Partnership social responsibility

Gordon Smith notes that William Draper Lewis, a principal drafter of the Uniform Partnership Act, described an argument against the entity theory of partnership as based on "the effect of the theory in lessening the partner’s sense of moral responsibility for partnership acts." Gordon suggests that it is "odd" to think that lessening moral responsibility would "emanate merely from a change in the nature of the partnership relationship, rather than any change in actual liability risk."

In fact, many modern corporate social responsibility theorists seem to me to be making precisely this argument. In other words, they argue that shareholders' ability to say that the "corporation" – a separate thing – committed the act, helps them avoid at least the feeling of responsibility. Among the more notable proponents of this view are Joel Bakan, The Corporation (2004); Ralph Estes, Tyranny of the Bottom Line (1996); Lawrence Mitchell, Corporate Irresponsibility:  America's Newest Export (2001); Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. REV. 733 (2005).

I don't think these writers would view limited liability as determinative. After all, if exposing owners to a bit more pocketbook risk would take care of the problem, why would you need a "moral" argument for social responsibility?

Ironically, from a practical rather than moral standpoint, entity may be more conducive to social responsibility than aggregate characteristics. I've argued that partnership-type incentive devices make managers more attentive to the bottom line and reduce their practical ability to engage in non-profit-maximizing social responsibility. See Accountability and Responsibility in Corporate Governance, 81 Notre Dame Law Review 1431 (2006), online version. Indeed, the original title of that article was the ironic "Partnership Social Responsibility."

Conversely, entity features such as locking capital in the corporation and putting control in non-owner managers effectively enable social responsibility in large firms. For example, manager power is at the heart of Blair & Stout's "team production" theory of corporate governance. Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 VA. L. REV. 247 (1999).

So Lewis may have had the relationship between entity theory and social responsibility exactly wrong, but he's got a lot of modern company.