Ownership, limited: reconciling traditional and progressive corporate law via an Aristotelian understanding of ownership.

• Author: Colombo, Ronald J.

1. INTRODUCTION II. CORPORATIONS CONCEPTUALIZED A. A Short History of the Corporation B. Shareholder Ownership Model C. Stakeholder Model D. Nexus of Contracts Model III. OWNERSHIP CONCEPTUALIZED A. Modern Conceptualization of Ownership B. Aristotelian Conceptualization of Ownership IV. IMPLICATIONS OF APPLYING ARISTOTELIAN THINKING TO STOCK OWNERSHIP A. Implications for Shareholders B. Implications for Boards of Directors 1. The Shareholder Wealth Maximization Norm 2. Board Consideration of Shareholders' Moral Obligations C. Implementation 1. The Role of Law 2. Shareholder Empowerment 3. Board Empowerment 4. Legal Mandates V. JUSTIFICATIONS FOR USE OF AN ARISTOTELIAN UNDERSTANDING OF OWNERSHIP IN CORPORATE LAW VI. CONCLUSION I. INTRODUCTION

   What exactly is a business corporation? For whose benefit is (or ought) it be managed? Although scholars have debated these questions for decades, the answers to them have grown increasingly important. (1) For today, few organizations in the world have as much power to do good, or harm, to individuals, communities, and society as a whole than does the business corporation. (2) Yet, unfortunately, fundamental questions concerning the corporation remain a matter of sharp disagreement. This Article proposes an understanding of the corporation that builds a bridge between two sides of the debate, enabling a compromise solution to the question of "for whose benefit the corporation ought to be managed?" At the heart of this proposal, and what enables this Article to accomplish what I claim it can accomplish, is the application of an Aristotelian conceptualization of ownership to corporate shareholders.

   Scholars have divided, roughly, into three camps over the question of what a corporation is, and this division has informed (again, roughly) opinions on for whose benefit the corporation is or should be managed. Traditionally, the corporate shareholder has been characterized as an owner of the corporation whose shares he or she (or it) possesses. (3) More recently, "progressive" corporate law scholars have re-cast the shareholder as merely one of many "stakeholders" in the corporate enterprise. (4) Still others--"contractarians"--object to the "reification" of the corporation, and assert that a corporation is not a thing capable of being owned, but rather merely a "nexus of [metaphorical] contracts." (5)

   To those concerned with issues of corporate governance and corporate social responsibility, (6) the characterization of corporate shareholders should matter (among other reasons) because it arguably goes a long way in establishing for whose sake and how the corporation ought to be managed. For if shareholders are viewed as owners of the corporation, then it comfortably follows that the board of directors, the body entrusted with managing the corporation, serves largely as the shareholders' agent. This thinking, in large part, gave rise to the reigning "shareholder wealth maximization" norm of corporate law, under which boards of directors are charged primarily with maximizing shareholder interests (traditionally understood as the equivalent of maximizing shareholder wealth). (7)

   If, however, shareholders are not viewed as the owners (or the sole owners) of the corporation, but rather as merely one of several stakeholders in the corporation, then it might more readily follow that the board of directors serves largely to promote and mediate among the interests of these various stakeholder groups. (8) And if the corporation is not conceived of as an entity at all, but rather simply a nexus of contracts, then the board of directors exists primarily to exercise the contractual powers conferred upon it, and to ensure that each real or metaphorical contractee receives his or her (or its) due. (9) Under such a contractarian conceptualization, whether the board operates primarily to maximize shareholder wealth would depend upon whether one concludes that shareholders contracted for such maximization (explicitly or implicitly) in return for their equity investment in the corporation. (10)

   This Article proffers to reconcile, to a degree, some of the divergence between the traditional and progressive camps of corporate law scholarship by demonstrating that the traditional conceptualization of the corporation (namely, that of a company owned by its shareholders) can be substantially harmonized with the ends promoted by "progressive" approaches to corporate law (namely, that the board of directors must consider the interests of various other corporate constituencies, and not simply those of the shareholders, when making its decisions). This reconciliation is made possible via recourse to an Aristotelian understanding of ownership. For if one embraces an Aristotelian understanding of ownership (and there are persuasive and justifiable reasons for doing so, especially within the context of corporate shareholders (11)), one could argue that (1) corporate shareholders are indeed the owners of the corporation, but (2) Aristotelian limitations on the rights of ownership enable--if not compel--boards of directors to exercise their agency obligations on behalf of the shareholders in a way that is consistent with the common good (and that, consequently, takes into account the interests of various nonshareholder constituencies of the corporation). This reconciliation is useful in that it enables one to argue for increased consideration of nonshareholder interests by boards of directors (aims of progressive corporate law scholarship) without being pressured to disassociate one's self from the traditional "shareholders as owners" model of the firm. Additionally, since this reconciliation retains the traditional model of the firm as shareholder-owned, it generally reaffirms shareholder primacy and eschews the more aggressive positions taken by some within the progressive corporate law camp (such as the position that boards of directors owe no special duty to shareholders beyond those duties owed to all stakeholders generally (12)), and thus presents a compromise answer to the question "for whose sake ought a corporation be managed?"

   This Article is organized as follows: Part II supplies a short history of American corporate law, and thereafter summarizes the three main conceptualizations of the corporation. Included in Part 11 is a discussion of the role of the board of directors under each of these conceptualizations. Part III addresses the concept of ownership generally, under traditional, contemporary, and Aristotelian perspectives. Part IV applies the implications of an Aristotelian understanding of ownership to corporate shareholders, and explores the theoretical and practical difficulties of such an understanding, and Part V sets forth a justification of the Aristotelian approach. In conclusion, this Article contends that applying an Aristotelian understanding of ownership to corporate shareholders is meritorious because it enables those who wish to advocate an increased level of responsibility on the part of corporate boards to nonshareholder constituencies to do so without abandoning the traditional conceptualization of the shareholder as an owner of the corporation, and proffers a reasonable compromise between dueling perspectives on the role and duties of boards of directors.

2. CORPORATIONS CONCEPTUALIZED

   There are and have been a variety of different conceptualizations of the corporation, and of the shareholder's relationship thereto. (13) Based upon their present and historical importance, this Article shall focus on three such conceptualizations: the shareholder ownership model, the stakeholder model, and the nexus of contracts model. (14) As previously mentioned, (15) the conceptualization adopted can have significant implications regarding the role and duties of the board of directors--implications which affect issues of corporate governance and corporate social responsibility. Following a brief sketch of the history of American corporate law, this Part shall examine each of these three conceptualizations, along with their corresponding implications regarding the role of the board of directors.

   1. A Short History of the Corporation

      "[M]an is by nature a political animal," (16) and so it should come as no surprise that practically as far back as recorded history can demonstrate, human beings have banded together to form business enterprises. (17) The forerunners of today's corporations--if not early corporations themselves--can be traced back to the universities of medieval Europe, where we can see analogues to modern-day shareholders and boards. (18) The first English settlement in America--Jamestown, Virginia--was settled by the joint-stock company known as the "Virginia Company of London" in 1607, thus introducing the corporation to American soil at least four centuries ago. (19)

      In the early days of the American republic, corporations were individually and specifically established through state legislative action. (20) Not surprisingly, therefore, in 1800, the United States was home to only 355 corporations. (21) Corporations were not established for whatever purposes their founders wished to pursue, but rather "to promote a public interest or purpose," (22) and thus were chartered to build and/or operate, among other things, banks, insurance companies, churches, canals, bridges, and roads. (23) Indeed, "[t]he dominant feature of businesses incorporated in the eighteenth century was their public character." (24) This was similar to the American colonial experience, for under eighteenth-century English law, corporate status was viewed "as a special, limited concession of the sovereign," and granted "to achieve a specific political objective, such as colonizing a territory, developing foreign trade, or exploiting a particular trade opportunity or natural resource." (25) During this period, the prevailing model of the corporation has been referred to as the "concession theory,"...