Are Corporations Required to Act Like Sociopaths?

By DirectorCorps

August 13, 2019 All Industries ESG

The latest salvo in the debate over the role of corporations in society was struck by Jamie Gamble, a former lawyer for insurance company American Insurance Group during the financial crisis and aftermath.

He proposed in an essay that modern executives are “legally obligated to act like sociopaths.” That’s because most corporate charters mandate executives and boards maximize shareholder returns. If companies defy this legal principle and consider the interests of other stakeholders, they can open themselves up to shareholder lawsuits.

“The corporate entity is obligated to care only about itself and to define what is good as what makes it more money,” he writes in the essay, according to The New York Times’ Andrew Ross Sorkin.

Gamble proposes that company bylaws adopt ethical rules that define the company’s relationship to stakeholders, including:

  • Their “relationships with employees.”
  • Their “relationships with the communities in which they produce and sell.”
  • Their “relationships with customers.”
  • Their “effects on the environment.”
  • And their “effects on future generations.”

He admits that this change will likely seem “insane” to many corporate directors and executives. He also concedes that in the current litigious environment, such rules provide even more fodder for lawsuits as stakeholders seek to prove the company violated its ethical guidelines.

Although Gamble is not well known, his ideas are increasingly on the forefront of a broader debate about the ethical role of corporations. A front-runner in the Democratic presidential primary, Sen. Elizabeth Warren, D-Mass., has proposed a law that would mandate that any company with more than $1 billion in revenues become a federally chartered company that considers the needs of all stakeholders — not just shareholders — in corporate decisions.

“The Accountable Capitalism Act restores the idea that giant American corporations should look out for American interests,” she wrote in the Wall Street Journal. She says the idea follows closely on the benefit corporation model, a special charter authorized in more than 30 states that give corporations the ability to consider a social purpose beyond shareholder value.

Workers also would get a say in the proposed federal corporation. Employees would elect at least 40% of directors, she said. At least 75% of directors and shareholders would need to approve a corporation’s political expenditures.

Like other Warren ideas, the Accountable Capitalism Act proposes radical change to address the increasing criticism of the modern corporation and its role in capitalism. It may never become law, but it is a part of the conversation. And what is part of the conversation sometimes does become law.