How do corporations cause harm? Courts and legislatures have long subscribed to a simple, straightforward approach: “[T]he corporation touches the public only by the hands of [its] agents and servants.” In other words, according to the law, there is ultimately only one source of corporate harm: individual employees.
In a forthcoming article, I urge reconsideration of that centuries-old legal assumption. The law’s approach would surprise many non-lawyers who study corporations—systems theorists, business ethicists, organizational psychologists, and technologists. They have a richer understanding of the mechanisms through which corporations “touch” the public, and, by extension, harm it. The law today does not always recognize corporate manslaughter, fraud, and discrimination when a corporation’s self-driving car hits a pedestrian, when its poor communication channels lead to false claims for payment, or when its biased algorithms deny credit. When courts and legislatures stipulate that corporations only act through employees, they simultaneously constrain the scope of legally cognizable corporate injury. This has important consequences for the law’s ability to steer corporations in socially productive directions using civil and criminal liability.
While long repetition has made the doctrine that corporations only act through individuals seem inevitable, there is nothing necessary about it. Unlike real people, corporations have no natural perimeter. As legal constructs, they start and end only where the law says. As a result, corporations think, act, transact, own, organize, speak, and injure only in the ways and under the circumstances that the law dictates.
If we could start from a blank legal slate, would our contemporary ideas of fairness and sound economic policy limit the scope of possible corporate mischief to the wayward acts of individual employees? That approach may have made sense at an earlier stage of economic history when corporations were much simpler ventures. For today’s vastly more complex and sophisticated business interests, it is an antiquated gift of limited liability. Unless some special liability doctrine applies (as when a firm markets a defective product), a corporation faces no liability for any harm unless it is traceable to the conduct of an individual employee. This gives corporations wide zones of legal immunity, regardless of whether they did (or could) exercise control over the source of harm. I argue that, in today’s business environment, there are many such zones.
This would not be the first time that modern developments have forced the law to update its understanding of how corporations can harm people. Historically, the U.S. law of corporate liability started narrow and expanded incrementally. Early on, when corporations were much more limited vehicles, the ultra vires doctrine constrained what could count as corporate harm. As of today, the view was that corporations cause harm only through individual employees, but with an additional limitation: the employee had to be acting within the scope of the corporation’s chartered purpose.
Early charters tied corporate purposes to narrow public works projects like building railroads or installing waterworks. The charters did not then permit, as modern charters do, the open-ended pursuit of any lawful purpose, and they certainly did not anticipate illegal activity. When employees acted beyond the chartered purpose, they did so solely in their individual capacities, not as extensions of their corporate employers. At the turn of the 20th century, the law began to recognize that adequately controlling corporations required a more expansive understanding of how corporations (as opposed to just their rogue employees) can harm others. Consequently, courts abandoned the ultra vires doctrine.
There is another (and, I argue, preferable) strategy the law could take toward conceptualizing corporate harm: working from the opposite direction by starting with a broad understanding of corporate liability and narrowing as needed. With this approach, the default assumption would be that whenever any aspect, mechanism, or feature of a corporation causes harm, that harm would presumptively be attributable to the corporation.
The policy logic behind the approach is straightforward. Corporations today are so large, complex, and sophisticated that many other elements within them are capable of causing harm. Corporations have control over these elements. By recognizing the harms caused by those elements as corporate harms, the law could hold corporations to account and thereby induce internal policing and reform. Where the law does not hold corporations accountable, it cannot induce responsible precaution.
There are at least three sources of harm beyond individual employees for which my start-broad approach would begin to hold corporations responsible: organizational structures, collective actions, and algorithms:
- Organizational Systems: Systems theorists recognize that organizational structures within large corporations can be the ultimate drivers of corporate action. For example, aggressive performance quotas and unidimensional evaluation metrics can induce inattention to ethical constraints.
- Collective Actions: Philosophers have long recognized that groups of people can do things that amount to more than the sum of what each individually contributes. This happens when everyone leaves work during rush hour and thereby collectively cause a traffic jam.
- Algorithms: Technologists are increasingly recognizing the capacity of corporate algorithms to impact the world around them without direct human intervention. A smart algorithm for approving customer credit applications might “learn” to discriminate on the basis of race or gender without any employee instructing it to do so.
There surely are (or will be) other elements of corporations that can cause harm. The approach I propose would presumptively include those too, once they have been identified.
If I am right, then, contrary to what seems to be the dominant view among corporate scholars, the current doctrine for pairing responsible corporations with the harms they cause is not too broad but far too narrow. Of course, corporate scholars are right that over-extending corporate liability can carry significant costs. While a start-broad approach would certainly go further than current law, there are other limiting principles already built into the law to ensure reasonable limits. Causing harm alone is generally not legally sufficient to establish corporate liability. Usually there must be some further factor indicating corporate fault, like negligence or a culpable mental state. But by starting with a broad approach to what counts as a corporate harm, we would at least allows courts, victims, and prosecutors to take up the question of corporate fault. In the absence of a harm that the law is prepared to trace to a corporation, there can be no corporate remedy.
Mihailis Diamantis is an Associate Professor of Law at Iowa University College of Law. His forthcoming paper, The Body Corporate, 83 L. & Contemp. Probs., is available online on SSRN.