Article by Robert Ashford
To address competently and faithfully issues related to capital acquisition, wealth maximization, corporate social responsibility, and other aspects of corporate planning, fiduciary duties require a consideration of the binary economic ownership-broadening approach as a means of enhancing corporate wealth for stockholders, stakeholders, and society. Professional responsibilities also call for the inclusion of binary economics in teaching related to corporate law, professional responsibility, and corporate social responsibility. With this Article, binary economics can be readily introduced in any course or seminar that considers the wealth-maximizing duties of fiduciaries, the scope of corporate social responsibility, or any of the other issues raised by Dodge v. Ford Motor Co.
The crucial relevance of binary economics to fiduciary duties and corporate social responsibility is revealed by a consideration of apparently vast, persistent, and growing unutilized productive capacity despite widely accepted claims that markets are becoming more competitive. Thus, if asked to determine the facts, the general counsel of most prime creditworthy companies would (after completing the due diligence of consulting with all appropriate experts) conclude that their companies (even as they determine the need to proceed with major downsizings, plant closings, and layoffs) owned the productive capacity (with available capital assets and labor) to increase output profitably by perhaps ten to twenty percent if there were only the customers with money to buy what could be readily produced at even lower unit costs. This would apply not only to consumer goods but also to producer goods, so that within existing unutilized productive capacity, there is the capacity to create even more unutilized productive capacity.
Although corporate fiduciaries routinely explicitly or implicitly employ neoclassical, Keynesian, and other economic paradigms to shape corporate policy and to address persistent conditions of unutilized productive capacity and untapped growth potential, both conditions persist and are seemingly growing. Unlike neoclassical, Keynesian, and other economic approaches (that do not consider the distribution of ownership to be an important determinant of unutilized corporate capacity, growth or value), the binary approach sees the concentrated pattern of capital acquisition as a major cause of unutilized productive capacity and a major obstacle to increased growth and wealth maximization.
By assuming that (1) capital and labor are independently productive, (2) technology makes capital much more productive than labor, and (3) capital has a potent distributive relationship to growth (such that the more broadly capital is acquired, the faster an economy will grow), binary economics (1) offers a coherent explanation for how unutilized productive capacity and untapped potential seemingly grow as markets supposedly have become more competitive and (2) suggests modest, but fundamental reforms that would open the existing system of corporate finance (so that creditworthy corporations could chose to meet their capital requirements competitively while enabling their employees, consumers, and other stakeholders to acquire stock ownership in those companies using the earnings of capital acquired, thereby providing a broadening ownership foundation for increased economic growth).
To open the market infrastructure to facilitate the diffusion, as well as concentration, of capital ownership, binary reforms would make available to poor and working people (minimal owners and nonowners) some of the same capital acquisition advantages presently used by well-capitalized people to acquire capital with the earnings of capital including (1) pretax corporate earnings by way of tax incentives for depreciation, research, development, investment, employment, and other costs; (2) prime corporate, nonrecourse credit; (3) credit insurance and other means of risk diversification; and (4) a friendly monetary policy. Thus, binary reforms would open the existing market infrastructure to extend to stakeholders of all participating creditworthy corporations the competitive opportunity to acquire capital with the earnings of capital and then to earn capital income to supplement their labor income and welfare payments. In essence, the binary reforms merely open the market infrastructure to enable market participants to evaluate and invest in the prospect of binary growth if they chose to do so. No ownership-broadening transactions are required.
According to binary analysis, as the advantages of binary financing become more widely appreciated, the cumulative effect of voluntary ownership-broadening capital acquisitions would be reflected in enhanced earning capacity for a growing portion of poor and working people, which would establish a growing foundation for increased economic growth by providing increasing incentives for the employment of existing unutilized productive capacity and investment in additional productive capacity. This would thereby greatly enhance corporate, shareholder, and stakeholder wealth.
Section I reveals that to address Henry Ford's expressed desires (1) to enable his employees and ever more working people to afford his automobiles and (2) to justify the retention of vast undistributed earnings of Ford Motor Company (FMC) common shares, FMC could have adopted a Binary Ownership-Broadening Plan designed to enable FMC employees, consumers, and others to acquire ownership shares of FMC and other participating companies while enabling those companies to finance additional capital investment. The Plan would enable FMC and other participating companies to meet any portion of their capital acquisition requirements while simultaneously enabling employees, customers, and other stakeholders to acquire an ownership interest in the participating company, paying for it with the income of capital acquired. To finance the Plan, FMC could have announced the indefinite suspension of most or all dividends on existing common shares. In support of affirming the Plan under the business judgment rule, FMC could have argued that a plan to encapitalize employees, consumers, and others is good business for FMC because it serves to (1) enhance worker productivity, customer loyalty, and general goodwill among the citizenry for FMC; (2) enhance the market for company products; (3) broaden and deepen the institution of private property, free markets, and democracy; and (4) enhance the wealth of FMC and its shareholders. After exploring additional arguments and possible responses of the Dodges either to enjoin the plan or compel additional dividends, Section I concludes that the Binary Ownership-Broadening Plan would easily find protection under the business judgment rule, although perhaps in modified form to protect the interests of minority shareholders.
Section II explores the implications that arise from the fact that a binary ownership-broadening plan that opens the capital markets and enables corporations to meet their capital requirements at advantageous rates while encapitalizing their employees would easily pass muster under the business judgment rule. One implication is that the historical doctrine that corporate fiduciary duties flow first to the corporation and secondarily to the shareholders takes on added, practical significance with regard to fiduciary duties and corporate social responsibility. If ownership-broadening financing may be good for corporations, then fiduciaries must consider it along with other ways to meet capital requirements. If reforms of the capital market structure can promote ownership broadening in ways that enrich the corporation, then fiduciaries should consider advocating those reforms. If the binary approach to ownership-broadening financing might produce beneficial alternatives for shareholders, employees, customers, welfare recipients, and other stakeholders, then their advocates should consider that approach. If corporate, shareholder, and stakeholder earnings can be enhanced by enabling all people to acquire capital with the earnings of capital, the shareholders and stakeholders have a right to know.
Students also have a right to know. The idea that corporations might have a wealth-maximizing interest or a social responsibility to finance a portion of their capital requirements so as to broaden capital ownership is almost never raised in the literature and course offerings on corporate law, corporate social responsibility, and related subjects. The unspoken assumption in the literature and course offerings is that corporate finance exists only for the benefit of existing shareholders; yet this position is historically wrong and contrary to the principle that corporate fiduciary duties flow primarily to the corporation and only secondarily to the shareholders.
The affirmative fiduciary obligation to explore, analyze, and inform should not go unheeded by conscientious proponents of (1) a rigorous approach to fiduciary duties related to wealth maximization and (2) a robust sense of corporate social responsibility. If corporations would benefit by ownership-broadening corporate finance, then shareholders and everyone else affected by corporations ought to be so informed.
The binary promise of substantial growth by way of a more open and competitive system of corporate finance is unusual and great. It need not be established as certainly true, or true beyond a reasonable doubt, or true more likely than not, or be accepted by mainstream thinking, for fiduciaries to have an obligation to consider it and act upon it, and for teachers to have an obligation to teach it.
About the Author
Robert Ashford. Professor of Law, Syracuse University School of Law. B.A., University of South Florida; J.D., Harvard University.
Citation
76 Tul. L. Rev. 1531 (2002)