A Head for Business, A Heart for People.

Before there were corporations, the economy was based on family businesses. Friends and neighbors were also customers and suppliers. Business decisions were made based on the financial gain to that family and the impact on the community.

As the world grew, corporations were formed to allow multiple unrelated people to do business together. Initially, they continued to consider the good of the community, as did the family businesses. During the Great Depression, Thomas J. Watson, who managed IBM, kept factories open and employees working, even when sales dropped and the machines they made were stored in warehouses.

Shielding owners from personal moral, legal and financial responsibility for the actions of business was a major factor in creating the corporate structures that allowed multiple unrelated people to own a business together. https://businessethicsblog.com/2011/10/20/do-corporations-shield-against-personal-responsibility/ This reduces personal risk and allows businesses to grow. The separation means owners are not personally responsible for the business actions or decisions of another owner or employee. An owner’s family home or their child’s college fund is not in jeopardy if an unhappy customer won a law suit against the company. It also means creditors don’t collect from the shareholders of a bankrupt corporation. Corporations allow separation between personal and business matters, making it possible for multiple people from multiple families to own companies, which allows companies to grow, economies to develop, and communities to thrive.

As the separation between business decisions and personal responsibility grew, the primary responsibility of the business and the board of directors soon became to maximize profits. Impact to people and communities was brushed aside with “It wasn’t personal, it was business.” This division has grown so deep that stockholders are able to sue boards of directors if a decision they made was not the most profitable option. It is the legally mandated fiduciary responsibility of a corporation’s board of directors to maximize profits.

“C-corporations and S-corporations are legally required to base their decisions solely on maximizing financial returns for shareholders.” http://bclawlab.org/eicblog/2017/3/21/the-rise-of-the-public-benefit-corporation-considerations-for-start-ups They are abandoning their legal responsibility if other factors are considered.

The separation between business decisions and personal responsibility continued to grow and filter down to small businesses. It became so generally accepted as a foundational principle of business in our culture that it prompted some states (Florida in 1990) to pass laws allowing businesses to consider the impact their decisions had on communities, the environment, etc. Yet, the mandated fiduciary responsibility of every corporation’s board of directors was engrained in case law. In 2010 Maryland became the first state to form a separate corporate entity that not only allowed but obligated a corporation to function as family businesses once had. The new structure, obligated to consider social and environmental factors, was called a public benefit corporation (“PBC”).

“PBCs, also known as benefit corporations, are for-profit companies that balance maximizing value to shareholders with a legally binding commitment to a social or environmental mission. In contrast with other for-profit entities, which by law must focus exclusively on increasing investor returns, a PBC is required to consider other factors. A PBC’s charter identifies a public benefit, namely a positive effect or reduction of negative effects flowing to stakeholders, that is “artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological” in character. When making business decisions, in addition to considering the value to shareholders, PBCs also must consider other stakeholder interests, which may include employees, customers, certain communities, or the environment.” Maria Stracqualursi for Boston College Legal Services Lab

“C-corporations and S-corporations are legally required to base their decisions solely on maximizing financial returns for shareholders. …By forming as a PBC, the company’s board of directors is actually obligated to go beyond their fiduciary duties and consider social and environmental factors when making business decisions. Directors and officers will be legally protected when they balance both financial and non-financial interests and pursue the company’s public benefit.​”

As an example, the Revlon standard originated from a Delaware court decision in 1986.

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986),[1] was a landmark decision of the Delaware Supreme Court on hostile takeovers. The Court declared that, in certain limited circumstances indicating that the “sale” or “break-up” of the company is inevitable, the fiduciary obligation of the directors of a target corporation are narrowed significantly, the singular responsibility of the board being to maximize immediate stockholder value by securing the highest price available.

Yet, this is its current description:

“C-corporations and S-corporations in Delaware must follow the Revlon standard, which establishes the duty of the board of directors to make business decisions based on increasing the short-term financial gains of the company.” Maria Stracqualursi for Boston College Legal Services Lab

Let’s revisit IBM.

IBM was incorporated in 1911 in New York. “Thomas Watson, a man of considerable marketing skill who became general manager in 1914 and had gained complete control of the firm by 1924. Watson built the then-floundering company into the leading American manufacturer” Britannica.com

Had IBM incorporated in Delaware, and Thomas Watson not had complete control of the firm prior to the Great Depression, and the current interpretation of the Revlon standard been applied, the board of directors would have been legally obligated to make a decision based only on the short term financial gains of the company. Continuing to employ workers by manufacturing machines and parts which were being stored in warehouses because there was no demand for them does not “increase the short-term financial gains of the company.” Even in the broader sense, eliminating “short-term”, does not meet the legally mandated fiduciary responsibility of the board.

How did Watson’s decision work out? The following is quoted from IBM’s history.

During the Great Depression of the 1930s, IBM managed to grow while the rest of the U.S. economy floundered. Thomas J. Watson, Sr., took care of his employees….While most businesses had shut down, Watson kept his workers busy producing new machines even while demand was slack. Thanks to the resulting large inventory of equipment, IBM was ready when the Social Security Act of 1935 brought the company a landmark government contract to maintain employment records for 26 million people. It was called “the biggest accounting operation of all time,” and it went so well that orders from other U.S. government departments quickly followed.

In short, if Thomas Watson had to make decisions based only on today’s mandated fiduciary responsibility, it is very doubtful that IBM would have survived and it is impossible to imagine that it would be the household name it has become.

Times have changed. We started as a nation built on families that had a head for business and a heart for people that were integral to healthy communities. Now, corporations are legally required to consider only the financial outcomes of their decisions. They are legally required to ignore the consequences of their decisions to employees, communities, culture, or anything else that their decision might impact.

It has gone so far that even the board games we play with our children enforce the legally mandated fiduciary responsibility of business onto governmental and personal decisions. How incredibly sad.

No wonder there has been such a backlash against business!

No wonder we talk about a head for business and not a heart.