Shareholder Primacy's Corporatist Origins: Adolf Berle and the Modern Corporation

Abstract

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. …

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