Shareholder primacy's corporatist origins: Adolf Berle and The Modern Corporation.

• Author: Bratton, William W.

1. INTRODUCTION II. EARLY TO MIDDLE BERLE: FROM CORPORATE LAWYER TO CORPORATIST A. Early Berle: From Self-Regulation to Judicially Enforced Shareholder Primacy B. Middle Berle: The New Deal and Corporatism 1. The "New Individualism" 2. Corporatist Theory 3. Berle's Corporatism in Practice: The National Industrial Recovery Act C. Summary III. THE MODERN CORPORATION AND PRIVATE PROPERTY IV. THE BERLE-DODD DEBATE A. Dodd's Attack B. Berle's Response C. Dodd Redux D. Berle's Closing Concession E. Summary of Berle-Dodd V. LATE BERLE: MODIFIED CORPORATISM A. The American Economic Republic B. Economic Planning C. Political Processes and Controls D. Corporate Power 1. The Political Position of Management 2. The Role of Shareholders E. Summary VI. BERLE (AND DODD) TODAY A. The Contemporary Gestalt B. Dodd Today C. Berle Today 1. Shareholder Primacy 2. Corporate Social Responsibility VII. CONCLUSION I. INTRODUCTION

   A continuing and longstanding debate has been waged in corporate law scholarship among those who favor shareholder primacy, those who favor management discretion, and those who believe that corporations have a social responsibility to other constituencies, such as the corporation's employees, and the wider public interest. (1) Although the battle lines wax and wane, shareholder primacy prevails today as the dominant view, (2) with management discretion advocates in the minority, and with advocates of corporate social responsibility (CSR) as a rearguard. (3) Many discussants think of themselves as picking up where Adolf A. Berle, Jr. and E. Merrick Dodd left off in their famous, precedent-setting debate of the 1930s. (4) The generally-accepted historical picture puts Berle in the position of being the grandfather of shareholder primacy. (5) Dodd, on the other hand, is cast as the original ancestor of CSR. (6) But this categorization of Berle and Dodd is mistaken-an example of failing to understand old texts in their original context.

   This Article corrects these mistakes and offers a new reading of these fundamental texts of corporate law, texts that recently reached their 75th anniversaries: Berle's 1931 article, Corporate Powers as Powers in Trust, (7) Dodd's 1932 response, For Whom Are Corporate Managers Trustees?, (8) Berle's subsequent 1932 rebuttal For Whom Corporate Managers Are Trustees: A Note, (9) and, finally, Berle's famous book with Gardiner C. Means, The Modern Corporation and Private Property,) (10) also published in 1932. (11) Our reading resituates these texts in the historical and intellectual context in which they were written.

   The time was the Great Depression, then believed to have resulted from the inherent instabilities of a capitalist system. The consensus was that emerging, modern corporate institutions were an integral part of the flawed system and thus part of the problem. The question of social responsibility was whether corporations should be treated as public institutions with obligations to mitigate the system's inherent instability, even if these obligations conflicted with maximizing shareholder returns. Parties to today's debate between shareholder primacy and management discretion ignore that question, even as it continues to be posed by the social responsibility rearguard. Today's mainstream assumes maximal returns to the firm as the only end and debates solely about the means, (12) with the dispute centered on the allocation of authority between managers and shareholders. (13)

   In contrast, both Berle and Dodd answered yes to the question of CSR. The legal allocation of authority within the firm did come up in their discussion at a secondary level, but in a convoluted posture that can be made intelligible only by reference to the evolution of Berle's thinking in the rapidly changing political environment of the early 1930s. Any resemblance between the normative issues Berle and Dodd discussed and those in today's debate between management discretion and shareholder rights is more apparent than real.

   For Berle and Dodd, the normative issue was the appropriate policy response to the crisis of the Great Depression. In 1932, when Berle and Dodd started their debate, it was abundantly clear that the job of formulating that policy would fall into the hands of a new Democratic administration likely to be headed by Franklin Delano Roosevelt (FDR). It was expected, although not yet certain, that FDR would follow the lead of many European leaders of the time and adopt a form of corporatism as the political economy of the United States.

   Corporatism sharply differs from the pluralism that dominated political thinking both before and after the New Deal. Under pluralism, only the preferences of individuals in their role as citizens count in the welfare calculus of government policy, and competition for the votes of individuals in a political marketplace determines policy outcomes. Corporatism privileges cooperation over competition and emphasizes group over individual interests. (14) It assumes that government, through consultation with the major groups in society, can articulate an objectively cognizable "public interest." Once the public interest is expressed, government calls on the various groups, with the corporation being one of the most important, to adapt their positions in support of it.

   Corporatism implies a radical restatement of the purpose of the business corporation. It does assume capitalism and a system of private property rights and has no trouble accepting the legal model under which directors must maximize the value of the corporation. But it does this only at the threshold, the point at which corporations come to the state-directed table where the groups determine the public interest. Given a determination, the calculus of corporate rights and duties must adjust and recognize a public interest constraint. Specifically, corporate directors have a duty to manage the business and affairs of the corporation in accordance with clearly articulated public policies, even if those policies interfere with the property interests of shareholders. Putting this in the terms of the theory of the firm, corporatism views the corporation as an entity that operates as an organ of the state and assumes social responsibilities.

   Both Berle and Dodd brought these corporatist assumptions to their debate. That alone inserts a normative barrier between their discussion and today's back-and-forth between shareholder primacy and management discretion in a pluralist and market oriented political context. It also introduces a significant contextual barrier between Berle and Dodd and modern CSR. Two questions arise in light of this barrier: first, what exactly were Berle and Dodd fighting about, and, second, whatever that was, how can it be that today's corporate legal theorists so casually assume the Berle-Dodd debate's continuing pertinence? By hypothesis, there must be a theoretical account that gets us over the barrier and explains the connection between the Berle-Dodd debate and the subsequent evolution of corporate legal theory. There is, but the answers to the two questions are much more complicated than they appear to the modern reader.

   This Article works through the complications, holding out solutions to a number of puzzles long unsolved in corporate legal theory. The binary picture of Berle as shareholder primacy and Dodd as CSR appears on a noisy historical screen. Some modern writers do acknowledge Berle as a CSR ancestor, (15) introducing a conflicting characterization. The conflict follows from contradictions in Berle's texts, with parts of The Modern Corporation and the 1932 rebuttal supporting a shareholder primacy reading, while other passages in The Modern Corporation presage CSR. Compounding the confusion, Dodd can also be read in different ways. Although most align him with modern CSR, others see him more as an advocate for management discretion, with social responsibility as just another area inside the zone of business judgment. Berle himself made the latter characterization of Dodd, (16) as do a small number of modern writers. (17) A third puzzle stems from changes of position in both authors' later writings. Dodd reversed his 1932 position in 1941, (18) to be followed by Berle's concession in 1954 that Dodd's debate position had been proven correct. (19)

   This Article shows that these complications followed from adjustments of position made by both Berle and Dodd as events unfolded in their own time, a context so far removed from that which exists today as to block either side from a legitimate claim to direct ancestry. Part II looks at Berle's evolution from a 1920s corporate lawyer to a 1930s academic and public intellectual. We call this the transition from Early Berle, who did indeed articulate a version of shareholder primacy, to Middle Berle, a corporatist on the national political stage. The discussion details the basic terms of corporatist political theory and their brief appearance in federal law in the National Industrial Recovery Act of 1933. Part III takes up The Modern Corporation, (20) distinguishing the parts of the book that set out Early Berle positions from the parts that anticipate Middle Berle, fleshing out the latter by reference to Berle's contemporaneous political writing. Part IV unpacks the Berle-Dodd debate, including rebuttals and later recantations. Part V moves on to Berle's post-war modification of his Depression-era corporatism, which we call Late Berle, highlighting the minor role he accorded to corporate governance in a scheme that integrated the legal firm within a broader theory of economics, politics, and society. Part VI relocates Berle and Dodd in the context of today's debates with indeterminate results.

   Our restatement of Berle and Means and Berle and Dodd poses a question as to modern day implications: if the modern shareholder primacy position is indeed rooted in Berle, then does the shareholder primacy viewpoint gain...