The Corporation as Time Machine: Intergenerational Equity, Intergenerational Efficiency, and the Corporate Form

Lynn A. Stout

Cornell Law School – Jack G. Clarke Business Law Institute

Abstract:

This Symposium Article argues that the board-controlled corporation can be understood as a legal innovation that historically has functioned as a means of transferring wealth forward and sometimes backward through time, for the benefit of present and future generations. In this fashion the board-controlled corporation promotes both intergenerational equity and intergenerational efficiency. Logic and evidence each suggest, however, that the modern embrace of “shareholder value” as the only corporate objective and “shareholder democracy” as the ideal of corporate governance is damaging the corporate form’s ability to serve this economically and ethically important function.

The Corporation as Time Machine: Intergenerational Equity, Intergenerational Efficiency, and the Corporate Form – Introduction

We are mortal creatures; we grow old and die. That hard truth carries a number of fundamental implications about the nature and objectives of individual human beings. It also carries a number of fundamental implications about the nature and objectives of an entity that (unlike human beings) need not grow old and die: the corporation.

This Symposium Article explores the possibility that mortal persons use the corporate entity to transport wealth between different time periods in two different ways. First, as a legal entity with the capacity to own assets in its own name, the corporation allows human persons to transfer resources to the corporate entity and make them unavailable for current consumption (“asset lock-in”) so that the resources can be instead invested in projects that generate wealth in later time periods. This future wealth may be consumed by the human persons who originally committed resources to the corporate entity. But the future wealth generated by a corporation with perpetual life can also be consumed by a future generation of human beings. Thus the corporate form offers not only a useful savings and investment technology for individuals seeking to serve their own interests, but also a vehicle for the present generation to altruistically pass resources forward through time to benefit those who will live in the future.

Second, some types of corporations—in particular, public business corporations with freely transferable shares traded on a reasonably efficient market—can transform wealth that will be generated in the future into wealth that can be enjoyed today in the form of a higher share price. This means the corporate form can be used not only to create future wealth to benefit future generations, but also to shift wealth backward in time to benefit earlier generations. This allows a kind of implicit exchange between those who live presently and those who will live in the future, rewarding the present generation of shareholders for preserving resources and making investments that benefit future generations.

The public business corporation with asset lock-in, perpetual life, and freely transferable shares, accordingly, is a legal technology that can play, and historically has played, an important role in promoting both intergenerational equity and intergenerational efficiency. However, the recent rise of a “shareholder value”-focused approach to understanding and governing public corporations has begun to erode public companies’ abilities to lock in their assets. Logic and evidence both suggest this loss of asset lock-in is threatening the public corporation’s ability to serve as a mechanism for transferring wealth between time periods and generations.

Part II of this Symposium Article describes how corporate entities can be understood as institutions designed to transfer wealth forward from earlier time periods to later time periods. Part III explains how the process can work in reverse, with public business corporations in particular shifting wealth from the future to the present. Part III also explains how this backwards time-shifting encourages the current generation to preserve and invest resources in a fashion that serves both intergenerational equity and intergenerational efficiency. Part IV offers some thoughts and evidence on the destructive consequences of the contemporary shareholder value approach to corporations and corporate governance. Part V concludes.

II. How Corporations Shift Wealth From The Present To The Future

A. On the Need for a Savings/Investment Technology

One of the many problems we face as humans is our need for a savings technology. Most of us are productive in youth and middle age and generate wealth beyond what we need for immediate consumption. But if we are lucky enough to escape disease and accident, we may live past the point where we can easily provide for our own needs. Moreover, even in youth and middle age, we see both fat years and lean. We need a technology to preserve (and ideally increase) the excess wealth we generate in good times so that it can be available to us in bad years and in our decline.

Intergenerational Equity, Intergenerational Efficiency, And The Corporate Form

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