Friday, November 9, 2007

The problem of the corporation

Corporations consist of conglomerations of individuals, and all financial costs and burdens imposed on a corporation are ultimately borne by those individuals. They include employees and stockholders, who can bear costs in the form of reduced wages or reduced profits and investment value. Insofar a corporation passes on costs in the form of higher prices, the costs are borne by customers.

When a corporation engages in wrongdoing, the wrongdoing is conceived and implemented by some of the employees. Other employees are completely innocent of any wrongdoing by the corporation, and stockholders and customers are likely to be innocent of the wrongdoing.

If a cost or liability is imposed on a corporation, little of the cost is likely to be borne by the employees who conceived of and carried out the wrongdoing, and most of the cost is likely to be borne by innocent employees, shareholders and customers.

To the extent the corporation received a benefit from the wrongdoing, and the benefit accrued to innocent employees, shareholders or customers, it is not objectionable if those innocent parties are held liable for returning the benefit that was wrongly obtained by the corporation.

At the same time, it needs to be kept in mind that the deterrent aspect of making wrongdoers pay is not being fulfilled by obtaining return from innocent employees, shareholders or customers, because those persons did not wrong themselves.

This analysis of corporations leads to a couple of conclusions about what is or is not just under the law.

First it raises the question of the legitimacy or imposing financial penalties on corporations that are borne mainly by innocent persons for the purpose of deterring wrongdoing, as opposed to penalizing and punishing the employees who designed and carried out the wrongdoing. This is not to say that a corporation should never be subject to financial penalties and punishment, but, at a minimum, that is something that should be approached with circumspection and is ultimately worthy of addressing by the legislature to make policy decisions.

Similarly, there should be sensitivity by the law that there may be a great lack of correlation between, on the one hand, what benefit was received by a wrongdoing corporation, and to whom the benefit accrued, and, on the other hand, who is bearing the cost if a liability is imposed on the corporation. That is likely to be something that cannot be determined with a great deal of precision, and a policy decision could be made not to try to make any such determination, impose the liability on the corporation, and not worry whether the persons who bear the burden received any benefit from the wrongdoing and the extent to which they, as innocent persons, are required to pay for someone else's wrongdoing that someone else received a benefit from, and thereby inflict a loss on those persons. Alternatively, an effort could be made to try to be cognizant of this possible result and to try to mitigate it.

Plaintiffs lawyers don't want to hear anything about the foregoing, because it can reduce litigation and reduce payments.

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