The Supreme Court’s recent decision in Burwell v. Hobby Lobby, 573 U.S. ____ (2014), has provoked a firestorm of criticism from those who apparently regard it as an affront to all human decency that closely-held corporations cannot be forced by the state to pay for health insurance that covers abortifacients, when the prescription and use of such drugs violate the corporate owner’s sincere religious beliefs and moral convictions. Those who object to the decision in Burwell are prone to invoking the plain fact that “corporations aren’t people,” as if this is somehow relevant to the morality of the policy under debate. As shown below, it is not.
Let’s start with the obvious. Because they invoke the corporate status of Hobby Lobby in condemning the Court’s decision, such critics are implicitly conceding that it would be wrong for the state to coerce a person in identical circumstances if he or she were doing business as a sole proprietor or general partnership, i.e. without the protection of the corporate form. So, presumably, if Hobby Lobby were operating in this fashion, it would be acceptable for the owner(s) to refuse to offer the health insurance at issue. Otherwise, what is the point of the “corporations are not people” objection?
It is equally obvious that a corporation is not a person, but it is created, managed, operated and owned by persons, and so what is done to the corporation can adversely affect the stakeholders’ legitimate interests. If, for example, the state seizes all the assets of a corporation simply because of the owner’s ethnicity or political views, it has quite clearly harmed him. Accordingly, we are entitled to ask for a justification when the state coerces corporations to act in certain ways.
One response is that since the advantages of corporate status (limited liability, the ability to raise capital by selling shares, and so on) are privileges granted by statute, the authorities can justly condition this legal right as they please. But this position quite clearly proves too much. Would proponents of this view really have no qualms if the state mandated that all corporations doing business as kosher delis must now serve shrimp and pork, or that corporations may no longer serve blacks or atheists? This argument not only seems implausible on its face, but since corporations and other limited liability entities (LLCs and limited partnerships) dominate the commercial landscape, this would leave disfavored minorities in a rather precarious position.
But there is another serious problem with the claim that the state can condition the right to use the corporation form as it sees fit; specifically, that it erroneously assumes that the state is granting corporate stockholders and managers some special privilege that would not exist in the state’s absence. However, under ordered anarchy those wishing to operate as a “corporation” would simply announce and widely publicize that they will only transact business with those who agree to treat their entity as a corporation (as under our current law). This hardly seems like an unjust offer, and one that should be enforced by any fair-minded tribunal. After all, there is no great outcry over the injustice of our current laws that create this same result.
To this, is it sometimes replied that corporate statutes give the organization’s owners protection against bankruptcy from tort lawsuits that would not otherwise be available. I disagree. Existing tort case law simply reaches the same commonsense result that would prevail under ordered anarchy. Corporate shareholders do not control, and are not even aware of, the day-to-day activities of the entity, and it would therefore be manifestly unjust to subject them to personal liability in an amount in excess of their investment. Accordingly, in this regard and in general, the state is not doing corporate owners any special favors, and are not thereby licensed to harm them in ways that would be impermissible if done to sole proprietors or general partners.
A couple of points, neither of which affect the main conclusions of the argument, but do, I think, suggest that further development is required.
You say that it would be unjust if shareholders were made to bear unlimited liability. The reason given is that they do not control and may well not be aware of the day to day activities of the corporation. The question is why this means that they would not bear unlimited liability. There does not seem an obvious logical connection between the two. As an example of a contrary situation, consider, for exmple, the situation of so-called ‘names’ in the Lloyds of London insurance market. These people did, until recently, have unlimited liability (and many were bankrupted when syndicates collapsed). But they did not necessarily control the syndicates, nor did they necessaririly have any knowledge of their day to day running. It seems to me the real question relates to the nature of the contract under which corporate stock is sold. The corporation can legitimately sell stock with either limited or unlimited liability under ordered anarchy. Let’s assume that the average shareholder elects limited liability. Under ordered anarchy, there is then a question of where unlimited liabilty would lie. I assume that the answer is with creditors, who lose their ability to claim back money advanced. This seems to suggest that creditors are in a riskier position than shareholders – and in return for such risk may demand a higher return than shareholders. Thus shareholders seem to become more like bondholders while creditors become more like owners. In would be foolish to imagine this will not have ramifications. I agree, however, that it has no impact on the right of governments to specify the conditions under which corporations grant medical insurance or any such related issues.
The second point is that one of the main reasons corporations are in the medical insurance business is due to tax advantages. Take these away and we can assume a very different situation would pertain which would include, inter alia, individuals choosing insurance plans suitable to their needs, assuming that insurance companies were willing to provide such plans. It seems, therefore, that the government, in return for the tax advantages, might demand something in return. The real problem, however, is government involvement in the first place.
Hi Simon:
Always nice to hear from you. I don’t think we disagree on much, so just a couple of quick comments. I’m not sure why the balance of power between creditor/debtor would change under ordered anarchy relative to the status quo. As they do now, creditors could demand adequate security for any loans they elect to make, and would otherwise have to evaluate the risk/reward of extending unsecured credit. As things now stand, there is no party that truly accepts unlimited liability for corporate actions, as in most bankruptcies there are many unsecured creditors who simply don’t get paid, or get paid pennies on the dollar. I expect that this would continue under ordered anarchy.
With respect to the tax benefits received by employers for providing health insurance, you are correct that this is an arbitrary and irrational arrangement brought on by our laws. However, prior to the Affordable Care Act (or ObamaCare), employers still retained the right not to offer insurance at all, and many didn’t. In this situation, there is more justification for your observation that “the government might demand something in return.” Now, employers with more than 50 full-time employees MUST provide it, so the tax advantage can’t sanitize the government’s use of coercion to force the employer/owner to violate his moral convictions.
Mark – I don’t think there is much disagreement either. Nor do I think that I made my points as well as I might have done. But I still don’t see unlimited liability as unjust per se, just because shareholders have little or no control over how the corporation is run. Impractical certainly, but not unjust if voluntarily accepted. My point about other creditors is this: if, though unlikely, unlimited liability were in place, it seems that being a shareholder would be riskier. Therefore, ceteris paribus, being a creditor would be less risky. We might expect certain things to follow from this. Banks, for example, might be prepared to grant finance to organizations previously declined credit. But I agree this is mainly counterfactual musing, since shareholders would be unlikely to accept the concept. But a worthwhile point is that, without government mandating certain ownership conditions, we might expect a flourishing of slightly different structures.
Agreed, with the key phrase being “if voluntarily accepted.” As you say, this is an empirical question, but I suspect that entities operating under a legal scheme that exposed shareholders to unlimited liability would have a difficult time attracting them. However, I could be wrong, or perhaps this would not be harmful.
The law of corporations may divorce owners from unlimited liability for corporate financial loss, but this is really purely a practical recognition by society through its laws, that such a rule is of great benefit to society as a whole. Four hundred years of experience proves the value of this legal form. The benefits to all humans, whether owners, workers, or customers, in the enhancement of the human condition, is clear. The legal fiction that corporations are entitled to be considered as “persons” for some legal purposes, is simply a corollary rule, designed to protect this form of business, and thus preserve the benefits, from the abuses of government associated with the denial of due process, a temptation of all governments.
Those who criticize the Hobby Lobby decision on the grounds that “corporations are not people” are misstating the concept of “limited liability.” They are actually hostile to corporate protections generally, because they are hostile to business, generally regarding it only as the Golden Goose which can be used to finance various schemes of which they approve. They have conflated their general hostility to corporations into an argument in the Hobby Lobby case, which is actually contrary to their usual arguments.
Incorporation is not a process that frees the corporation from moral responsibility, any more than individuals are free from moral responsibility for their actions. Most people advancing the “corporations are not people” argument are not hostile to the idea at all. In fact they frequently argue that corporations should consider the moral ramifications of their business activities. We have often seen this same cast of characters argue that this or that corporation ought to be held morally responsible for business activities, such as investing in various activities or doing business with certain countries, or manufacturing, buying and selling various products, of which they disapprove. Such a position is hardly compatible with denying the owners of Hobby Lobby the right to have a moral opinion that is eligible for protection under the Religious Freedom Restoration Act. Actually the Hobby Lobby critics really only take issue with the validity of the moral vision held by the owners of Hobby Lobby, not the concept of the corporation having a moral vision. They are thus revealed as being of the mindset which believes that only their views entitled to the protection of law, which is why their argument is not only nonsense, but intellectually dishonest.
Hi George:
Good to hear from you again! And, right you are. If the owners of Hobby Lobby had just announced that they were boycotting all products made in Israel, their current critics would praise them. If, in response, the federal government passed a law coercing them to abandon the boycott, these folks would be outraged. So, corporate coercion is wrong for them only when it reverses a decision by the owners of the corporation that they favor, which is to say their position is unprincipled.