25 March 2023
CHANGE THE SYSTEM
These eleven words will change the corporate system where it is most dangerous by ensuring that we never again face the situation where an industry’s pursuit of profit threatens to severely damage the environment.
By Robert C. Hinkley
Ever wonder why, after 27 Conferences of the Parties (COPs), at which the nations of the world got together and pledged to eliminate the threat of global warming, we are still barrelling toward a climate disaster? By now it should be obvious that government pledges at conferences are not enough. The governments making those pledges must be able to return home and convert them into action — new laws that restrict the emission of greenhouse gases (GHGs).
So far, this hasn't happened. The level of emissions has only continued to rise, and the threat of climate change has become more dire. The reason for this is simple. We live in a world of systems, and those systems sometimes prevent the governments of the world from delivering on their promises. The public sector is being prevented from passing laws which would require the private sector to curtail its GHG emissions.
In other words, in the battle between government and business, business has proved itself the stronger. Governments around the world have turned out to be incapable of passing laws to keep big companies from destroying the environment.
Big business getting on top of government was not an accident. It was a choice, a choice to make the pursuit of a better economy more important than the protection of the public interest. The result is that we have become victims of our own greed.
The question the world now faces is what can be done about it? Are we going to change the system? Or, are we going to continue on our current course and go over the climate change precipice (assuming we haven't already)?
The current system
Corporations are the engine of the world's economy. Big companies have immense capacity to cause severe harm to the environment and other elements of the public interest. Their efforts represent the combined efforts of thousands of people working together backed by billions of capital. The damage they can do is not just local. It can be regional, national, and, as we now realise, even global.
If they cannot be regulated, the damage they cause can get out of hand. As it has now. Big companies will tell you they are over-regulated, not under. They'll point to the volumes and volumes of business regulations now on the books. They won't mention that those regulations are the result of their own interference (lobbying) to make sure their business is able to operate mainly unrestricted.
Business won’t make much of a fuss about regulation that costs them little or the cost of which can be passed on to customers. The problem comes where the damage caused is severe and the cost of stopping it is significant. It’s here that business interference with the legislative process is most intense, and where big companies fight hardest to win. Even when they lose, they can move to another jurisdiction which is willing to put up with the damage.
The companies causing severe damage tend to be in industries with high capital expenditure requirements. They don’t start out to harm the environment or other elements of the public interest. Their business starts and grows. It’s only after they have become successful and have billions invested that the severity of the damage they cause is discovered.
Their directors have a duty to protect the interests and the assets of the company. They can’t walk away or ignore this obligation. So, they don’t stop.
Instead, they employ a wide array of defensive tactics which companies have developed over the years to shield themselves from additional regulation. Their opponents are portrayed as “special interests” and naïve. They attack activists as “woke” or worse. They finance political campaigns. Their industry trade groups spend millions lobbying. Legislatures are threatened with the loss of jobs in their jurisdiction. The result is that the passage of new laws protecting the public interest is delayed or frustrated.
Fixing the system
Let’s face it. Unless we recognise that our current system is failing us and do something to change it, business will continue emitting larger quantities of GHGs each year, and soon our opportunity to solve the problem will be extinguished.
What I mean by “fixing the system” is that we must change the balance of power between government and business. Either government must be made stronger, a strategy that isn’t working, or business must be changed to make it less willing to continue destroying the environment.
A different approach to tackling corporate anti-social behaviour is necessary. In fact, this has been recognized for some time now. Over the past twenty years, two movements have gained significant traction to try to reduce corporate abuse of the public interest: socially responsible investing (SRI) and the environmental, social, and corporate governance framework (ESG) – the idea that companies should also consider the effects they have on the environment and society and govern themselves responsibly.
SRI has grown from a few firms dedicated to offering socially responsible mutual funds to now boasting more than $30 trillion under socially responsible management. ESG, which didn’t exist at the turn of the century, is now taught as a separate discipline alongside marketing, accounting, and finance in every business school. Every major corporation at least pays it lip service.
The two movements have a lot in common. Both are private sector based. Rather than pursue government to force a change in corporate behaviour legislatively, they seek to convince or cajole businesses into being better citizens voluntarily. They are examples of what their proponents like to call win-win solutions. The public interest is less harmed, and the company gets improved public relations.
The widespread adoption of both SRI and ESG shows the public’s acceptance of the concept that big companies should behave better. It also shows that companies can behave more responsibly when it suits them.
But there is a sticking point: an elephant in the room, if you will. SRI and ESG can be effective when the solution costs little, but not when the solution is expensive. They don't work when the cost of changing the company's behaviour is significant. Existing corporate law requires directors to act in the best interests of their company. How can incurring such costs be in the company's best interests?
Global warming is one example. Electric power generating companies won’t close their fossil fuel burning power plants because that would require them writing-off their billion-dollar investments in those facilities. For a similar reason, motor vehicle manufacturers won’t abandon the internal combustion engine except on their own timetable.
For this to change, a legislative remedy is necessary. The law must take up the slack where SRI and ESG become ineffective. The duty of directors to protect their company’s investments must be curtailed in cases where those investments cause severe harm to the environment. The existing duty of directors in the law, “to act in the best interests of the company” must be amended to add “but not at the expense of severe damage to the environment.”
Conclusion
These eleven words will correct a fault in the system that now encourages companies to continue causing severe damage to the environment. They will change the corporate system where it is most dangerous by balancing the pursuit of corporate self-interest with respect for the public interest. They will ensure that we never again face the situation where an industry’s pursuit of profit threatens to severely damage the environment.
Companies emitting significant quantities of GHGs will be forced to cease such emissions. All companies will learn from this example and become more cautious with the public interest. They will constantly monitor their operations to ensure they are not going to be found causing severe harm. SRI and ESG will become stronger. All companies will become better citizens — a beneficial result for everyone and the environment.
* Robert C. Hinkley recently retired after a career as a corporate lawyer spanning more than 40 years. He is the originator of the Code for Corporate Citizenship (www.codeforcorporatecitizenship.com) and author of the book “Time to Change Corporations: Closing the Citizenship Gap” (2011).