The Other Shoe

In yesterday’s post, I was talking about the fallout from this week’s Hobby Lobby decision, and why the whole policy that resulted in the lawsuit was a bad idea from a Management standpoint. For many years now I have maintained that any decision or policy that is ultimately against the best interests of the employees is not in the best interests of the company, at least in the long term. In a larger sense, I’m generally against policy decisions that negatively impact any of the corporation’s stakeholders unless there is some overwhelmingly important reason for doing so. Actions which are bad for the community, state or country in which the company operates in general are rarely good for the firm itself in the long run, if only in the sense of having customers who can buy your products and of not being constantly besieged by regulatory bodies, law enforcement agencies, consumer advocates, environmental groups, community leaders, civil rights lawyers, or angry mobs with torches and pitchforks. But as bad as all of that it, the Hobby Lobby decision may actually have created something even worse…

Traditionally, one of the reasons people form corporations is to protect themselves from certain types of legal liability. Incorporating the company creates the legal fiction that the company is an entity separate from the people who own it or manage it. The corporation can own property, conduct business transactions, borrow money and pay taxes; it can also be fined or sued – but the people who own it can’t be. As one of the stockholders, you can’t be personally held responsible for the actions of the corporation – which seems only reasonable, since you are only one of the hundreds or thousands of people who own it, and you didn’t personally make any of its questionable decisions. If a company in which you own shares declares bankruptcy and is sued by its creditors, the court may be able to seize the company’s assets, but they can’t take your personal funds. You can see how important this could be in the case of major product liability suits or matters of criminal malfeasance, to take only the two most obvious examples…

This legal fiction is generally called the Corporate Veil, and it is often considered one of the most important kinds of protection offered by incorporation. The problem is that the Veil is only a legal fiction; if the owners of the company do anything that even implies that the corporation is not a completely independent entity it is possible for the courts to ignore that fiction, or “pierce the Corporate Veil,” and hold the owners directly responsible for anything the company does. Common violations would include not keeping accurate records, not paying dividends to the shareholders, or intermingling the company’s assets – using corporate funds to pay for personal expenses, for example. It isn’t usually possible to pierce the Veil because the owners are clearly just using the company to further their own interests or agenda, because it is usually very difficult for hundreds or thousands of owners to agree on a personal agenda in the first place but it can happen – when a single individual or family owns the entire company, for example…

In the case of Hobby Lobby, it’s much too easy to argue that the owners of the company – who happen to be members of a single family – are using the company and its compensation packages to further their own political and/or religious agenda (to the extent that there is any difference, these days). As noted in yesterday’s post, their anti-birth control policy is not in the long-term best interests of the employees, the company or the owners themselves, but the opportunity to challenge the Affordable Care Act under a religious exemption does further both the political and religious agenda of the owners. If the court – any particular court hearing a case against the company – decides that they have broken the rules and may therefore not have the protection of the Veil, damages assessed by that court may be directed against the owners of the company. That would include any of the gender-discrimination or religious-discrimination cases starting up over this situation, by the way…

Now, I’m not going to pretend that this was the first thing that came to my mind when I heard about the Supreme Court decision last week. It wasn’t until I read the news story here and the “Friend of the Court” brief it references here that I realized that just how badly this could end for the company’s owners – and that nearly four dozen law professors from top universities thought so, too. So however much we may want to mock the owners of Hobby Lobby for the financial and public relations consequences of their actions, it would appear that the legal aspects of the situation are even worse – and that any first-year Law student could have told them how utterly stupid and ultimately self-destructive their policies were…