Cotard's Syndrome and the Modern Corporation

Mademoiselle X was dead, or so she thought.   According to her medical records she was convinced that “she has no brain, no nerves, no chest, no stomach, no intestines… only skin and bones of a decomposing body”.

Her neurologist diagnosed “délire des negations”.

Cotard’s Syndrome, named after the 19th century doctor who first treated the unfortunate French woman, is a condition whereby sufferers believe they no longer exist.   Left untreated, the afflicted, believing they have no need to eat any more, eventually starve themselves to death.

While dying from this bizarre psychosis is rare among natural persons, for corporations, a Cotard like condition may be a silent killer.

THE Curious Case of DuPont

Label unmarked samples and leave everything else in place”.  No sooner had DuPont announced its merger with Dow Chemical, than the scientists working at Central Research & Development were being told to halt their laboratory work.

The company that invented and commercialized nylon, rayon and Teflon was changing its business model from chemical engineering to financial engineering.   

“We are taking our costs down to align with what we think is affordable in the current business environment that we are facing and the challenges we have,... It is not what you spend. It’s what you get for what you spend”.

Motivating this change of direction was not the interests of the centenarian but the desire to “drive better returns on R&D by aligning what we work on with what has commercial potential”.             

Abraham Lenoff, a chemical engineering professor at the University of Delaware, describes the madness:

It takes an enormous effort and a lot of time and a large infrastructure, especially human infrastructure, to create value in a large company like DuPont. The financial community doesn't know how to do that. Hedge-fund managers know how to extract value from a company, and leave an empty shell, so they can build their houses in the Hamptons.
DuPont had one of the premier engineering units anywhere in the world. They knew the principles and how to apply them. Without people like that you can't develop, design, and start up plants. It's an enormous loss to science and engineering.”

Like Mademoiselle X, DuPont’s leaders appear to be starving the corporation by denying its critical need for human and intellectual capital required to maintain a viable system of innovation.   Jeffrey Sonnenfeld, an influential academic on the work of boards, sums it up in terms of self-harm: “What they’re cutting now is muscle and bone – not fat”.

If Cotard were not a neurologist but a board doctor he might wonder if his patient had lost its mind. 

The Delirium of Negation within the Boardroom

No doubt, Mademoiselle X thought her doctor was sick.   Could he not see that she was no more?

Likewise, there are those who are adamant that lawyers who consider that corporations are real, and have interests of their own, are mentally deficient :

"a requirement to benefit an artificial entity, as an end in itself, would be irrational..."

But to my mind, and that of many of my learned colleagues, the suggestion that a corporation does not exist is as implausible as a walking talking corpse.   However widely held, the belief in non existent corporations does not conform with well established legal principles.

And, whilst there are many law school professors keen to argue otherwise, denying that corporations are separate legal and commercial persons has done little to arrest their ever increasing mortality rates.

Indeed, if the deniers who promote the exclusive interests of shareholders and others were conducting a clinical trial rather than best practice, the experiment would have been stopped years ago on ethical grounds.

With this is mind, let's consider the three symptoms of this novel corporate condition.

The DELUSION THAT Corporations Don't Exist

Among experts in corporate governance there is a widespread belief that corporations don't exist other than as a legal fiction.

Shareholder primacists are convinced that corporations are an aggregated body of the shareholders and that company directors are their agents.  As such, these officers have a duty to use the corporation as means to maximize the interests of the shareholders.

Opponents argue that company directors have a responsibility to use the corporation to advance the interests of a broader range of stakeholders, that include, but are not limited to shareholders.

What both shareholder and stakeholder theorists share in common is the delirium of negation.   Both equate the corporation as a thing, a form of technology rather than a legal and commercial person.  As one commentator puts it:

Corporations are, in effect, a social technology, a form of organization that has evolved -most especially over the last century to serve human interests. Those interests are many and varied. for the most part, corporations serve the interests of those who create them, although of course those that are successful at earning profits in the long run are successful at doing so precisely because they are able to serve a range of other parties interests, too.

Conceived as a technology (and to shareholder primacists, property), the corporation has no intrinsic existence other than to satisfy the extrinsic interests of others.

Australia’s leading legal text for company directors makes no mention of what a corporation’s “interest” is or might be. The financial interests of shareholders are often treated as synonymous with those of the corporation.   Whereas, the when the word “interest” is debated among lawyers and academics, the question is whether directors can have regard to the interests of stakeholders over and above the shareholders. 

In all cases, the focus is not on the interests of the corporation as conceived by the law as a separate person, but on extrinsic purpose.

The DELUSION that Corporations Don't Have THEIR OWN Interests

Yale Law professor Jonathan Macey illustrates the second aspect of the delirium, the denial of the corporation's interests:  

“all major decisions of the corporation, such as compensation policy, new investments, dividend policy, strategic direction and corporate strategy should be made with only the interests of shareholders in mind”.

The Professor forgets that it's not because of the shareholder's needs that shares are issued but because the corporation needs money.   If it were not for the needs of the corporation, they would not be shareholders.   The board issues shares when the company needs financial capital, not when an investor needs somewhere to put their money.

In fact, in nearly all cases,  stakeholders owe their relationship to the corporation based not on their needs, but the needs and necessity of the corporation to possess a form of capital required for its continued existence. 

The basic building blocks of corporate life are the capitals:  intellectual, human, produced, environmental , social and financial.  The only capital it does not acquire from some one else is its unissued share capital.    Depending on the sophistication of its business model, a corporation must continually acquire these capitals.  

Employees, customers, suppliers, shareholders, corporations, institutions, groups and communities are just other names for these treasures.   Each stakeholder holds some form of vital capital that the corporation, as a sovereign entity, requires to sustain its existence.  In this sense, the corporation's interests are defined by what it needs to remain a vital legal person.    DuPont needs them all.   Investors only need one. 

The proposition that a corporation has its own interests can be tested.

How long can a corporation continue to survive by denying its interest in maintaining viable suppliers, funded research and financial savings to name but a few? 

The answer for a public company is about 10 years and declining. 

Put simply, a board that denies the needs and necessities of its corporation, out of the mistaken belief that it is a mere tool to serve others, will eventually starve the corporation of its business critical value needed to remain in existence.    That is until, like Mademoiselle X, it is no more.


The third, and most disturbing symptom of the delirium of negation is the tendency to self-harm.

“Everyone who has worked with American management can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes,”

For Peter Drucker, the business of business was to stay in business.  Rationally, that objective requires that the corporation prioritize stakeholders based on its self interest as defined in terms of both financial and non financial capital.   What a stakeholder receives is a function of their importance to the survival of the corporation.    As the needs of the corporation change, so does the importance of each holder of financial and non-financial capital. 

The idea that a corporation can stay in business through financial engineering designed to maximize the financial interests of shareholders who (in the main) are not contributing to the viability of the corporation is illogical.  

The essence that preserves and maintains corporate existence cannot be mastered, let alone understood, by studying the purpose of the corporation through the pocket of the shareholder. 

But for the 20th Century's most influential corporate denier, that's precisely his logic: 

The firm is not an individual.  It is a legal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals (some of whom may “represent” other organizations) are brought into equilibrium within a framework of contractual relations.

To Michael Jensen,  the only legitimate interest is the financial interests of shareholders:

I argue that since it is logically impossible to maximize in more than one dimension, purposeful behavior requires a single valued objective function. Two hundred years of work in economics and finance implies that in the absence of externalities (and when all goods are priced) social welfare is maximized when each firm in an economy maximizes its total market value.

According to Jensen’s thesis the greatest challenge faced by capitalism was not figuring out how a corporation stays in business by prioritizing stakeholders based on their contribution to the firm survival.   The challenge was getting managers to maximize profits on behalf of shareholders by aligning their financial interests.

A proposition that is now described as “the Dumbest Idea In The World" and widely acknowledged as the leading cause of chronic short termism.  A condition that causes business leaders to focus on quick financial results and meeting short term financial expectations to the firm's long term detriment.  For example, 80% of US financial executives surveyed in 2006 said they would decrease spending on research and development to meet a short term earnings target.

But turning corporations into cash machines is not really about the short or the long term.

What short term decisions have in common is the pursuit of financial capital to benefit another person at the expense of the capital required for a corporation to stay in business.   To understand why Drucker thought financialization was suicidal you need only to consider the idea of borrowing vast sums of money to buy back shares that are promptly torn up.  How does increasing debt, incurring interest expense and assuming onerous lending covenants contribute to the viability of the firm?   

What we call short-termism might better be described as the corporate equivalent of Cotard’s syndrome.    Time is not the issue and it's a red hearing.   The real problem with the financialization of corporations is the detachment of the action from its probable harmful consequences to the firm as a legal and commercial person.

How to Treat Delirium

Is there a cure?

We know shock therapy isn't the answer.   The global financial crisis of 2008 didn't work and neither have successive corporate scandals caused when companies put the interests of others ahead of their own.  The paradox of the condition is that failure appears to reinforce the delusion. 

It begs belief that the most notable response to the world's worst liquidity crisis caused, in large part by companies not acting in their own interest, has been a re-commitment to the primacy of shareholder financial interests measured by the ever increasing influence of activists over the affairs of corporations.

My solution is cognitive.  Let's talk openly about what causes the condition, how it spreads and why it is so resilient.   

Fortunately, while the causes of Mademoiselle X's delusion remains a mystery to the medical profession, the cause within the boardroom seem more obvious.    The idea that only shareholders exist and have interests have been at the core of management education, academic research, journalism and management consulting for over 30 years.    Perhaps it's sensible to start the intervention there.










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