Corporations and Human Life

Frank Partnoy is George E. Barrett Professor of Law and Finance and Director of the Center for Corporate and Securities Law at University of San Diego School of Law. This post is based on his recent article, forthcoming in the Seattle University Law Review.

Here is a surprisingly difficult yet largely unexamined capital budgeting problem: imagine a corporate decision that will generate $5 million of profit today but result in the loss of one human life in ten years. This example is not abstract: corporations in a range of businesses engage in decisions and oversight that affect risk to human life: consider autonomous cars, airbags, pharmaceuticals, medical devices, and many categories of consumer products. Historically, regulation and tort liability have addressed corporate liability for the loss of human life, but the corporate governance literature, and corporate law, have had little to say.

One way to approach this example—and related examples that involve probabilistic threats to human life—is to treat them like other capital budgeting problems and use the NPV rule: the question is whether an expected value of $5 million today (the positive present inflow) is greater than the absolute value in today’s terms of the expected loss of one human life in ten years (the negative future outflow). Calculating the present value of the expected loss of one human life in ten years requires two steps. First, one must assess the value of a human life. There is an extensive, and controversial, literature in economics devoted to assessing the value of human life; many find it objectionable. Nevertheless, current regulatory and tort policy require such estimates, and corporate actors could follow similar approaches. (Many regulatory estimates put the average value of a human life in the range of $9–$10 million.) Second, one must discount the value to today, a complicated calculus that the article addresses in detail. Moreover, many corporate decisions are likely to save lives, which also should be part of the calculus.

Although the business judgment rule generally protects corporate decision making from judicial review, there are some reasons to treat corporate decisions that put human life at risk differently. NPV analyses of corporate decisions that involve risk to human life are fraught with difficulty. Such decisions necessarily involve an externality cost to society that standard corporate decision making approaches will not take into account. Even directors and officers who are informed, disinterested, and independent are likely to consider risk to human life from a perspective that will not internalize the social costs of risk to human life. Because of these concerns, judges might justifiably scrutinize corporate decisions that otherwise would be protected by the business judgment rule if those decisions involved significant risk to human life, unless the decision-makers “reasonably considered” such risks. In other words, there could be a separate category of intermediate scrutiny of corporate decision making that involves significant risk to human life. As an alternative to judicial implementation, state legislatures could amend their corporate statutes to provide for exculpation of directors for breaches of fiduciary duty that result in the loss of human life only if the board previously had “reasonably considered potential risks to human life.” (The article considers similar analyses with respect to oversight, as well as decision making.)

Alternatively, corporations could engage in private ordering, adopting charter or bylaw amendments, or other corporate policies, that address risk to human life. Risk management committees could amend their charters to add risk to human life as an explicit consideration. Directors and officers might adopt a practice of taking a pause to consider risk to human life before making important decisions, in the same ways doctors and nurses pause before undertaking medical procedures that put human lives at risk. One way to encourage private ordering solutions would be “shield” laws designed to protect the details of corporate actions with respect to risk to human life from scrutiny by regulators and tort litigants. Such laws might encourage directors and officers who are currently unwilling to consider risks to human life explicitly (because of concerns about regulation and tort liability) to develop a framework for considering those risks. The challenge associated with such laws would be maintaining appropriate incentives for corporate actors to take care to avoid loss of human life, while encouraging them to consider more precisely the effects of their decisions and oversight.

Human beings make judgments about the impact of our decisions and actions on human life. We typically try not to kill others, and we can suffer consequences when we do. Decisions about human life are difficult and sensitive, but we do not avoid them. We often, or at least sometimes, think explicitly about risk to human life. The same kinds of difficult issues that arise for human persons also arise for corporate persons. My primary point is that corporate actors should explicitly consider how their decisions and oversight might impact human life; they should not ignore such impacts. Nor should they simplistically monetize risk to human life based on expected tort and regulatory liability discounted at their applicable cost of capital. A better approach would be to assess the impact on human life explicitly, make judgments about how many lives likely would be affected, and when, and then use a low social discount rate to convert that future value into today’s terms.

My tentative answer to these difficult questions is that corporate directors and officers should explicitly address risk to human life in both decisions and oversight, and judges in corporate law cases should apply a heightened standard of scrutiny in cases when boards have not done so. Policy makers should consider moving away from the traditional external governance associated with regulation and tort liability in favor of internal corporate governance. In a just society, human persons undertake efforts to ensure that their actions do not kill others. Corporate persons should do the same. Directors and officers are the corporate actors best positioned to think carefully about the impact of their decisions and oversight on human life. This article is intended to start the conversation about them doing so.

The complete article is available for download here.

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