation since one may have to choose between a financial gain (self-interest) or a benevolent act (altruism). Many Enlightenment philosophers in the eighteenth century identified individual self-interest as inherent in human nature, but it was Adam Smith who uniquely juxtaposed the often conflicting personal morality of benevolence with the impersonal morality of materialistic self-interest in his seminal works, The Theory of Moral Sentiments written in 1759 and The Wealth of Nations written in 1776. While he was nationally recognized, admired and frequently publicly quoted for his treatise on moral sentiments, it was only after his death that he was widely recognized as the father of laissez-faire capitalism based on his economic theory revealed in The Wealth of Nations.

The Theory of Moral Sentiments, for which Smith gained national praise and attention, described man’s sympathy for others as similar to that of the compassion of a spectator which arose “from the consideration of what he himself would feel if he was reduced to the same unhappy situation.” Smith argued that concern for others was a basic feature of human nature, recognizing, “However selfish soever man may be syposed, [sic] there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.” Smith maintained that the happiness of others is “necessary” to human beings; meaning that man is naturally compelled to consider others’ happiness when deciding how to act and that we act out of consideration of others regardless of what utilitarian benefits we may derive from such action. He argued that man was inherently or naturally sympathetic to other men and believed that the community of men required reciprocal assistance “afforded from love, from gratitude, from friendship, and esteem . . . ,” all necessary for society to flourish and be happy.

Smith’s view was certainly communitarian in that his conception of human nature required man living in a society to be dependent upon others in the community, based upon frequent “intercourse with others and mutual sympathy.” Smith in The Theory of Moral Sentiments recognized the necessity of self-interest for the preservation of man’s life and the protection of his community, but only self-interest tempered with benevolence, compassion, pity and sympathy. Smith’s view of morality in The Theory of Moral Sentiments is consistent with communitarian beliefs that the nature of man is shaped by the values and culture of the community and a recognition “that communal bonds are inseparable from moral character and obligation, [and that] . . . one’s moral identity and one’s obligations are inextricable.

Smith’s view of morality in The Wealth of Nations, published seventeen years after The Theory of Moral Sentiments, relates to economic transactions, however, completely ignoring his communitarian and anti-utilitarian view described in The Theory of Moral Sentiments, and focused instead on man’s actions motivated solely by self-interest. Smith explained:
Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities but of their advantage.

In The Wealth of Nations, Smith speaks of “all the necessaries of life,” falling under the governance of self-interest , making no mention of man’s benevolence, compassion or natural sympathy. Smith seems to differentiate personal relationships from impersonal economic relationships. In economic relationships, when one is dealing with “anonymous others,” and there is little or no familiarity, people may feel little or no benevolence, or as James R. Otteson claims:
The people with whom one deals in the marketplace, the people with whom one barters, trucks, and trades, are for the most part strangers; frequently one does not know them at all, less frequently, they are but distant acquaintances, and only rarely are they family members or close friends.

Therefore benevolence diminishes as one moves outward from familiar social relationships surrounding each individual within the community, and as Samuel Fleischacker explains:
Thus, we feel the strongest sentiments of love and concern for our immediate families, a somewhat weaker level of those feeling for the friends and neighbors we see on a regular basis, a considerably weaker level yet for our nation as a whole, and a very weak benevolence, . . . for the immensity of the universe.

Smith’s claim that there may be unintended public benefits resulting from impersonal economic transactions, coupled with diminishing benevolence among individuals as they become more unfamiliar the further relationships are removed from the local community, would tend to inflate the importance of impersonal economic transactions and reduce the importance of communal relationships based on compassion, sympathy, duty and obligations. Unintended public benefits of increased economic activity, no doubt, include the creation of employment, additional business opportunities, the creation of personal wealth and increased tax revenue for the larger community. Individual materialistic self-interest advocated by Smith created advantages and opportunities for community economic growth and private wealth creation. Smith also, however, maintained that businesses, while having more knowledge about their own self-interest, would often engage in activities to advance their own materialistic self-interest, while ignoring, overriding or harming the public interest. In other words, according to Smith, the pursuit of materialistic self-interest by those engaged in economic transactions may unintentionally benefit the public or may intentionally or unintentionally harm the public, or possibly do both. For Smith this caused no moral dilemma; it was simply a fact of life and the result of man’s natural materialistic self-interest when engaged in impersonal economic transactions.

Ironically, nowhere in The Wealth of Nations did Smith reference his earlier The Theory of Moral Sentiments, nor make reference to his four principal virtues: justice, benevolence, prudence, and self-command; nor did he discuss an individual’s feelings for his fellow man, expressing sympathy, compassion, or pity. It was as if Smith accepted a kind of moral dualism, where one’s personal morality, which he had previously discussed in The Theory of Moral Sentiments, was checked at the marketplace door.

British Professor John Hendry believes that Adam Smith’s dual moralities have evolved into a “bimoral society,” arguing that, “So long as the morality of self-interest was confined to impersonal economic relationships, leaving personal relationships to be guided by traditional morality, the two realms could be kept psychologically apart.” Hendry questions whether or not the two rival moralities can presently actually coexist, when psychologically conflict becomes inevitable, and whether or not the morality of self-interest inevitably undermines the morality of obligation. He postulates that business often abandons “the dictates of traditional morality.”

Albert Z. Carr agrees with Hendry that when unfamiliar individuals are engaged in economic transactions, personal morality is often ignored, claiming that “business operates with a special code of ethics,” “a business strategist’s decisions must be impersonal, . . . subordinating personal feelings,” and more importantly:
Most executives from time to time are almost compelled, in the interests of their companies or themselves, to practice some form of deception when negotiating with customers, dealers, labor unions, government officials, or even other departments of their companies. By conscious misstatements, concealment of pertinent facts, or exaggeration – in short, by bluffing – they seek to persuade others to agree with them.

James R. Otteson argues that Smith’s description of economic exchanges between unfamiliar individuals pursuing their own interests produces an unintended system of order in large-scale human institutions which include individual standards of morality expressed in Smith’s Theory of Moral Sentiments, based upon people’s natural feeling of benevolence which varies directly with familiarity. Otteson believes that the “familiarity principle” explains why different motivations in different areas of life are proper, and “in particular why self-interest is properly the motive people feel in economic activities.”

Hendry’s “bimoral society,” and Otteson’s “familiarity principle,” both seek to explain and/or reconcile Smith’s dual moralities of personal, familiar, and interdependent relationships that he penned in The Theory of Moral Sentiments, with impersonal, unfamiliar and autonomous relationships between individuals interacting under materialistic capitalism which he later described in The Wealth of Nations. In essence, Smith recognized that individuals could easily maintain a personal morality based upon compassion, sympathy and benevolence within a smaller close knit community in which everyone was a family member or familiar, balanced with necessary and natural self-interest when engaged in economic transactions with these known individuals. As economic transactions moved further away from the community of familiar individuals, benevolent or personal morality becomes less important, and materialistic impersonal self-interest becomes more important. The more individuals deal with unfamiliar others, or impersonal organizations engaged in economic transactions, the less likely each is to recognize personal morality expressed as compassion, sympathy and benevolence, and the more likely morality is expressed as individualistic, impersonal and materialistically self-interested. If such materialistic self-interest becomes excessive, it can lead to selfishness, indifference and autonomous or individualistic behavior.

The philosophy of Adam Smith was especially compatible with liberal democratic theory as it was evolving in the United States in the late eighteenth and early nineteenth centuries. Liberal democracy in the United States established a sovereign constitutional government with limited republican powers to control narrow “natural” individual self-interests, primarily related to protecting property and contractual rights. Enlightened self-interest coupled with a minimal state provided economic advancement amidst a liberal democratic system based upon equality and liberty, which was conducive to the American concept of individualism.

It is natural for man to express both a personal morality of compassion, sympathy and benevolence toward other men, as well as an impersonal morality of self-interest of independence and individualism when engaged in economic transactions with unfamiliar individuals. As one distances himself further away from the community while engaged in economic transactions, the more impersonal such relationships become, and the more the relationship evolves into materialistic self-interest. If such self-interest becomes excessive, it can degenerate into selfishness, indifference and autonomous behavior. The results of materialistic self-interest, however, can unintentionally benefit the public and/or unintentionally or intentionally harm the public, or possibly both.

Self-interest once it becomes excessive can lead to overindulgent or extreme behavior which can result in intentional or unintentional social harm or injury. An insatiable desire for wealth and/or income can also often lead to undesirable behavior. The desire for wealth and/or income, in and of itself, may not lead to bad, anti-social or illegal behavior. On the other hand, when the desire is extreme and insatiable and is not balanced by the morality of obligation described above, it can lead to excessive self-interest which can cause social harm or injury.

The extreme desire for wealth that is insatiable has often been described as the “love of money” and likened to an addiction, or compared to a dependence on drugs, alcohol or gambling which can become habitual.

It is not, however, necessarily always the strength of the desire for materialistic self-interest, or for material things, but the fact that the agent privileges the satisfaction of such desire over other moral requirements or obligations. In fact, an agent, or an individual, can have a very strong desire for material things without possessing excessive materialistic self-interest, just so long as the individual is able to disregard the desire when it conflicts with strong moral obligations to others.

Excessive materialistic self-interest can frequently lead to greed, egoism, self-love, indifference and autonomous behavior that may cause social injury. Social injury can be intentional in the case of robbery, extortion, kidnapping, fraud and other violations of law.

There are numerous and various categories of social injury, including illegal acts of physical damage to property or inflicting bodily injury to natural human beings, including the taking of life, or torture, both mental and physical. Physical acts of injury generally receive priority under law, domestic and international, which include violations of human rights, including crimes against humanity, involving torture and extra-judicial executions. Social injury also includes labor rights violations, including the intimidation of workers, firing union leaders, preventing union organizing, abducting and torturing or beating labor organizers and other abusive tactics.

Society can also be harmed by acts of intentional dishonesty, malfeasance, corruption and bribery, or other acts of wrongdoing brought about by excessive materialistic self-interest. Additionally, social injury can result from “acts of God,” and natural causes.

Social injury can also be caused by economic, financial and/or environmental activities and can be the results of multiple causes and effects, and the agents behind them can be spatially dispersed throughout the globe, and in the case of climate change, may cause long-term multiple injuries and be intergenerational.

This dissertation is primarily concerned with acts by natural human beings, often acting as directors of corporations which cause unintentional social injury. Excessive materialistic self-interest that causes unintentional social injury is injury that is a consequence of a legal or illegal act. Social injury is often harm inflicted upon individuals and groups in civil society by business enterprises or large corporations conducting ordinary business in the pursuit of profit and increasing shareholder value for owners and other stakeholders alike.

The 2008 financial crisis and the recession which followed exemplified the results of excessive materialistic self-interest of men and women primarily working in financial services, including real estate and bank and non-bank financial institutions, that were incentivized by excessive materialistic self-interest (greed) to engage in fraudulent or illicit transactions, and/or non-fraudulent transactions in an effort to increase wealth for themselves and/or for the corporation.

The activities described above were self-interested economic transactions that involved unfamiliar others, or impersonal organizations in which there was little, if any, recognition of personal morality expressed as compassion, sympathy or benevolence, but was expressed as individualistic, impersonal and materialistically self-interested.

It is also evident from the consequences of the financial crisis that there was a lack of concern for others, as the concern for oneself overcame the needs and interests of the vast majority of Americans. This privileging the satisfaction of their own material wants over the obligation to others created excessive materialistic self-interest which created great universal social injury or harm.

The results of the 2008 financial crisis included 7 million Americans losing their jobs, 25 million (over 16% of the workforce) who became unemployed or underemployed, 2 million families who lost their homes to foreclosure, $13 trillion of wealth that disappeared and possible generations of Americans that will avoid markets similar to those that responded to the 1929 Depression. As the economy is analyzed post-recession, while the financial institutions that were bailed out have now not only regained their economic strength but grown stronger and are much more concentrated, and the divide between the wealthy and the middle class has grown larger.

The financial damage inflicted on the economy during the Great Recession was so severe and caused such widespread social injury that it should not be mistaken simply as the results of an unfortunate event in a smoothly running capitalist market economy. It should also not be seen as simply “crony” capitalism. It was not the results of free enterprise creating winners and losers in a competitive market environment, but a crisis that created great damage to civil society, causing millions of Americans to lose their jobs, increasing poverty, destroying homeowner equity and forcing millions of people into foreclosures.

This dissertation will also discuss other forms of social injury or harm that are generally recognized in domestic and international law as violations of human and labor rights, including environmental damage; all of which has been traditionally recognized by governments and international organizations as having a higher priority of social injury to be addressed by the state through public disclosure, rebuke, adjudication, enforcement action and remediation.

“Social injury,” as described by Simon, Powers and Gunnemann, can result from “ . . . activities which violate, or frustrate the enforcement of rules of domestic or international law intended to protect individuals against deprivation of health, safety or basic freedoms.” References to corporate social injury may also include such conduct or behavior as an injurious impact on employees, consumers, and/or other individuals and groups resulting directly from specific actions or inactions by a company. Social injury can also encompass other harm to civil society, such as violations of environmental law and long-term environmental damage leading to unhealthful living conditions, i.e., climate change and pollution.

Social injury or harm caused by a corporation in its normal operations, however, is not surprising, considering that corporations in the twenty-first century are immersed in almost every activity in the United States and around the globe. Social injury can occur; however, without laws necessarily being violated, but where consent has not been obtained by those injured and where there is acknowledgment by society that there is a minimum moral obligation or duty not to inflict harm, intentionally or unintentionally, and if social injury is discovered, there exists an obligation to halt such activities and remediate the injury. This dissertation will recognize and discuss at length, specific corporate social harm or injury that has been the result of corporate activities related to individual decisions made by agents acting as corporate fiduciaries, that in addition to violating the law or moral obligations to society, have also created substantial social injury, both prior to and during the 2008 financial crisis.

Injury inflicted upon U.S. society by financial corporations and individuals in the financial services industry, not only damaged the overall economy, but produced ongoing harm to individuals who lost their employment, homes, income, access to healthcare and other necessities of life.

The social injury described above relating to that of financial institutions during the crisis and recession has contributed to and has compounded the social harm caused by the growing divide between the middle class and working class and the rich that has been growing faster, both in terms of wealth and income. The richest 1% of Americans possess over a third of the country’s wealth, more than the combined wealth at the bottom 90% of American families. The top 10% of American households take in 42% of all income and hold 71% of all wealth. Since the mid-1980s, the top 1% of Americans have increased their share, the largest of the gains accruing to the richest 1%; and half of those gains going to the top 0.1%. From 1979 to 2005, the top 1% of all taxpayers went from gathering 9.18% of all U.S. income to 16.97%, or an increase of 85%, while finance professionals in the top 1% went from controlling 0.82% of all U.S. income to 2.77%, or an increase of 238%.

The tremendous growing inequality of wealth and income has led many financial analysts to warn that it threatens the U.S. economy’s ability to expand, creates financial instability and increases political dysfunction. According to the World Economic Forum, for the third straight year, 700 global experts assessing global economic risks, found that the world’s worsening income inequality was the risk most likely to cause serious damage around the globe in the coming decade.

Contributing to the dramatic increase in global inequality of wealth and income leading up to the 2008 crisis and recession and continuing post-recession, is the seemingly undeterred advance of corporate CEO or executive compensation levels. While this may appear to have played a minor role in the financial crisis and represent an insignificant social injury, excessive salary and benefits, including large corporate severance allowances provided by self-nominated compensation committees and boards of directors of large oligopolistic corporations, represents a painful political reminder of how a minority of privileged and wealthy individuals dominate the economy. As will be discussed below, increasingly large salaries and other compensation paid out to CEOs before, during and after the recession, following multi-trillion dollar taxpayer bailouts, on top of billions of dollars of fines and litigation expenses extracted from shareholder and stakeholder pockets, represents serious and egregious social injury. This, compounded by the public sector losing literally billions of dollars in federal tax revenue by the largest corporations utilizing foreign tax havens to avoid U.S. taxation, represents social injury experienced by the state as well as multiple stakeholders, including all of civil society.

This dissertation will focus much of its analysis on the 2008 financial crisis and recession, but at no time, however, will it attempt to prioritize categories of social injury or specific levels of injury in an effort to quantify or balance corporate social benefits with social injury. To do so would be impossible.

Each corporation would have to be quantitatively and qualitatively measured for not only public benefits each corporation received from the state and stakeholders, but what benefits each corporation provided to both private and public interests. It would also be necessary to measure all of the social injury, and benefits which would include environmental harm, or benefits, cumulatively produced over the lifecycle of an enterprise. In addition, because corporations have different life cycles, and exist through mergers, takeovers, bankruptcies and restructurings, the quantitative data alone would defy modern algorithmic modeling and creation.

Relative to individual corporation information, it is currently impossible to solely balance categories of qualitative and quantitative corporate data regarding social and environmental injury. While data systems have been developed in the past relating to social harm in specific categories, there has been no uniform methodology developed to quantify or weigh injury against benefits, or balance one type of social injury over another.

Practically speaking, a corporation that may excel in one category of social performance, such as governance or employee relations, but may produce an extremely harmful product, i.e., tobacco. In case of a tobacco company, one or two beneficial categories of social performance cannot be weighed against producing a product that causes a significant social injury, such as killing its customers as well as non-smokers. By the same token, a mortgage broker in providing accessible and low cost mortgage financing to promote home ownership, while processing fraudulent paperwork to generate high commission sales, creates grave social injury, not only because such practices violated the law, but the resulting economic recession led to even greater social harm.

In other words, corporate social injury cannot be “offset” or balanced by another corporate social benefit. There must be transparency to reveal an injury, such injury or harm should be remediated, if possible, and the corporation should take action to prevent similar injury from occurring in the future.

In the past, corporate social injury was initially overlooked by the state, as the public benefits provided by the corporation were seen as more predominant. As corporate power evolved, however, and social injury became more widespread, pronounced or egregious, often taking the form of illicit or illegal conduct, the state and civil society intervened, seeking remedial action to constrain such corporate activity. This response to restrain certain conduct was an attempt to prevent social injury, fearing that without state control, the corporation’s conduct would undermine its legitimacy and acceptance as a valuable social institution to provide public benefits.

The state, the stakeholder and the fiduciary have all at one point or another been called upon to constrain or control irresponsible and socially injurious corporate behavior. The state attempts to control socially injurious behavior by adopting legislation and enacting regulations to disclose, prevent, reduce and/or eliminate activities that create social injury and occasionally also attempts to remediate such injury.

Stakeholders, acting as shareholders, have attempted to control corporate socially injurious practices by engaging corporate management in dialogue and frequently by introducing shareholder resolutions to discourage socially injurious practices and encourage positive corporate governance and enlightened corporate behavior to avoid or reduce such conduct in the future.

Individuals acting as corporate officers and directors have been called upon by shareholders to exercise their legal duties as fiduciaries pursuant to stakeholder theory acting in the best interest of the corporation pursuant to the business judgment rule to restrain irresponsible socially injurious corporate conduct.

While corporate law in the United States can be changed by legislation, it can only be changed by state legislatures. Based upon a decentralized republican form of government in the U. S., all fifty states are authorized to enact and amend corporate statutes, but such action will be limited to affecting only those corporations which are registered or chartered in the state. In addition, and as will be discussed below, since most large publically traded corporations are chartered under the laws of Delaware, stakeholders, including shareholders as legal owners of the corporation, also have severely limited powers to actually change the bylaws or amend the articles of incorporation. Conversely, self-nominated directors, pursuant to fiduciary standards and based upon the business judgment rule, have almost unlimited powers in controlling the corporation.

Delaware competes with other states to create a legal regime that benefits managers at the expense of shareholders as well as other stakeholders. On the other hand, shareholders continue to work to create an efficient and more democratic governance framework. The ability of a corporation to adopt the so-called internal affairs doctrine, which dictates that the rules of corporate governance be based on state law where the corporation is chartered, is somewhat illogical, since corporations operate not only interstate, but globally. This dissertation will argue that it makes more sense to enact corporate registration at the federal level, as the federal government currently has a centralized regulatory framework for global corporations operating in the U. S. This could provide not only consistent registration and chartering, but provide federal oversight to remove inconsistencies and often conflicting state chartering requirements.

Also discussed
in more detail below, to produce good outcomes, it may be necessary that either the state, the stakeholders, or both, adopt appropriate standards of mandatory corporate conduct or protocols to not only control corporate conduct, but reduce the cost that may fall on both private and public interests to remediate corporate social injury.

As an important social institution, the modern corporation creates value, but it also creates additional burdens upon society, including serious social injury. The state and/or the stakeholder have two means to address these issues, either individually or collectively: 1) adopt laws, rules or appropriate protocols to reduce the social cost and injury; and/or 2) reconcile the claims of those who are unjustly harmed by providing them various forms of compensation. While this dissertation will discuss both, it will primarily focus on the former (1).

On the other hand, the utilization of the fiduciary obligation of the duty of care can also address problems early to avoid extended, lengthy and repetitive social costs that historically have fallen upon those least able to afford such burden. Corporate social injury or occasional bad outcomes will occur, but if standards are adopted as an overall protocol for obligatory corporate management conduct, the government, civil society and stakeholders will not need to consistently intervene with legislation or regulation or by attempting to adopt and enforce rigid governance control.

That being said, however, the current corporate structure and governance regime inadequately serves, shareholders, other stakeholders and the public. The corporation as presently designed and based upon its current operational standards falls far short of minimizing social injury while maintaining social value. Its consistent structural and operational inadequacies continue to undermine its own credibility and legitimacy as a social institution.

The corporation, a creature of government, chartered by the state, has the right to engage in any lawful business activity. It is not prohibited by law to engage in social injury unless it is an “unlawful” business activity. There is also no law that requires a business to provide shareholders a return on their investment, pay dividends or maximize shareholder value. Corporations are also not required by law to make a profit.

On the other hand, it is generally accepted that corporations should produce profits and should increase the wealth of owners, but it is not specifically required by federal or state law, nor is it required by corporate charter, the bylaws or the articles of incorporation. Obviously, if that were the case, many, if not most businesses, would be illegal.

More importantly, however, it is generally accepted that corporations should serve private interests as well as consider public interests, as corporations are authorized and given legal permission to operate by state law.

Unlike government, corporations are not required to serve only public interests. While it is questionable that governments, state and federal, in the United States always serve only public interests, they are by law required to do so. Public corporations are owned by the “public,” or anyone that can afford to buy a company’s stock, including individuals, public and private corporations, non-profit and for-profit institutions, pension funds and other retirement accounts and governments. Corporations are not only “public” in the sense that they are authorized by public charter to conduct lawful business, but they are actually owned by the public, and are responsible to the public as they are not only authorized by government, but regulated by government, representing the public interest.

As will be discussed in more detail below, I will argue that corporations are owned by shareholders, as a class of stakeholder, but responsible to all stakeholders by law, custom and practice. Stakeholders are not only owners, but include employees, mangers, customers, vendors, creditors, as well as anyone that is affected by the corporation, including government and civil society.

While non-shareholder stakeholders are not legal owners and therefore do not have the same limited access to corporate agents as principals of the corporation, other stakeholders have legal rights as employees, vendors, contractors, customers and debt holders. Also, government should be considered as a stakeholder, since government, in many ways, including financially and politically, is certainly affected by corporate activities. In the United States, government represents the public interest.

I will argue that the corporation’s board of directors are legally obligated pursuant to Delaware law to consider the interests of all stakeholders when making policy decisions. I shall also argue that boards of directors should be prohibited from causing social injury described above and in more detail below. Consideration of stakeholder interests implies that directors when engaged in concentrated study, policy review or when making decisions, should make an effort to arrive at purposeful decisions balancing often conflicting claims or evidence among all stakeholders. I will argue that it does not mean taking only one stakeholder’s interest in mind, but all constituent stakeholders, which legally comprise “the corporation.” It will also be argued that currently, corporate boards of directors do not engage outside experts or otherwise receive independent advice from stakeholders, other than occasionally from shareholders, who have limited legal access to management and to the board of directors through the proxy and at the shareholders meeting, which is held annually pursuant to state law. Almost all information furnished to directors, as fiduciaries, regarding corporate policy and operations is provided by management. This raises important legal questions discussed in more detail in chapters five and eight regarding fiduciary duty.

I have my doubts that the modern corporation in some form can be saved as a valuable and profitable social institution, unless and until stakeholders and government have the political will to make significant and long-lasting structural changes to the corporation. The current corporate structure, state and federal laws, and corporate governance practices no longer serve the corporation or the public. Without radical legal, regulatory, constitutional and corporate governance reform, the corporation will continue to gain in economic and political power and influence, attempt to totally control the state, and threaten the national economy and political sovereignty. The corporation may eventually undermine itself as a valuable social institution by continuing to maximize private wealth for fiduciaries and some stakeholders, while ignoring its obligations to civil society. It risks alienating the majority of stakeholders and being replaced by an entity solely benefiting public interests.

This appraisal of the nature of the corporation is the result of my belief that what primarily motivates contemporary corporate conduct is what primarily motivates man himself: materialistic self-interest. The dominant doctrine of personal conduct and motivation in Western society today is materialistic self-interest, which has become excessive, leading to selfishness and indifference, eventually contributing to socially harmful behavior.

Materialistic self-interest becomes excessive when an individual or agent privileges the satisfaction of their own material desires over the obligations to others. A balance is required between materialistic self-interest driven to excess, and ordinary morality, or the morality of obligation and that of fiduciary duty. Ultimately, materialistic self-interest must be controlled and balanced by man himself. The less man can control his excesses internally, the more man will need to be controlled externally by the state and the stakeholder. If, in fact, the corporation is destined to control the nation and state sovereignty, it must be man himself who restores Aristotle’s balance and that of man’s own virtue of character.

The first chapter will discuss the creation and evolution of the corporation from a largely small, private and family company into an independent, semi-sovereign legal entity unrestrained by national and state governments. This chapter will show that the modern corporation has been able to limit government and regulatory supervision due to the structure of overlapping federal and state laws and regulations, including successful litigation and judicial rulings favorable to corporate management, which have allowed corporations to spend large amounts of money to lobby Congress and finance political campaigns. This has led to the increased domination of corporations over the U.S. political system and government.

The second chapter will discuss the financial crisis of 2008, which was, in large part, caused by Congressional deregulation. This chapter will also review how Congress adopted the Dodd-Frank Act authorizing regulators to re-regulate financial corporations, including large banks and non-bank financial institutions and how that has failed to constrain corporate social injury or effectively improve corporate governance oversight and transparency.

The third chapter will explore the evolution of stakeholder power, represented primarily by institutional shareholders and their attempts to constrain corporate power through portfolio screening. This chapter will specifically review a form of institutional ownership self-regulation that, while making an important moral statement, has failed to control corporate social and environmental injury or improve corporate transparency and governance.

The fourth chapter will explore stock ownership, fiduciary standards for institutional investors and investment professionals, shareholder advocacy and SEC rules of shareholder engagement. This chapter will argue that shareholders have limited ability to successfully challenge corporate management and that while many corporations have adopted voluntary corporate codes of conduct, such codes are not legally binding and stakeholders have no recourse when violations occur. This chapter will also argue that without statutory, regulatory and constitutional change, stakeholders and civil society will be unable to prevent the continuation of corporate social injury.

The fifth chapter will review the current law regarding fiduciary duty as it relates to stakeholder versus agency theory, as well as discuss the traditional fiduciary duties of trust, loyalty, care and good faith consistent with the business judgment rule. It will be argued that stakeholder theory provides directors in their capacity as fiduciaries to have the flexibility and independence to represent all corporate constituencies on behalf of the best interests of the corporation, shareholders, other stakeholders and civil society. This chapter will argue, however, that stakeholder theory should be codified in federal statutes to insure that directors acting as corporate fiduciaries have a legal obligation to represent all of its natural constituencies, taking into account the interests of the public.

The sixth chapter will summarize how private businesses have evolved into large social institutions that have come to dominate the state and how the state, including Congress and regulators, have been unable to constrain corporate power to prevent social injury. This chapter will argue for legislation and stronger regulatory oversight for corporate conduct, primarily utilizing the precautionary principle, and recommend major structural reforms to prevent corporations from engaging in socially injurious conduct that threatens to undermine the existence of the corporation.

The seventh chapter will argue for stakeholder action to develop a more comprehensive portfolio screening methodology to implement the Dodd-Frank Act, and for a shareholder strategy to improve corporate governance, including proxy access to nominate directors. This chapter will also argue that shareholders should encourage additional director independence from management control, amend corporate bylaws to require binding majority executive compensation votes and advocate for companies to adopt mandatory protocols to prevent or limit corporate social injury.

The eighth chapter will discuss the need for greater transparency and more aggressive attempts by directors to acquire independent input from stakeholders and the public prior to board deliberation and decision making. It will be argued that there is a need for board diversity and representation of disparate pluralistic civil society and for boards to consider their moral obligations to natural human beings pursuant to fiduciary duty.

The ninth chapter or the Conclusion will claim that corporations have continued to gain greater economic strength, and have successfully transformed economic power into political power, thus undermining what Milton Friedman (1912-2006) identified as “competitive capitalism,” which allows economic power to be separate from political power, which “enables the one to offset the other.” They are currently one and the same, and as such, corporations are not only threatening to undermine competitive capitalism, but challenging government and civil society. The prophecy expressed by Berle and Means that the corporation may supersede the state “ . . .as the dominant form of social organization” has already been realized.