Most comments on the January 21 US Supreme Court decision in Citizens United v. Federal Election Commission (1) have focused on the effects of direct contributions by corporations to candidates. Are such contributions invitations to corruption, or exercises of protected speech by persons associated in corporations?

But for those concerned about corporate governance or corporate accountability in any of its forms, Citizens United has a context and implications that go well beyond elections and freedom of speech. These challenge fundamentally the notion of corporate social responsibility (CSR) and socially responsible investing (SRI).

In this post and some that will follow, I want to explore how Citizens United affects what proponents of CSR and SRI have advocated.

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To start, let’s look at a blog post on Citizens United by Stephen M. Bainbridge, a chaired law professor at UCLA. The post reveals a view of the relationship between corporations and society that contradicts most responsible investors’ understanding.

Bainbridge criticizes Justice John Paul Stevens’s dissent in Citizens United because he believes that Stevens rejects “the contractarian model of the firm.” Says Bainbridge:

In his dissent in the Citizen United v. FEC case, Justice Stevens reveals a rather pernicious understanding of the reason society validates the corporate form:

[Stevens writes that] unlike other interest groups, business corporations have been “effectively delegated responsibility for ensuring society’s economic welfare ….”

[Bainbridge replies] No. They haven’t. (2)

Let’s start with the obvious question: in what context do the 16 quoted words appear in Justice Stevens’ 90 page dissent? Not being told that it is on page 75 of the slip opinion inhibits all but the most rabid fact checkers – something one must assume this author of law journal articles intends.

Now, what does Justice Stevens’s dissent actually say?

The fact that corporations are different from human beings might seem to need no elaboration, except that the majority opinion almost completely elides it. Austin [v. Michigan Chamber of Commerce (3), one of the cases the majority overruled] set forth some of the basic differences. Unlike natural persons, corporations have “limited liability” for their owners and managers, “perpetual life,” separation of ownership and control, “and favorable treatment of the accumulation and distribution of assets . . . that enhance their ability to attract capital and to deploy their resources in ways that maximize the return on their shareholders’ investments.” [Austin] 494 U. S., at 658–659. Unlike voters in U. S. elections, corporations may be foreign controlled. [Footnote omitted.] Unlike other interest groups, business corporations have been “effectively delegated responsibility for ensuring society’s economic welfare”;(4) they inescapably structure the life of every citizen.(5) [Emphasis added. Footnote renumbered.]

Justice Stevens’s summary seems inoffensive, especially with the words Professor Bainbridge omits. But Bainbridge wants to attack a point central to the belief systems of corporate social responsibility advocates. From his blog post:

It is true that a corporation must have a certificate of incorporation from the state to obtain legal recognition as such. We might reasonably infer from Stevens’ comment, however, that he accepts some version of the old concession theory, pursuant to which the corporation was regarded as a quasi-state actor exercising powers delegated by the state. It has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously. In particular, concession theory is plainly inconsistent with the contractarian model of the firm, which treats corporate law as nothing more than a set of standard form contract terms provided by the state to facilitate private ordering.(6)

In the narrow context of Citizens United’s First Amendment entitlements, it’s irrelevant whether “corporate legal theory” – meaning the contractarian model — takes “the concession theory seriously.” And Justice Stevens explicitly said so.(7)

Bainbridge has a larger objective. He asserts the corporation is nothing more than a dress pattern to be altered to accommodate the form of the people who’ll wear the finished article. He must, therefore, deny that any delegated responsibility comes when the pattern is bought. In doing so, the professor contests what is obviously true.

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Bainbridge’s problem has become all too common amongst the economics and law & economics professoriate: their models have failed to predict because they are not grounded in precedent and practice. And the behaviors the models were meant to drive have proven destructive at best.

The professor’s problem starts with history.

As a matter of fact, corporations took life from charters. Charters were the means by which the sovereign delegated its authority and powers. Magna Carta means simply “great charter,” and it wasn’t unique in its time.(8) Three hundred and eighty-five years later, Elizabeth I launched the modern business corporation by issuing one to the East India Company in 1600.

Corporate personhood is an attribute of sovereignty. The right to be treated collectively as a single entity can only – literally only – come from a delegation. A court can determine two people acted as partners without a written or even an oral agreement. They cannot legally function as a corporation without such agreement.

At least since the execution of Charles I in 1649, it has been inarguable in the Anglo-American political system that a social contract came with sovereignty. Of course, for 360 years there has been continual argument about its terms.

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Now consider again Bainbridge’s assertion that “…corporate law [is] nothing more than a set of standard form contract terms provided by the state to facilitate private ordering.” If he is right, a corporation’s social contract is little more than the one a vacationer gets at a car rental counter.(9)

“Private ordering,” as we will see in later posts, refers to “bargaining” between incorporators and potential shareholders, among others, as to how a corporation will be organized. In the contractarian model, the shareholders’ right, for example, to nominate directors is the subject of “private ordering.” If a firm’s articles of incorporation don’t provide for shareholder nominations, then one must assume potential shareholders don’t want the right.

Bainbridge’s view is no more “fringe” than those of the Chicago School economists who’ve dominated finance for the past generation. Indeed, they have common origins and feed the same political and social – not to mention financial and economic – thinking. Neither socially responsible investing nor corporate social responsibility, at least as I conceive them, have places in their models.

It is this context that makes understanding Citizens United so important.

Footnotes

(1) Citizens United v. Federal Election Commission, 558 U.S. ___ (2010).

(2) Stephen M. Bainbridge, “Citizens United v. FEC: Stevens’ Pernicious Version of the Concession Theory,” ProfessorBainbridge.com, Jan. 21, 2010

(3) Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990)

(4) “Regan, Corporate Speech and Civic Virtue, in Debating Democracy’s Discontent” 289, 302 (A. Allen & M. Regan eds. 1998), in Citizens United (Stevens dissent, slip op. at 75n.71.)

(5) Stevens, slip op. at 75.

(6) Bainbridge, Citizens United, op. cit.

(7) In a footnote to the paragraph quoted in part above, Stevens apparently anticipated Bainbridge’s interpretation. “Nothing in this analysis turns on whether the corporation is conceptualized as a grantee of a state concession, a nexus of explicit and implicit contracts, a mediated hierarchy of stakeholders or any other recognized model.” (Citations omitted.) Stevens, slip op. at 76n.72.

(8) J.C. Holt, Magna Carta, 2d ed., (Cambridge: Cambridge Univ. Press, 1992), pp. 24-27.

(9) Cf. Bainbridge’s use of this example in Stephen M. Bainbridge, “Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship,” 82 Cornell L. Rev. 856, 870-71 (1997).