The corporate realism theory viewed the corporation as an entity which is completely independent from its members. This theory provides theoretical legitimacy to managerial power, and inherently an accountability problem arises. In the 1930s these problems started the famous debate between two law professors Berle and Dodd. They summed up the essence of the issue in the question "for whom are corporate managers trustees?". In this essay, firstly, I will provide both different answers given by Dodd and Berle to this question respectively, and after that I will try to give my answer to the question.
The theoretical basis for Dodd's claim was provided by corporate realism, but he expanded the theory by including corporate social responsibility. He argued that corporations are not just making a decision on the cost of business, but they are making decisions that have social consequence to all of us. He accepted that the Corporation is a real entity distinct from its shareholders, but similar to any other real person that entity has a social role and should be subjected to the principles of citizenship. Therefore, Dodd's answer to the debate's question was that managers are trustees for the Corporation as a socially responsible person. Dodd argues that where the owner of a business employs a manager to assist him in carrying on the business, that manager owes not only a contractual duty towards his principal but is also a fiduciary who must loyally serve his principal's interests. The relationship between them is, therefore, one of the agency rather than trusteeship.
However, Berle stated that such a solution entails hidden accountability weakness because of the lack of an effective enforcement mechanism. In his reply to Dodd's position, Berle asserted that managers are trustees for the shareholders rather than the company itself. He assimilated the corporate interest with the shareholders' wealth maximization objective by disregarding the insight of corporate realism. In this model, there is no direct social benefit, but he suggests that shareholders make a better decision than managers about the reallocation of the sources to the society by reinvesting. In fact underlying Berle's minimalist analysis is a version of the aggregate theory which also comprises a contractual relationship between shareholders and managers. Under that contract, the former entrusted their private property to the latter.
My answer to the question would be that managers are trustees for the shareholders as Berle argued, because in Dodd's theory, we have a strong problem with legitimizing the unconstrained managerial power that we cannot make sure managers will always act in the benefit of corporation and society. One justification for this could be that managers have the information and they have the best position to make a decision and they are elected by the shareholders. As for Berle's theory again we have an accountability problem with shareholders, but at least in that theory, we have a focus point which is "shareholder". The possibility of takeovers improved the focus on shareholder's profit satisfying and the change of the shareholder type of individuals to institutions, whose shares are greater and enough to make a change easily, improved their influence on the Corporation. These make me think that those shareholders have the potential to really fulfil the Berle's model.
In conclusion, although both theorists have, as their starting point, the de facto separation of the share ownership from control, their final propositions are anthitetical. Dodd welcomed the ostracism of the shareholder from the center of corporate control in order to give way to the possibility of "socializing" the corporate entity. On the other hand, Berle regarded the rise of managerial power as a danger to society. . By the 1950s Dodd's pluralism/realism appeared to win the argument and this was even acknowledged by Berle himself, however, the nominalist/aggregate approach did not disappear. Instead, it was taken up, expanded and refined, this time by economists rather than lawyers to become the dominant theory by the end of the twentieth century. In the same way with the dominant approach, I tend to think that managers are trustees for the shareholders for the reasons that I have mentioned above.
07.02.2018
Attny Gonenc Yay, LL.M