Lord Eustace Percy was a Conservative public servant but was better known as a serious thinker, indeed, as the “Minister of Thinking.” There is a remarkable and much-quoted passage in his 1944 Riddell Lecture The Unknown State.
“Here is the most urgent challenge to political invention ever offered to the jurist and the statesman. The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise—the association of shareholders, creditors and directors—is incapable of production and is not expected by the law to perform these functions. We have to give law to the real association, and to withdraw meaningless privilege from the imaginary one. [Percy, Eustace. 1944. The Unknown State: 16th Riddell Memorial Lectures. London: Oxford University Press, 38]
The larger context is also of interest since he actually suggests how to effect this change, namely reconstitutionalize the corporation as trust for the people working in the company and redefining the shareholders as creditors of the trust. Here is the longer quote.
To give an example of such neglect is, inevitably, to enter upon controversial ground. The example I wish to give is peculiarly controversial; but I cannot shirk it, for the whole future of modern civilization seems to me to turn upon it. My example is the limited liability company, on which the livelihood of the modern citizen and the solvency of the modern State principally depend.
To the historian unlearned in the law, the industrial company of the nineteenth and twentieth centuries is the direct successor, by natural evolution, of the joint trading ventures of earlier days; the modern shareholder is the immediate descendant (let us say) of the ‘proprietors’ of the East India Company. That, too, is the common assumption of the trade unionist and of the general public; it is the assumption also of the director, who talks easily of ‘the property of our shareholders’. But in law this view is wrong. Legally, a ‘company’ at any given moment is a board of directors, acting within the limits of Articles of Association. The shareholder is, not a partner, but a simple creditor; he has an ‘equitable interest’ in the company’s transactions, but he has no insurable interest in its property. [break p. 36 to 37]
On a winding-up, he can claim his share in the break-up value of the company’s assets, but he invests his money on the assumption that the company will be wound up only when its assets are relatively valueless.
Yet, in order (presumably) that he may protect his equitable interest, this irresponsible creditor elects the directors. He neither is the company (even if he is the sole shareholder) nor owns the company, but he constitutes the company. This constituent power is seldom effective and its exercise cannot usually be more than a formality ; but it invests the shareholder with the same sort of responsibility as that of a parliamentary elector. Indeed, this whole branch of the law is obscurely biased by the political analogies of the mid-nineteenth century. The director is elected, because that is constitutional good form. When elected, he is responsible to the shareholders, as a Victorian Member of Parliament was responsible to his tax paying constituents. But his responsibility is for general honesty and due economy, with ‘redress of grievances’ affecting the personal interests of his constituents. He is not responsible to them for the conditions of employment of hundreds or thousands of workmen, any more than the Victorian M.P. was responsible to his constituents for the internal administration by the Crown of the Queen ‘s Army and Navy. When ‘en lightened self-interest ‘ was thought the best guide to policy, such a division of responsibilities was natural ; but today, when it has been superseded in politics by the principle that the interest and responsibility of both M.P. and elector extend over the whole field of government, its persistence in industry is neither understood nor trusted. If it is still understood and trusted more in the United States than in this country, the explanation may lie partly in the division of responsibilities still recognized in government by the American Constitution.
Yet, in face of this misunderstanding and distrust, the jurist, busy on the reform of company law, continues to conceive such reform almost exclusively in terms of protecting the financial interest of the shareholder against misrepresentation and maladministration. I believe that much of the current talk about the ‘profit motive’ is untrue to facts and dangerous to morals, because it transfers to a single scapegoat the love of money which is the sin of all men . But the trouble is that such [break 37 to 38]
talk is not the invention of sentimental propagandists, but the cold assertion of the law. Current profit (as opposed even to the prudent administration of property) is the only interest which the law recognizes in the shareholder. The legislator, therefore, tends increasingly to assume that it must be the predominant interest also of the director whom the shareholder elects. Reasoning thus, the legislator drifts into absurdity in his administrative statutes and is forced into something worse than absurdity in his statutes of high policy. He places responsibility for observance of safety regulations in mines, not upon the company, but personally upon the colliery manager who is the company’s servant ; and he balances his denial of the shareholders’ responsibility for anything but their own financial interests by absolving the workmen from any responsibility for respecting those interests. It is not trade union law alone which has reintroduced ordeal by battle as the normal method of regulating personal relationships in industry; it is company law itself which has disabled the State from offering any other legal remedy to the employer or to the employed.
Here is the most urgent challenge to political invention ever offered to the jurist and the statesman. The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognized by the law. The association which the law does recognize, the association of shareholder-creditors and directors, is incapable of production or distribution and is not expected by the law to perform those functions. We have to give law to the real association, and to withdraw meaningless privilege from the imaginary one. But the statesman shows little sign of fitness for this task, mainly, perhaps, because he still tends to be misled by the political analogy. If he is alive to the problem at all, he thinks of it in terms of ‘industrial democracy’, of giving to the workman voting rights similar to those now possessed by the shareholder. The analogy is false, for there is no similarity between the management of a property and the government of a State. And, even if the analogy were true, it would point in almost the opposite direction. In English theory and practice, at least, parliamentary democracy does not consist in the direct election of an executive; and continental [break p.38 to 39]
experience indicates that a democracy which tries so to constitute its executive destroys itself. So the positivist, seeking to fit law to the cold facts, must turn for clarification and definition from the compromises of statesmanship to the logic of the jurist.
Having said that, I must not myself presume to suggest remedies, but it is not, I suppose, difficult to guess in what general direction they lie. ‘Trust’ was the most respectable word in the language of the law until it was applied to certain industrial combinations; it may prove in the future to be the most powerful word in that language if it is now applied to the whole field of industrial association. The jurist shrinks from the diminution or transfer of property rights, even to fit changed facts ; but he will readily modify, in such circumstances, the purposes of a trust. And in this field, such modification can be effected without real injustice. An unlimited trust for the benefit of the actual members of an industrial unit, whose livelihood depends upon its prosperity, subject only to a redefined liability to its creditors, limited to fair interest and sinking fund on their loan, will deprive those creditors of no expectation on which, in these days of economic revolution, they can reasonably rely. The difficulty lies, of course, in the method by which such a trust is to be constituted and perpetuated, not merely for existing corporations but for the new enterprises of the future, without conferring upon a State bureaucracy a dangerous power to resist novelty and restrict freedom. On that problem I will only say that there is always a price to be paid for facing facts, but it is smaller than the cost of contentment with fictions. [pp. 36-39]