shareholders - limited liability means limited moral standing

I was listening to a presentation last week from a colleague who practices corporate law with a Minneapolis law firm. He was giving an overview of corporate law to participants in our certification training program on stewardship for members of corporate boards. Something in the way he placed emphasis on an old chestnut about corporations triggered an excited thought as if I was seeing the subject for the first time.

Bryn's comment was simple: corporate law places the management of a corporation in the hands of the board, not in the hands of the shareholders.

This basic rule for me expeditiously resolved one of the most tenacious arguments in business ethics - that between the relative claims of shareholders and stakeholders for a preferred status in the business calculations of corporate managers. Shareholders, some argue, have exclusive priority while many who promote business ethics would give the nod to stakeholders, including shareholders as one set of those who depend on corporate performance for their wellbeing.

The justification for giving preference to shareholders is that they are the "owners" of the corporation and as such have rights to full concern and attention of those who work for them. Stakeholders, on the other hand, it is pointed out are not owners but stand outside the structure of corporate power and decision-making.

Now, the fact that management of a corporation is given to the board and not the shareholders makes all the difference in this argument. Management is the prerogative of owners. It is the heart and soul of the powers of dominion that owners are given under the law. A fully empowered owner can do anything he or she pleases with property under ownership - even to the point of destroying or abusing or wasting it for no good reason.

If shareholders can't be such owners, then they are a limited kind of owner with expectations of exercising dominion less than those held by "real" owners.

Shareholders are not given rights of full ownership in a corporation; there are limits to their risk exposure. They enjoy limited liability - not full liability for the losses of the corporation, but only financial sacrifices up to the amount of their investment in the stock.

Their limited liability is balanced by limited rights and powers. Full liability as in a sole proprietorship comes with full rights of dominion. Gaining an advantage in having one's liability limited by the law is offset by having to sacrifice before the law advantages in one's ability to exercise power and dominion.

Shareholder rights are set by their contract with the corporation. They do not have rights of management.

Thus when it is argued on their behalf that they have priority over other stakeholders, we should cautiously think about the scope and expanse of such priority. They do not carry full risk of business failure; their corresponding claim to fortune should therefore be a modest one.

If they don't manage, they shouldn't ask for the deference that goes to those who are in the arena running all the risks and carrying all the burdens of success.

Shareholders do have a claim on the corporation, but not an extreme one. Their claims are as limited as their are powers of management and liabilities.