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The Berle-Dodd debate is the name for a series of exchanges over the purposes of the
corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
between the
New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Cons ...
architect, A. A. Berle, and Merrick Dodd, a law professor. In this debate, Berle argued that corporations should "serve... all society" through legally enforceable rules, and argued that shareholders' interests should ultimately be "equal" or "subordinated to a number of claims by labor, by customers and patrons, by the community". Dodd argued that corporate powers should be regarded as held on "trust" by directors and managers, and considered it "undesirable... to give increased emphasis... to the view that business corporations exist for the sole purpose of making profits for their stockholders". This debate has become well known in
corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions th ...
, with widely conflicting interpretations, for the conflict over the extent to which corporations should pursue "
shareholder value Shareholder value is a business term, sometimes phrased as shareholder value maximization. It became prominent during the 1980s and 1990s along with the management principle value-based management or "managing for value". Definition The term "shar ...
" or the "public interest". Both Berle and Dodd agreed that the corporation should pursue the public interest, but were initially at odds in how this was achieved.


Background

Berle had been an adviser and attendee at the
Versailles Peace Conference The Palace of Versailles ( ; french: Château de Versailles ) is a former royal residence built by King Louis XIV located in Versailles, about west of Paris, France. The palace is owned by the French Republic and since 1995 has been managed, u ...
but like others he had returned disillusioned by the lack of progress, particularly in the claims of labor. His first paper argued that labor should control enterprises, through increasing ownership of stocks. He went on to write a textbook on corporate finance, adjusting his views, to say that this should not be individual ownership but diversified ownership through pension or other saving funds. After the
Wall Street Crash The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...
struck in 1929, Berle became an adviser and speech writer to the next presidential candidate for the Democratic Party,
Franklin D. Roosevelt Franklin Delano Roosevelt (; ; January 30, 1882April 12, 1945), often referred to by his initials FDR, was an American politician and attorney who served as the 32nd president of the United States from 1933 until his death in 1945. As the ...
. He became an influential part of the Brains Trust and led the drafting of the Securities Act of 1933 and much of the concepts by the
New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Cons ...
, including a new "economic declaration of rights". Merrick Dodd was a professor at Harvard Law School, and decided to respond to Berle's 1931 article that argued directors needed to be held accountable in law.


Exchange in Harvard Law Review

After the
Wall Street Crash The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...
and as the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
unfolded, Berle argued in 1931 in the
Harvard Law Review The ''Harvard Law Review'' is a law review published by an independent student group at Harvard Law School. According to the ''Journal Citation Reports'', the ''Harvard Law Review''s 2015 impact factor of 4.979 placed the journal first out of 143 ...
that it was better that there was shareholder control of companies than pure-director control. He originally stated that corporate powers should be used ‘only for the ratable benefit of all the shareholders’ as opposed to being left to director discretion: (1931) 44(7) Harvard LR 1049. This followed his view that directors of companies had become too unaccountable, and that tight legal control was needed. At this time, most shareholders were workers saving for retirement, because
social security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
had been held illegal by the US Supreme Court. This meant people had saved vast sums of money in the stock markets: Berle thought directors should be accountable to them. Responding to this article, Merrick Dodd stated he was "in sympathy with Mr. Berle's efforts to establish a legal control which will more effectually prevent corporate managers from diverting profit into their own pockets from those of stockholder" but that it was "undesirable, even with the laudable purpose of giving stockholders much-needed protection against self-seeking managers, to give increased emphasis at the present time to the view that business corporations exist for the sole purpose of making profits for their stockholders." He held up the examples of the executives and president of General Electric Company, who argued that to cure instability, "organized industry should take the lead, recognizing its responsibility to its employees, to the public, and to its stockholders rather than that democratic society should act through its government". Berle quickly responded by clarifying that his 1931 article was merely a historical theory expressing the need for accountability to shareholders "as a matter of law", and the goal was to change this. However, wrote Berle, "you can not abandon emphasis on "the view that business corporations exist for the sole purpose of making profits for their stockholders" until such time as you are prepared to offer a clear and reasonably enforceable scheme of responsibilities to someone else." This is what Berle proposed to do, including through speeches that he had written for
Franklin D. Roosevelt Franklin Delano Roosevelt (; ; January 30, 1882April 12, 1945), often referred to by his initials FDR, was an American politician and attorney who served as the 32nd president of the United States from 1933 until his death in 1945. As the ...
, by proposing "the development of an economic declaration of rights, an economic constitutional order." According to Berle, the ‘shareholder... may ultimately be conceived of as having an equal participation with a number of other claimants’ or be ‘subordinated to a number of claims by labor, by customers and patrons, by the community’ but this needed to be worked out in enforceable laws, not just by giving managers power ‘on trust’.


Significance and interpretation

The Berle-Dodd debate has been widely cited and often misinterpreted as involving Berle, who represented a pro "shareholder value" stance, and Dodd, who represented a pro "public interest" stance. This takes Berle's original view out of context, as he had argued that while directors had been in 1931 bound to follow shareholder interests as a matter of law, this should not be the case. In later years, Berle said squarely that the law had changed, and his original theory that the law required directors to pursue shareholder profit was now completely reversed by 1954, so that the contention that directors' exercise of corporate "powers were held in trust for the entire community". The same remains true today including in the leading state of incorporation, Delaware.See L Stout, ‘Bad and Not-so-Bad Arguments for Shareholder Primacy’ (2002
75 Southern California Law Review 1189
1204


See also

*
US corporate law United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance ...


Notes

{{reflist


References

*
AA Berle Adolf Augustus Berle Jr. (; January 29, 1895 – February 17, 1971) was an American lawyer, educator, writer, and diplomat. He was the author of '' The Modern Corporation and Private Property'', a groundbreaking work on corporate governance, a pro ...
, 'For Whom Corporate Managers Are Trustees: A Note' (1932
45(8) Harvard Law Review 1365
*
AA Berle Adolf Augustus Berle Jr. (; January 29, 1895 – February 17, 1971) was an American lawyer, educator, writer, and diplomat. He was the author of '' The Modern Corporation and Private Property'', a groundbreaking work on corporate governance, a pro ...
and
GC Means Gardiner Coit Means (June 8, 1896 in Windham, Connecticut – February 15, 1988 in Vienna, Virginia) was an American economist who worked at Harvard University, where he met lawyer-diplomat Adolf A. Berle. Together they wrote the seminal work of ...
, ''
The Modern Corporation and Private Property ''The Modern Corporation and Private Property'' is a book written by Adolf Berle and Gardiner Means published in 1932 regarding the foundations of United States corporate law. It explores the evolution of big business through a legal and economi ...
'' (1932) Book IV, ch IV *AA Berle, ‘Property, Production and Revolution’ (1965) 65(1) Columbia Law Review 1 *WW Bratton, 'Collected Lectures and Talks on Corporate Law, Legal Theory, History, Finance, and Governance' Legal Theory, History, Finance, and Governance' (2019
42 Seattle University Law Review 755
*EM Dodd, 'For Whom Are Corporate Managers Trustees?' (1932
45(7) Harvard Law Review 1145
*R Eden, 'On the Origins of the Regime of Pragmatic Liberalism: John Dewey, Adolf A. Berle, and FDR's Commonwealth Club Address of 1932' (1993
7(1) Studies in American Political Development 74
*E McGaughey, 'Democracy in America at Work: The History of Labor's Vote in Corporate Governance' (2019
42 Seattle University Law Review 697
*CRT O'Kelley, 'Merrick Dodd and the Great Depression: A Few Historical Corrections' (2019
42 Seattle University Law Review 513
*L Stout, ‘Bad and Not-so-Bad Arguments for Shareholder Primacy’ (2002
75 Southern California Law Review 1189
United States corporate law