Thursday, July 3, 2014

Hobby Lobby decision makes investors personally liable for the company's ethical decisions

Follow my logic here.

The Supreme Court just ruled that a "closely held" corporation cannot be forced to do things contrary to the religious beliefs of those who own it. The owners of Hobby Lobby, opposed to certain forms of contraception, therefore do not have to cover such costs in their employees insurance.

The courts did not say that corporations have religious rights under the First Amendment, but did hint at the idea that owners of some corporations can somehow imbue religious concerns onto the corporate entities they control.

My understanding of corporations is that they are essentially legal fictions set up to pool resources and shield investors from personal liability in the event of thing going wrong. Were a company to be sued, the assets of the corporation would be forfeit but not the assets of the individual investors. 

Further, it is my understanding that corporations have narrowly defined goals. They seek profit and seek to increase shareholder value. If a corporation were presented with an ethical dilemma, the solution is always the option that makes the most money, within the bounds of what is legal. If one country will host your factory cheaper than another, that's where the factory will be built, even if human rights in that country are less than stellar.

This is why public pressure on corporations in the form of boycotts and activism is so important. Such pressure can make it more profitable for a corporation to do the ethical thing.

However, and back to the main point: Hobby Lobby is a corporate mask worn by David Green and the Green Family, its primary owners, to shield them from certain financial liabilities. However, the Greens have decided (and the Supreme Court has mandated) that though the corporate mask financially protects the family from the world and its ethical concerns, it does not financially protect the world from the ethical concerns of the Greens.

This seems wrong. The corporate protections, once punctured from either side, should be porous enough to allow the Greens to impose their beliefs on others but also allow others to reach through and hold the Greens personally liable for the actions of their company.

In other words, "closely held" corporations should not have the ability to shield their owners from lawsuits based on decisions that are ethical in nature.

Here's an example:

Let's say that Banana Corp has a choice between sourcing its products from one of two countries. The first country treats its citizens well, but of course it costs more to do business there. The second country utilizes slave and child labor, and keeps costs lower. Following its ethics, this "closely held" corporation sources its products from the slave labor country, keeping costs down and maximizing shareholder value at the expense of human lives being exploited and wasted.

It seems to me that the people being exploited have a lawsuit on their hands against the people who own the "closely held" company who made the decision to exploit and demean them. The owners of Banana Corp had an ethical responsibility to bring their own ethics to bear in the decisions they made. Not only the company, but all the shareholders should now be liable.

I'm no lawyer, so I'm sure my reasoning is full of holes and my example woefully naive and incomplete. 

But I can't help think that this line of reasoning would be extremely profitable in the hands of the right tort lawyers.


  1. Since the citizens are in a different country they don't have standing to bring up a case. Hobby Lobby would only be able to be sued by the judicial system in that country, which is obviously ok with the legality of what they are doing already.

  2. Looks like Mother Jones magazine and a ton of law professors think I might be onto something: