How Corporations Can Do Good for All

let's get to it with William Magnuson. He is associate professor at Texas A and M Law School. His new book for Profit, A History of Corporations. He's also taught at Harvard. He is also the author of Blockchain Democracy, and he joins his via zoom from Austin, Texas. Professor Magnuson, nice to have you here with Paul Sweeney and myself. So tell us about this book. What was your thesis going into it? Well, thank you so much for having me on. When I first started writing this book, I

really didn't have a thesis. My idea was I wanted to explain where this institution, this economic institution that affects all of our lives in so many ways, where it came from and why we created it in the first place. And so I started with ancient Rome. I began looking at where corporations first arose. And the first economic institution that really starts looking like a modern corporation was ancient

Rome Or. They had something called Associetatis publican norm, and I then explored it through the chapters, how they evolved over time, from ancient Rome through the Medici Bank through the East India Company, and I spotlighted these important points, these turning points in history when the corporation truly changed and until until it eventually evolved into the institution that we know of it as today. Professor in business school, I learned that it was the role of the corporation

to maximize profits for shareholders full stop. Now that seems to be evolving to maybe something broader, maybe maximize the good of the common stakeholders, maybe the common good. That's how do you see that playing out? Is that really being embraced across corporate America? That's right? And I think that is corporate law one oh one right. Corporate law one on one tells you the purpose of a corporation indeed, the duty of a corporation is to maximize profits. That said,

that is a relatively recent development. Right before the twentieth century, no one would have ever told you that the sole purpose, the only thing a corporation was supposed to be thinking about, was profits for shareholders, right and Eliza elizabethan England. When the East India Company was first formed, it didn't promote itself by saying, We're going to enrich this small group of merchants in London. No I told Queen Elizabeth that it was going to expand the trade, the international trade

of England. When the Medicie Bank was formed in Florence, it didn't say, well, I'm going to enrich this small medici family. It said we're going to contribute to the flourishing of Florence. It did lead, indeed to the enrichment of that city. And so I think that that the idea that corporations are solely supposed to pursue profit is a relatively recent development. Part of it has been driven by developments in the law. Right, So, developments in the law.

In the last uh century and a half or so, corporations have gone from institutions that had to be formed by the monarch or the government and you had to petition it for a charter. So now it is very simple. Anybody could form a corporation. I could form a corporation the next fifteen minutes if I wanted to. And so that means that corporations no longer have to justify themselves

to a government. How many people, how much of maybe when companies go wrong and things go wrong has to do with companies are in the public markets, publicly traded, and ultimately it is about as Paul was talking about earlier, making money. Yeah, yeah, exactly. I do think that a really important theme in the history of corporations is the role of stock market. Right until the sixteen hundreds, there

was no real stock market. The East India Company was one of the founding members of the London Stock Exchange. And so nowadays they of course have become these all powerful forces. We have shareholder activism, we have proxy contests. Uh, they now exert a new kind of control. We see corporations in many ways responding to the demands of shareholders. And there's a big debate now in corporate law and then the public and public discussion about just how the

effect just how stair shareholders affect corporations. Do they make corporations Uh, turned to more short term oriented goals at the cost of long term goals. And so that's one of the big themes of the book is trying to explore how do we make sure that corporations aren't just focusing on short term profits but thinking about the long term as well. Well, I guess you need propercentives. There is that in order to impact behavior. I would think, yeah,

I think that it's a couple of things. One is, you need incentives, right, you need laws, You need incentives, You need economic structures that give corporations reasons, real tangible reasons for thinking not just about the short term or not just about shareholders, but also about other long term constituencies. But you also need a cultural change, right. I think that historically we have thought about corporations in terms of civic common virtue. Right. We want corporations to contributing to

the common good. And I think that in order for corporations and particularly corporate executives to have that in mind, we need a change in the expectations, the cultural expectations of them. So, Professor, I'm wondering, you know, giving your research here flash if you know, fast forward to today, are there any companies that are doing it right or industries that are doing it right in terms of maybe expanding how they view themselves within their markets, within society

more broadly. Yes, Well, it's hard not to think when you think about a corporation that is considering all the factors right, not just shareholder profit, but also other features, the environment, workers, uh, the country. It's hard not to think about Patagonia, right. Patagonia is a is obviously the outdoor equipment maker and clothes maker, but there their founder has always been deeply committed to promoting not just the

interests of shareholders, but also thinking about broader constituencies. And so I think that that type of corporation something, a corporation that has in mind not just their own independent small fyfems, but increasing the the the flourishing of their society and their community as well. That those kinds of corporations I think are the ones that are going to succeed long term. Why aren't there more Patagonias than today? That's a very good question. I think there is that

there really has been a cultural shift. Now you don't expect corporations to have those kinds of those kinds of goals. Right, as we mentioned earlier, the today it is sort of corporation corporate law one oh one that says that part executives not only should be only thinking about profits, but they actually might even have a fiduciary duty to only consider uh profits. And so I think that is part

of it. There's pressure on executives to say, well, I can't I can't frame my business strategy in terms of anything but share older profits. And so my book and in many ways, is to explore how that shift came about, How why did this happen? Historically speaking, you know, environmental social governance E s G investing, that's become a bigger part of I think, the the investing landscape. Do you think and you know, do you think shareholders may be

able to affect some change here? As even Blackrock, the biggest you know, asset manager out there, is really pushing its managers to incorporate E s G. Yes, E s G is going to be an increasing trend. I think in the history of corporations, I've always thought that environment

makes a lot of sense, social makes a lot of sense. Governance, I think is it's sort of an outlier here, right, the idea that we should be in moving the governments of corporation doesn't quite seem like the environment and social causes. That said, it's there's going to be increasing pressure. We've already seen increasing pressure on corporation is to be considering these other elements. Part of the problem, though, if with the current E s G movement, is that they've been

struggling to find real metrics. Right. It's hard to find a metric to say, well, this corporation is doing better on E s G than this other one. That just doesn't make a lot of sense currently. So history isn't always a guide for what's to come. But based on what you've learned about the history of corporations, where they came from, where they went, um, can you get any indication of kind of where they are going ultimately longer term? Especially I think with Paul, you know, Paul and I

we talked about it all the time. Battle the money going into E s G. You would think that might have an impact in terms of companies initiatives and being maybe more purpose driven as well as profit driven. But where do companies go from here? Ultimately? Sure? I think that the message that I take away when I examine these historical corporations is that humanity works best when it

works together. Corporations are these tremendous vessels for improving economic efficiency, for producing goods, for responding to the demands of consumers. Right there, this tremendously efficient vehicle for doing that. But they also have these flaws, and so each each generation we have a new type of corporation. I think we're currently living in the age of the startup, right, the Facebook world, the Twitter world, and we're starting to see

some of the downsides of that startup world. Right, We've got Twitter engaging in all sorts of difficult content moderation, uh questions. We've got Facebook involved an election disinformation and so we're going to be seeing a lot of developments in the legal world in the next few years, and I think we'll also developments and in corporations as well.

All it really appreciated. Uh. William Magnusson, Professor, Associate Professor of at Texas A and M Law School, his new book for Profited History of Corporations