by Dr. Meir Tamari
Many ethical questions regarding corporate business activities and social responsibility flow from the separation of identity, recognized by almost all legal systems, between the corporation and its individual shareholders. This separation is primarily reflected in the nature of shareholder liability. Such liability, in contrast to that of partnerships or individual ownership, is limited only to the equity of the corporation, without recourse to the private wealth of the shareholders. The separate legal identity of the corporation raises the following ethical questions:
- 1. Shareholders, directors and employees view the corporation as a depersonalized economic force, devoid of shared non-contractual rights or obligations. This allows an individual to relax ethical standards and avoid social obligations to which he would adhere in private life.
- 2. By separating ownership from control and management, the corporation enables both shareholders and directors to evade responsibility for ethical issues facing its operation.
Directors argue that they cannot determine the ethical beliefs of shareholders or that these may vary widely and contradict one another. Directors say their only task is to operate a company efficiently and within legally imposed limits: to do otherwise would constitute dereliction of duty and make them liable to dismissal.
Shareholders argue that they have no control over a corporation’s daily operation or often over its general policy. The broader the base of a corporation’s stock ownership and the more it relies on hired, non-owner management, the greater will be the effect of these arguments on the corporation’s ethical behavior.
Halacha (Jewish law) can recognize a business entity such as a corporation in which creditors’ claims are limited to the corporation’s share capital, without recourse to private assets of individual stockholders. Such a limitation is public knowledge. Banks, suppliers and other creditors are aware of it at the time obligations are created. They make their business decisions in light of this knowledge, and claims or counter claims can be judged accordingly.
Jewish law, however, does not seem to accept a separation between corporation and individual when it involves the abrogation of halachic responsibilities related to ownership of wealth. This may be seen from the following halachic decisions:
1. The prohibition against taking interest on loans applies to transactions between two individual human beings. One could argue that as a corporation is not a human being, this prohibition does not apply to loans involving two corporations or to a corporation and an individual. Most rabbinic authorities reject this argument. The halachic prohibiton against taking interest on loans applies as much to corporations with a majority of Jewish shareholders as to the individual shareholders themselves.
2. The laws of Pesach reflect a similar rejection of the view that a corporation as an independent legal entity is exempt from behavior required of individuals. Individuals and partnerships are not allowed to own chametz (leavened bread) during Passover. They are required to follow a specific rabbinic procedure for disposing of their chametz. Corporations with a majority of Jewish shareholders are required to follow the same procedure.
3. A person is always held liable for damage caused directly by his own actions or those of his assets. This is equally true when he operates through an agent, such as a corporation. A shareholder’s private assets could be subject to claims stemming from damages caused by corporate pollution or negligence, if the corporation is unable to provide compensation. Assuming that the damage made the firm halachically liable, the treatment of the shareholder’s personal assets would depend on the nature of the corporation’s equity.
4. Many responsa clearly state that a Jew is forbidden to profit from work done on the Sabbath by a Gentile. The prohibition also applies to a Jewish-owned corporation. If the “work” involved acts forbidden to the Gentile by Jewish law, such as theft and murder, then the Jew’s partnership with the Gentile would also be illegal, even if the Gentile was “self-employed.”
The above rulings deal with different halachic aspects of the nature of the corporation. The rulings make it clear that a corporation’s separate legal and operative status only applies to a limitation of creditors’ rights to the equity of the corporation without recourse to the shareholders’ financial assets. Other limitations on business activities imposed by Jewish ethical teachings and rabbinic law, together with individual social obligations flowing from the possession of wealth, are therefore binding on the corporation as well.
Jewish executive officers of corporations owned or controlled by Jews cannot claim that their sole responsibility is to maximize shareholder profits without regard to Jewish ethical and moral principles. The rabbis reject this claim when made by individual businessmen, and the corporate status of an enterprise provides no exemptions. Halachah rejects the concept of a shaliach I’devar aveirah (an agent for performing forbidden acts), of an agent who “only follows orders” and cannot be held responsible for his actions. Corporate executive officers cannot use the “instructions” of shareholders as an excuse for violating the Torah’s ethical laws.
Since the Torah requires Gentiles and Jews to observe the same laws regarding monetary matters, the religion of the corporation’s shareholders would in many cases be irrelevant. Jewish executive officers of large or multinational corporations in which no individual holds a large block of shares are obligated to follow halachic rules in the absence of effective shareholder control or direction. The separation of ownership from control means that such executive officers in effect control the wealth of the corporation. The officers are therefore obligated to follow halachah in those operations. The shareholders would seem to be required to dismiss their corporate officers if these did not follow halachah. If the shareholders did not dismiss corporate officers violating halachah, the shareholders would be responsible for the officers’ misdeeds.
Dr. Tamari is the former chief economist of the Office of the Governor at the Bank of Israel, and the founder of the JCT Center for Business Ethics and Social Responsibility.