This paper will discuss whether the power structure of the corporation has

legitimised an ethos of irresponsibility, the subject being the modern public

corporation which is characterised by diffused ownership and managed by the Board
of Directors. The scope is to critically analyse the elements of the structures that
comprise the corporation and whether it has institutionalised irresponsibility. To
achieve this, the paper will also consider a behavioural issue to add a layer of
realism to the theory critiqued. A conclusion will summarise the arguments affirming
the outcome of the inquiry.

Is the corporate architecture fit for the purpose of responsibility?

The era of capitalism has promoted and facilitated individual autonomy, progression,
self-interest, entrepreneurism:1 all elements that resonate with how the corporation
pursues its own interests. Adding to this economic and social momentum is the role
of money which as Ellul stated:

it is really money that uses us and makes us servants by bringing us under

its law and subordinating us to its aims.2

The abstract nature of money has allowed the corporation to pursue activities with
immoral, yet legal, outcomes because as will be discussed below, money renders
morality to be indifferent thus the effect on humans is that they become less
conscious and emotionally invested in how it operates, only concerned with its use in
furthering capitalist values such as prosperity through acquisition. In this light,
money has served as the grease in the wheels of the corporate vehicle speeding
through the capitalist racetrack.

In Australia, like most common law countries, 3 there is notable protection afforded to
shareholders, in comparison to civil law jurisdictions which encourage stakeholder
participation. Judicial support4 and legislation5 has enforced this shareholder primacy
model over time, the latter mostly codifying fiduciary obligations directors owe to the
best interests of the company. Understanding why shareholders have retained such
primacy highlights the concoction for irresponsibility that arises when shareholders
are economically driven to participate (invest) in a corporation and managers are in
charge of that investment. The divorce between the ownership and control of the
corporation is justified as being an inevitable consequence of the diffusion of
shareholders who have referred control to suitably qualified managers.6 As a reward
for this concession, they obtain certain privileges such as limited liability, the right to
dividends and voting rights. This appears to be a logical and practical deduction
except for the moral hazard implications. Shareholders become fiscally irresponsible

1 Sherwin Klein, The Natural Roots of Capitalism and Its Virtues and Values [2003] 45(4) Journal
of Business Ethics 387, 401.
2 Jacques Ellul, Money and Power (InterVarsity Press, 1984) 76.
3 Forest L. Reinhardt, Robert N Stavins, and Richard H K Vietor, Corporate Social Responsibility
Through Economic Lens [2008] 2(2) Review of Environmental Economics and Policy 219, 224.
4 Peters American Delicacy Co Ltd v Heath (1939 61 CLR 457; Nugurli Ltd v McCann (1953) 90
CLR 425.
5 Corporations Act 2001 (Cth) ss 181-184.
6 Adolf Berle and Gardiner Means, The Modern Corporation and Private Property (revised ed, 1967)
313.
and legally immune7 and corporations are able to pursue the interests of
shareholders narrowly acknowledged as shareholder wealth maximisation. As a
result, such a narrow objective renders the means of pursuing profits to be morally
indifferent; companies that produce cigarettes and chemical fertilizers attract equity
the same way that a company manufacturing baby cots would.

The fact that the law has armed shareholders with such weaponry to obtain their
primacy, for example, their right to vote on executive remuneration 8 incentivises the
myopic pursuit of shareholder wealth maximisation because they authorise a
mechanism to align the performance of the company share price to executive
bonuses. Contrastingly, their right to remove management9 disincentives conduct
which would deviate from the primary goal of shareholder wealth maximisation. To
conform with shareholders needs return on investment - they will less likely engage
in conduct such as investing significantly in long term projects with uncertain yields.
The situation is calamitous10 as the combination of the strict application of the
separate legal entity principle11 and limited liability have widened the opportunity for
shareholders to be passive beneficiaries of the fruits of the corporation.
Unfortunately, these fruits may be contaminated by ethically-challenged decision-
making and present moral hazards by management.

The example of tax avoidance is useful in highlighting how corporations have taken
advantage of globalisation magnifying the moral vulnerability of the corporations
structure. Benjamin Franklin once said:

in this world nothing can be said to be certain, except death and taxes. 12

Well, the corporation obtains perpetual life upon incorporation and near-exemption
from tax obligations. The latter because it capitalises on the lack of uniform tax laws
around the world to engage in tax avoidance practices such as transfer pricing, 13
debt shifting,14 and shifting profits to tax havens15 through their organisational
structure. In Australia, Apple paid $80M in tax on revenue of $5.86B for the year to
September 2014: not anywhere close to the 30% corporate tax rate.16 How they do
this is beyond the scope of this paper. Why they do, is clear: it is not illegal and it is
accepted to be commercially logical if the opportunity is available. The justification is

7 Harry Glasbeek, Piercing on steroids (2014) 29 Australian Journal of Corporate Law 233, 236.
8 Corporations Act 2001 (Cth) s 250R.
9 Ibid s 203D.
10 Otto Kahn-Freund, Some Reflections on Company Law Reform (1944) 7 American Economics
Review 311, 319.
11 Salomon v Salomon & Co Ltd [1897] AC 22.
12 Alexander Engel, In this world nothing can be said to be certain, except death and taxes
Benjamin Franklin, 1789 [2012] 14(4) Colorectal Disease 399.
13 John Sokatch, Transfer-Pricing with Software Allows for Effective Circumvention of Subpart F
Income: Googles Sandwich Costs Taxpayers Millions [2011] 45(2) International Lawyer 725, 733.
14 Buettner et al, Internal Debt and Multinational Profit Shifting: Empirical Evidence from Firm-
Level Panel Data [2013] 66(1) National Tax Journal 63, 64.
15 Mark Trayling, Tax havens and the alternatives: lower personal and corporate tax rates in
Australia would be a far more effective way of countering the revenue impact of tax havens
[2003] 117(1) Journal of Banking and Financial Services 1, 3.
16 The Australian Institute, Submission No 62 to Senate Economics References Committee,
Corporate Tax Avoidance, February 2015, 1.
found in the corporations legal and economically-charged obligations to maximise
shareholder wealth which is obviously assisted through paying as least tax as
possible.

This is an example of the misalignment of the law and morality. Corporate tax is a
significant source of State revenue that could be invested in improving many facets
of civil life, yet this money is redirected to an elite class who indirectly deprive the
opportunity to enhance the collective interests of society. There is no suggestion that
people are naturally cruel, just affirmation of the interaction between the corporate
structure and the morally-indifferent nature of money contributing to an ethos of
irresponsibility, in this case the crafty avoidance of tax obligations.

Is the Berle-Means conception of the corporation the most optimal?

Shleifer17 concluded that the widely-held professionally managed corporation, as

articulated by Berle and Means, was the superior arrangement for a corporation to
optimally perform because of its inherent Darwinian characteristics, namely the
ability to outcompete the market through only focusing on profit to survive. This
proposition is not true.

Firstly, agency costs cannot be eliminated. Despite the pressures of the managerial
labour market, it is still within managements capability to pursue self-interests at
the expense of the owners and this moral hazard is more likely to exist in larger
public companies.18 This may be because of the widening gap between directors
acting as a check and balance of management on behalf of the shareholders which
will be examined later.

Secondly, the Berle-Means conception tacitly suggests that the trade-off between
managerial expertise for a diffused ownership is optimal because it creates a
competitiveness among managerial candidates thus being in a better position to
attract more sophisticated candidates. Such perspective is ignorant of the valuable
experience obtained in a family-owned private company as well as the role
blockholders (large shareholders) play which are less-existent in large public
corporations as a result of diffused membership. Blockholders can monitor
management more effectively because they are a mobilised unit with a larger
financial interest to sustain an influence on the corporation and as such are able to
orchestrate decisive action such as the removal of directors without the difficulties of
obtaining sufficient numbers to exercise such rights. Unsurprisingly, there is
evidence of a healthy correlation between blockholders and corporate governance. 19

Finally, because of the shareholder primacy model that characterises the Berles-
Means conception, corporations with blockholders such as those privately owned by
families are able to overcome the myopic bias as a family is more likely to take a

17 Burkhart, Michael, Fausto Panunizi, and Andrei Shleifer, Family Firms [2003] 58(5) Journal of
Finance 2167, 2170.
18 M.C Jensen, The Modern Industrial Revolution, Exit and the failure of Internal Control Systems
(1993) 48 Journal of Finance 831, 842.
19 Alex Edmans, Blockholders and Corporate Governance (2014) 6 Annual Review of Financial
Economics 23, 29.
long-term generational approach and aspire to protect the firms reputation. This
genuine and visionary approach allows for a wider managerial perspective than
would exist in a widely-held corporation whose primary defined interests are
shareholder wealth maximisation.

Monkey see, monkey do

Morck20 found that directors were psychologically vulnerable to reflexive obedience

to each other and to the CEO. Such heuristic biases in upper management will
contribute to an ethos of irresponsibility because it harms the exercise of the
expected standard of duty of care that directors owe to their company. The reality is
that in a corporation shareholders are usually limited to an annual opportunity to
exercise any control through their voting rights, thus rendering them as a remote
abstraction. Milgram refers to the agentic shift21 involving a compromise of rational
reasoning for loyalty. This pathology of loyalty is morally-charged which makes it
harder to address as directors will justify instinctively supporting the CEO on the
same morally-charged behaviour premised on duty and trust. Other behavioural
tendencies such as directors reciprocating favours out of gratitude create a
gentlemens club only tacit arrangement with similar moral hazard implications.
This behavioural conflict signals the potential for irresponsibility that exists in upper
management simply because the power structure fails to provide the checks and
balances to mitigate agency costs. If shareholders cant practically monitor senior
management who should be supervised by the BOD, to whom is responsibility
assigned and how is it exercised?

The paper has critiqued the organic structure of the modern corporation
demonstrating how it has contributed to an ethos of irresponsibility with severe
moral hazards. The role of money neutralising any morality in the monitoring of the
corporation means there are serious barriers to addressing the shareholder primacy
model which has strong judicial and legislative support. Finally, the reflexive
obedience that appears to exist at management level is a concerning product of the
ethos of irresponsibility that has ascended from the power structure of the
corporation.

20 Morck, Randall, Behavioral Finance in Corporate Governance: Economics and Ethics of the
Devils Advocate (2008) 12 Journal of Management and Governance 179, 188.
21 Milgram, Stanley, Behavioral study of obedience (1963) 67 Journal of Abnormal and Social
Psychology 371, 378.