Case Study (4 pages total) double space (reference page separate)

June 15, 2012

This case was prepared by Cate Reavis, Associate Director, Curriculum Development, under the supervision of Senior
Lecturer Leigh Hafrey.

Copyright © 2012, Leigh Hafrey. This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative
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Corporate Personhood, Business Leadership, and the U.S.
Presidential Election of 2012
Leigh Hafrey, Cate Reavis

Lead the people by laws and regulate them by penalties, and the people will try to keep out of jail, but
will have no sense of shame. Lead the people by virtue and restrain them by the rules of decorum, and
the people will have a sense of shame, and moreover will become good.

—Confucius, The Analects (II:3)1

The corporation’s status as a legal person might seem an arcane matter, relative to the dire individual
and organizational circumstances that set in following the subprime mortgage crisis of 2007. That
crisis had evolved into the “Great Recession,” which still weighed on many real, flesh-and-blood
human beings in the U.S. and global economies in 2012. Yet by 2012, corporate personhood had
become an issue in no less an event than the election of a U.S. president. Former Massachusetts
Governor, Republican presidential candidate, and former Bain Capital CEO Mitt Romney commented
to an interlocutor at the Iowa State Fair, in August 2011: “Corporations are people, my friend. . . .
Everything corporations earn ultimately goes to people. Where do you think it goes?”2 Incumbent
President and Democratic candidate for re-election Barack Obama responded with equal certainty the
following spring, telling an audience at a campaign stop in Ohio in May: “I don’t care how many
ways you explain it, corporations are not people. People are people.”3 If the debate over corporate
personhood mattered to the American electorate as much as the candidates appeared to believe it
should, how might businesspeople and the business community at large assess a core structural
element of global business practice: the corporation?

1 Simon Leys, The Analects of Confucius (New York: W.W. Norton & Company, Inc., 1997).
2 Philip Rucker, “Mitt Romney Says ‘Corporations Are People’ at Iowa State Fair,” The Washington Post, August 11, 2011.
3 (accessed May 23, 2012).

Leigh Hafrey, Cate Reavis

June 15, 2012 2

The Great Recession and Corporate Free Speech

In early 2012, after five years of economic turmoil, glimmers of light indicated that the United States
was emerging from the long dark tunnel that it had entered five years earlier.4 The stock market was
nearing 13,000, unemployment had inched its way down to 8.3%–after hitting a high of 10% in
October 2009–5and the home foreclosure rate for the year (at 1.9 million homes, according to
RealtyTrac) was the lowest since 2007. Banks were showing signs of renewed confidence.
Commercial and industrial lending was up 10% in the third quarter of 2011, compared to a 1.7%
decline the previous four years.6 However, the country’s debt-to-GDP ratio remained a matter of deep
concern: it had started a steep upward climb right at the time the U.S. Government began bailing out
financial institutions, with a ratio of 40% in 2008, and over 70% at the end of 2011.

As the economy appeared to improve, public attention focused on who should be held responsible for
a crisis that had nearly brought down not only the U.S., but the entire global financial system.
Heightened by a number of best selling books, including The Big Short, Too Big To Fail, and 13
Bankers: The Wall Street Takeover and the Next Financial Meltdown; investigative pieces broadcast
on the television news program 60 Minutes; feature films including Inside Job and Margin Call; and
the Occupy Wall Street protest movement, the public’s interest turned to the role that financial
corporations had played in the crisis. While many firms faced civil charges,7 no firm had been
criminally charged for its involvement, no executives prosecuted.8 Beyond the possibility of criminal
action lay the question of ethical responsibility: what curbs might corporations, or the boards and
executives who ran them, have placed upon their operations during the run-up to the crisis? Could
they themselves, as well as the society in which they operated, expect them to exercise such care, and
if so, by what mechanism?

Under U.S. law, corporations had rights and responsibilities, like natural persons. In the Santa Clara
County vs. Southern Pacific Railroad Company ruling in 1886, the chief justice of the U.S. Supreme
Court, Morrison Waite, is reported to have begun oral arguments by stating, “The court does not wish
to hear argument on the question whether the provision in the Fourteenth Amendment to the
Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of

4 “The Global Financial Crisis of 2008-2009: The Role of Fear, Greed and Oligarchs,” provides a more detailed description of the financial crisis. The note can
be accessed at
5 U.S. Bureau of Labor Statistics,
6 Steve Matthews and Ilan Kolet, “Bank Credit Highest Since Before Lehman as U.S. Growth Continues,” Bloomberg, December 11, 2011.
7A number of firms had paid fines for misleading investors without denying or admitting guilt. In 2011, Goldman Sachs settled a lawsuit with the Securities and
Exchange Commission (SEC) agreeing to pay $550 million (4.1% of its 2010 net income) and JP Morgan agreed to pay the SEC $153.6 million (.9% of its
2010 net income). That same year, Citigroup agreed to pay $285 million (2.7% of its 2010 net income), to settle civil charges that it had defrauded customers
during the housing bubble. As part of the settlement, the company made a pledge to the SEC that it would never again violate one of the main antifraud
provisions of the nation’s securities laws. The company had made the same pledge in July 2010, May 2006, March 2005, and April 2000. In September 2011
the Federal Housing Finance Agency, Fannie Mae and Freddie Mac’s conservator since 2008, filed a lawsuit against 17 financial institutions—Ally Financial,
Inc., Bank of America, Barclays Bank, Citigroup, Inc.; Countrywide Financial Corporation; Credit Suisse Holdings, Inc.; Deutsche Bank. AG; First Horizon
National Corporation; Goldman Sachs & Co.; HSBC North America Holdings, Inc.; JPMorgan Chase & Co.; Merrill Lynch & Co./First Franklin Financial
Corp.; Morgan Stanley; Nomura Holding America Inc.; The Royal Bank of Scotland PLC; Société Générale—alleging violations of securities laws and
common law in the sale of mortgage-backed securities. Seeking damages of $200 billion the FHFA alleged that “the loans had different and more risky
characteristics than the descriptions contained in the marketing and sales materials provided to the Enterprises for those securities.”
8 Jean Eaglesham, “Financial Crimes Bedevil Prosecutors,” The Wall Street Journal, December 6, 2011.

Leigh Hafrey, Cate Reavis

June 15, 2012 3

the laws, applies to these corporations. We are all of the opinion that it does.”9 Though the legal
standing of Justice Waite’s statement has been questioned,10 the opinion has been widely taken to
confirm corporate personhood in U.S. law. In 2010, the concept of the corporation as a fictitious
person gained new complexity when the U.S. Supreme Court, in Citizens United v. Federal Election
Commission, prohibited the government from banning corporate and union expenditures related to
political campaigns; in the Court’s opinion, the ban violated the First Amendment right to free
speech. As Gov. Romney and President Obama’s opposing views suggested, public opinion was
sharply divided—often along political party lines—on whether corporations were indeed people, and
if they were, what values they might choose to voice by exercising their right to free speech.

The Accountability Question

Ultimately, the question of personhood underlay the leadership role that both individuals at the top of
the corporation and the corporations themselves had played or failed to play in the downturn. Those
who believed that financial firms should be held accountable for their actions, including liability for
harms committed by their agents,11 argued that, like people, corporations were granted rights, but also
held to responsibilities that extended beyond the law to moral or ethical commitments to certain
values. People who fell into this group believed that financial institutions needed to be held legally
accountable for their actions leading up to the financial crisis. Others, who also blamed the financial
firms, were wary of holding entire firms responsible for their actions at a time when the economy was
still recovering. They remembered what had happened to Arthur Andersen during the Enron
scandal12: the thought of punishing, and ultimately destroying, an entire firm for the bad behavior of a
minority didn’t sit well.

At the same time, many observers and industry players saw the banks and other financial services
providers as victims or innocent bystanders rather than culprits. Some felt that the public sector had
precipitated the crisis when it deliberately eased banking regulations starting in the late 1990’s, with
the goal of making homeownership a reality for more Americans. In essence, they thought that
government hadn’t done its job, and it wasn’t fair or right to blame financial institutions. Still others
believed that responsibility for the crisis should be placed on the society as a whole. Financial firms,
Congress, regulators, credit agencies, accounting firms, and consumers — all had played a role in the
downturn; in other words, we were all to blame.

9 Santa Clara County v. Southern Pacific R.Co. 118 U.S. 394 (1886), (accessed June 4, 2012).
10 Jack Beatty, Age of Betrayal (New York: Alfred A. Knopf, 2007), p. 110.
11Susan Farbstein and Tyler Giannini, “Liability for Harms,” The New York Times, February 28, 2012.
12 In June 2002, a federal jury convicted the accounting firm Arthur Andersen of obstruction of justice for destroying documents pertaining to its accounting
work with Enron. In addition to being fined $500,000 and sentenced to five years probation, the firm agreed to stop auditing public companies, which led to the
demise of the business. In the United States alone, 28,000 people lost their jobs. In 2005, the United States Supreme Court overturned the conviction finding
fatal flaws in the jury instructions on which the conviction was based. For more on this see Elizabeth K. Ainslie, “Indicting Corporations Revisited: Lessons of
the Arthur Andersen Prosecution,” American Criminial Law Review, Vol. 43:107, 2006.

Leigh Hafrey, Cate Reavis

June 15, 2012 4

1. Corporations

Among those who believed that financial firms should be held responsible for the financial crisis was
William K. Black, a professor of economics and law at the University of Missouri and a senior
regulator for the Federal Home Loan Board during the savings and loan banking crisis of the 1980’s.
“I think this crisis was driven by fraud and I believe it was systemic,” he stated. Furthermore, he
believed, the fraud had begun in CEOs’ offices and boardrooms.13

According to Black, certain firms had participated in accounting-control fraud, a term Black himself
had coined. A control fraud occurs when a person in a position of responsibility in a company or state
subverts the organization and engages in extensive fraud for personal gain. The savings and loan
crisis and Enron were examples of control frauds as was, in Black’s opinion, the subprime mortgage

Black believed that compensation was a key factor in creating what he called the criminogenic
environment at many Wall Street banks and even the government-sponsored entities Fannie Mae and
Freddie Mac. The latter were responsible for purchasing and securitizing mortgages, thereby ensuring
that funds were consistently available to the institutions that lent money to home buyers. In his view,
compensation schemes in these firms created perverse incentives not only at the executive, but also at
the lower levels of the company hierarchy. For example, loan officers at Washington Mutual and the
brokers they hired were put on volume commissions. Black commented:

Now that’s insane. We know it will produce intense adverse selection. And we know that it will
produce a negative expected value. Even the brokers were tempted with commissions of $20,000
for every loan that was approved, which perpetuated false reporting of income and assets on
millions of loan applications. Now the broker doesn’t believe they are doing anything wrong.
They’re helping the client get a loan and be able to become a homeowner. They know the lender
is in on it and they’re not cheating the lender, or at least the lender’s management.

Black believed the control fraud, motivated by perverse compensation systems, extended to major
investment firms like Goldman Sachs. “The investment banks all knew that the asset values of the
CDOs were massively overstated, because the incredible problems in asset quality were deliberately
being covered up,” Black explained. As Black noted, the industry was warned several times that
mortgage fraud was “epidemic” and would likely cause an economic crisis. The FBI issued its first
warnings in September 2004, in open testimony to the House of Representatives, and the industry’s
anti-fraud experts released a warning in early 2006 that liar’s loans14 had a fraud incidence rate of
90%. The banks, however, continued to issue these loans. Credit Suisse reported that 49% of new

13 Interview with Bill Moyers on Bill Moyers Journal, April 3, 2009,
14 A liar loan described a category of mortgages that required little if any documentation verifying the borrower’s income and assets. These loans helped
encourage unethical behavior by both borrowers and lenders. For more on this see William K. Black, “When ‘Liar’s Loans’ Flourish,” The New York Times,
January 30, 2011.

Leigh Hafrey, Cate Reavis

June 15, 2012 5

originations in 2006 (more than 1 million) were liar’s loans.15

Jeff Shames, former CEO and chairman of MFS Investment Management and a senior lecturer in
finance at the MIT Sloan School of Management, believed the large Wall Street banks bore a good
deal of responsibility. As he put it, “Nothing would have happened without the CDO vehicle in place
that Wall Street firms and financial engineers created. CDOs allowed banks to make instant profits on
risky securities by converting them into riskless securities.”16

Unlike Black, however, Shames didn’t accuse the banks of fraud. “No corporation sets out to lie.
Everything starts out legitimate. And some risky type of business gets created that some people have
qualms about but the quantitative models show that it’s risky, but within the bounds. And if the firm
diversifies enough, it will work. So nobody in these firms believes they are doing anything fraudulent
or unethical. They think ‘This is the industry norm right now. It’s working fine.’”

Like Black, Shames placed blame on the industry’s compensation system, which rewarded people for
short-term gains, not long-term growth:

Wall Street’s broken in the sense that the compensation system doesn’t work for what’s good for
society. Financial corporations should have a bigger obligation to society. You could drive the
Internet off a cliff, and nothing happens to society. You can’t drive the financial industry off a
cliff. As a result, a financial company can’t be treated like an Internet company or a
manufacturing company. Financial firms have to be held to higher standards because of their
effect on the financial system and on society. Do we want finance people to be the highest paid
people in society? Definitely not. The compensation structure has got to be restructured in a
dramatic way or else we need to make the business less profitable by forcing banks to keep a lot
more of their capital.

Many believed that expecting financial firms to act with high moral standards was unrealistic. As Leo
Strine, Chancellor of the Delaware Court of Chancery,17 remarked:

Instead of recognizing that for-profit corporations will seek profit for their stockholders using all
legal means available, we imbue these corporations with a personality and assume they are moral
beings capable of being ‘better’ in some way in the long-run than the lowest common
denominator. We act as if entities in which only capital has a vote will, when a choice has to be

15 William K. Black, “When ‘Liar’s Loans’ Flourish,” The New York Times, January 30, 2011.
16 For a more detailed description of the CDO market see Michael Lewis, The Big Short: Inside the Doomsday Machine (W.W. Norton & Company, 2010).
17 The Delaware Court of Chancery is a non-jury trial court that serves as Delaware’s court of original and exclusive equity jurisdiction, and adjudicates a wide
variety of cases involving trusts, real property, guardianships, civil rights, and commercial litigation.

Leigh Hafrey, Cate Reavis

June 15, 2012 6

made between profit for those who control the board’s re-election prospects and employees and
communities who don’t, somehow be able to deny the stockholders their desires.18

Robert Reich, former labor secretary under President Clinton, believed that endowing corporations
with moral compasses was misguided:

Corporate executives are not authorized by anyone—least of all by their investors—to balance
profits against the public good. Nor do they have any expertise in making such moral
calculations. Democracy is supposed to represent the public in drawing such lines. And the
message that companies are moral beings with social responsibilities diverts public attention from
the task of establishing such laws and rules in the first place…. By pretending that the economic
success corporations enjoy saddles them with particular social duties only serves to distract the
public from democracy’s responsibility to set the rules of the game and thereby protect the
common good.19

Milton Friedman, the Nobel Laureate in economics, had argued precisely Reich’s points in an article
he published in the New York Times Magazine on September 13, 1970: “The Social Responsibility of
Business Is to Increase Its Profits.” Enormously influential in the U.S. and abroad during the last
decades of the 20th century, Friedman saw government as the umpire to the games businesses play.
Hadn’t the corporation changed during that time, though? What to make of the retort to Friedman
implicit in management guru Charles Handy’s 21st-century comment that “It used to be said that the
business of business was business, but that was before those businesses became larger than
countries”?20 One might argue that the burden of responsibility on the business community had
moved it beyond the freedom to play games with other people’s money, let alone their lives: the
analogy of controls on big finance, like the ones that the Federal Drug Administration applied to
pharmaceutical companies, had begun to proliferate.

2. Government

The size and reach of 21st-century corporations notwithstanding, many believed that government was
largely responsible for the financial crisis. David Schmittlein, John C Head Dean of the MIT Sloan
School of Management, commented:

I think a lot of people would like to make it about a few big banks that got together and did
something naughty. And it isn’t fair, and it’s barely even true. The banks were not the root cause
of the problem. They did not inflate housing prices. The housing bubble was first and foremost
the result of an expansive monetary policy by the federal government, under multiple presidential

18 Leo E. Strine, Jr., “Bailed Out Bankers, Oil Spills, Online Classifieds, Dairy Milk, and Potash: Our Continuing Struggle with the Idea that For-Profit Firms
Seek Profit,” The University of Western Ontario, The Beattie Family Lecture in Business Law, March 8, 2011.
19 Robert Reich, “How Capitalism Is Killing Democracy,” Foreign Policy, September/October, 2007.
20 Charles Handy, “Tocqueville Revisited: the Meaning of American Prosperity,” Harvard Business Review (Reprint # R0101C), January 1, 2001, p. 10.

Leigh Hafrey, Cate Reavis

June 15, 2012 7

administrations, and secondly the result of federal government policies and institutions aimed at
expanding home ownership.

Many argued that financial institutions, under extreme pressure to deliver short term results, were
merely pushing boundaries that government had set too loose. As Leo Strine noted:

It is well known that businesses aggressively seeking profit will tend to push right up against, and
too often blow right through, the rules of the game as established by positive law. The more
pressure business leaders are under to deliver high returns, the greater the danger that they will
violate the law and shift costs to society generally, in the form of externalities. In that
circumstance, if the rules of the game themselves are too loosely drawn to protect society
adequately, businesses are free to engage in behavior that is socially costly without violating any
legal obligations.21

Nouriel Roubini, an economist at New York University, was more assertive in blaming the
government decision to loosen regulations. He believed the financial crisis represented a massive
failure of public policy:

There was an ideology for the last decade in Washington that was critical to this financial crisis.
[It] was an ideology of laissez-faire, Wild West unregulated capitalists. The base of this ideology
was the idea that banks and financial institutions will self-regulate. And as we know, self-
regulation means no regulation. It was the ideology of relying on market discipline, and we know
when there is irrational exuberance, there is zero market discipline….

The job of the Fed is to take away the punchbowl when the party gets going but unfortunately not
only did the Fed not take away the punchbowl, it added vodka, whiskey, gin and every toxic stuff
to it. Greenspan was the biggest cheerleader of this kind of financial innovation: zero down
payment, no verification of income, assets and jobs, interest-only mortgages, negative
amortization, teaser rates, all this toxic stuff. 22

Why didn’t Alan Greenspan, then head of the Federal Reserve, “take away the punchbowl”? Simon
Johnson, the former IMF chief economist and a professor at the MIT Sloan School of Management,
believed that the government had fallen victim to regulatory capture. In essence, the government had
allowed a few big financial institutions to use their size and power to reshape the political and
regulatory landscape to their advantage. As a result, they had become too big to fail:

The political influence of Wall Street helped create the laissez-faire environment in which the big
banks became bigger and riskier until by 2008 the threat of their failure could hold the rest of the

21 Leo E. Strine, Jr., “Why Excessive Risk-Taking Is Not Unexpected,” The New York Times, October 5, 2009.
22 “Blame Washington More Than Wall Street for the Financial Crisis,” Intelligence Squared US, March 17, 2009.

Leigh Hafrey, Cate Reavis

June 15, 2012 8

economy hostage. That political influence also meant that when the government did rescue the
financial system, it did so on terms that were favorable to the banks. What ‘we’re all in this
together’ really meant was that the major banks were already entrenched at the heart of the
political system, and the government had decided it needed the banks as much as the banks
needed government. So long as the political establishment remained captive to the idea that
America needs big, sophisticated, risk-seeking, highly profitable banks, they had the upper hand
in any negotiation. Politicians may come and go, but Goldman Sachs remains.23

3. Society

Andrew Lo, a professor of finance at the MIT Sloan School of Management and the director of MIT’s
Laboratory of Financial Engineering, believed that responsibility for the crisis could not be placed on
one group or even shared among financial corporations and the government:

When you have society-wide disregard for certain practices, then effectively what’s happening is
that the rules are being rewritten. I think this is about a broader set of issues that interact between
ethics and sociology and economic behavior.

This is not just about one group that fell asleep at the wheel. It was systemic. And the reason it
was systemic is pretty simple. When things go well—politicians are getting reelected, regulators
are getting kudos for how stable the markets are, shareholders are making money, mortgage
brokers are making money, homeowners are making money—nobody wants to leave the party
early. It takes an enormous amount of courage to stand up to that. And people did and they were
crushed. The whistle-blowers at Citi and Countrywide were fired.24 We have to think much more
expansively then simply saying corporations were irresponsible. There are plenty of people that
were irresponsible in addition to corporations.

Americans’ cozy relationship with consumption and, therefore, debt, also bore a share of the blame.
As David Beim, a finance professor at Columbia Business School, argued in early 2009:

The ongoing recent global economic collapse is so monstrous, so broad and so deep that it
requires a big-picture explanation. This isn’t just about some stupid moves by mortgage brokers
in California—how could that have such a vast impact on the global economy? It isn’t just about
Wall Street greed—hasn’t Wall Street been greedy forever?

For the past 25 years we have been over-consuming and over-borrowing…The problem is debt
itself. All that borrowing by individuals had a powerful stimulatory effect on the economy.
Business sales grew, and production increased to meet improved demand. But debt was growing

23 Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (New York: Pantheon, 2010), p. 6.
24 For more on this see: “Prosecuting Wall Street,” 60 Minutes, December 4, 2011,

Leigh Hafrey, Cate Reavis

June 15, 2012 9

faster than income, so the aggregate ‘credit ratio’ of household debt to median household income
steadily deteriorated. People maxed out their credit cards and pulled the equity out of their
houses. And most people stopped worrying about ever paying the debt back, since the abundant
liquidity in our system made it seem that debt could always be rolled over and refinanced. More
of our prosperity than we have been willing to admit has been driven by debt.25

A Business Solution?

If “we” were the cause, if all of us were to blame, what was the proper response to the crisis? Was it a
matter of, in Beim’s words, …

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