by Robert C. Hinkley[i]
29 May 2023
“It’s time to recognize democracies can’t always pass new laws protecting us from destructive behaviour and start looking for solutions which pre-empt the possibility of that behaviour arising in the first place.”
How many of you believe we can still do something to relieve the climate emergency we are now facing? How many think it’s already too late? How many aren’t sure?
I’m not sure I know. I’m not a climate scientist. I’m a corporate lawyer. I do know however, there’s a flaw in the corporate law which is contributing to the crisis. The object here is to identify that flaw and suggest a strategy for fixing it.
About twenty years into my career, I was having lunch with a friend who was the head of the Centre for Peace and Conflict Studies and a professor of social policy at Sydney University. He was interested in getting Australian companies to pay more attention to human rights in the workplace when it came to their Asian subsidiaries.
He asked me, “Why is it that, when I talk to Australian CEOs, they don’t seem to care about human rights? It’s not like they’re against the idea, it just doesn’t seem to matter to them.”
Like any corporate lawyer would, I knew the answer. I replied, “They don’t see it as part of their job description. They see their job as simply making money for shareholders.
To the extent human rights is a factor for them, it’s that they know their company must comply with laws which protect human rights in each jurisdiction in which they operate—but it’s the company’s lawyers who oversee that responsibility.
“CEOs know that human rights laws in Asia are more lax than in Australia. However, as opposed to something they should try to change, they may even see it as an opportunity which gives their company a competitive advantage.”
“Great,” he replied, “Write me a chapter on that for a book I am editing. I want that explanation to be part of it.”
I wrote the chapter and have been thinking about my answer and its implications ever since.
Winston Churchill was reputed to have said about Americans (but I’d say it’s probably true about all democracies) that, “They always do the right thing…After they’ve tried everything else.”
Over the last 30 years we’ve tried numerous ways to halt the global emission of greenhouse gases:
27 Conferences of the Parties (on the environment) have been held where the nations of the world pledged to do something about the problem,
Delegates to the COPs returned home and proposed new laws to cut greenhouse gas emissions,
Economists and investment bankers offered carbon taxes, carbon trading, getting to net zero, and carbon offsets as solutions,
Accountants suggested requiring the disclosure of carbon footprints, and
Finally, socially responsible investing and the corporate social responsibility movement (now called ESG, standing for companies showing more respect for the environment, society, and good governance), have each tried to entice industry to cut emissions voluntarily.
Overall, these strategies have had little success. Global emissions continue to rise. What was a potential problem when we started, has now become an emergency.
Existing Law
First, let me suggest that company managers treat the environment very much like they treat human rights in the workplace. Environmental laws differ from place to place. Company managers tend to cut emissions to the level the law in each jurisdiction requires. When cutting emissions further, costs more, there’s very little incentive for them to do it. They are not obligated to do so.
Secondly, I’d like to dispel the myth that the emissions continue because corporate managers are greedy. It’s not the personal greed of managers that keeps the emissions going. It’s the law which encourages them to continue and discourages them from stopping.
In more than thirty years in private practice, I never had a businessperson come to me saying they had a great idea for a business that, though immoral, unethical, or highly destructive, was legal and would make a lot of money. In my experience, business doesn’t work that way.
What usually happens is that companies incorporate, become successful, and then, through advancements in science, are discovered to be destroying the environment or otherwise causing severe harm to the public interest.
The decision to enter the business they’re in was made years ago, by people who are no longer at the company. The people who made it, had no way of foreseeing, the long-term consequences of their actions. The problem is then inherited by their successors.
A perfect example of this is companies in the electricity generation and motor vehicle manufacturing industries which cause the emission of large quantities of greenhouse gases. When they started, no one knew that burning fossil fuels would result in the current climate emergency. This only became evident years later, after the companies had billions invested in plant, equipment, and technology.
This is where the existing law that tells directors what to do, lets us down. It commands them “to act in the best interests of the company.” Full stop.
In Australia, it’s in Section 181 of the Corporations Act. This provision is not unique to Australia. Very similar provisions are contained in the corporate laws of every other country.
This provision recognizes the profit motive and gives companies their direction. Missing from the law, is any requirement to safeguard the environment or protect the rights or property of others.
In other words, the law tells directors to pursue the company’s self-interest without including any guardrails. To the extent companies cause harm to the environment or others, government must contain that behaviour by passing additional regulation later.
A Bit of History
We tend to assume the lack of consideration for the public interest as the way business must be. We think, incorrectly, that it’s always been this way and we should expect no more.
But that’s not true. It hasn’t always been this way--and it needn’t be so in the future.
Legal scholars know that governments once kept corporations on a much shorter leash. The law provided that companies which harmed the public interest could lose their charter, their license to operate.
Then, in the late 19th century, the Industrial Revolution started to get traction and governments decided they needed to compete to get companies to set up in their jurisdiction. The idea was that this would create jobs, build the local economy, and increase tax revenue.
In what is now referred to by legal commentators as the “Race to the Bottom,” governments changed the law to eliminate the requirement that companies not harm the public interest. In other words, they took down the guardrails marking the outer limits of acceptable corporate behaviour.
This didn’t pose a serious problem back then when companies were small, acted mainly locally, and employed relatively primitive technology. But it does today, when some companies employ tens of thousands, are backed by billions in capital, and operate all over the world using modern technology.
The Consequences
So, what should directors do, when they discover their business is causing severe harm to the environment?
Their company is complying with all laws and is highly profitable.
Closing its destructive operations will involve writing off billions.
Modifying those operations may involve new research and development at high cost and risk.
The corporate law says they must act in the company’s self-interest without any need to protect the environment.
In these circumstances, company directors might cut back on the damage they’re causing if the cost is small, or the public relations value is high. However, when the costs are high, it is unlikely directors will decide voluntarily to stop or modify their business to make it less destructive.
How could that be in their company’s best interests? Rather, it’s more likely they will spend millions on greenwashing and lobbying to prevent changes in the law which would make them stop.
This is how the law encourages directors to let their company’s destructive behaviour continue. Worse, it actually justifies it.
A Problem for Democracies
Let me explain why this is a problem, especially for democracies.
When individuals or companies cause harm, governments are supposed to respond by passing laws which require them to change their behaviour. The new laws carry penalties which the government is expected to use to punish violators and deter others.
At least that’s the theory.
When it works, the destruction stops—the people’s security, and the public interest are preserved. This is the benefit we receive when we give up a portion of our freedom and assent to being ruled by a government of laws.
But what happens when government is unable to pass laws protecting the environment from severe harm? The destruction continues. This is the position we are now in with respect to greenhouse gas emissions. When the damage can’t be stopped, people can lose faith in democracy. Worse, they can lose hope in the future.
It’s time to recognize democracies can’t always pass new laws protecting us from destructive behaviour and start looking for solutions which pre-empt the possibility of that behaviour arising in the first place.
America’s inability to do something about the gun problem is one example. Slavish adherence to the second amendment right to bear arms in the US Constitution results in hundreds of mass killings every year. Maybe it’s time to recognize the amendment was adopted when “arms” were single shot muskets and mass shootings not a problem. It’s repeal may be necessary in a world that now includes automatic weapons.
But also, why should governments grant charters and limited liability to companies which sell military grade weapons to ordinary citizens? Does that make sense?
Smoking is another example. Government knows it can’t criminalize smoking. It didn’t work with alcohol in America. It won’t work with tobacco.
But why should governments grant charters and limited liability to companies which engage in the mass manufacture and distribution of a product which kills 8 million people every year? If they didn’t, capital couldn’t be aggregated to mass produce tobacco products and smoking would become a much smaller problem. Without infringing on anyone’s right to smoke, the lives of millions would not be cut short and billions would be saved in public health care costs.
The emission of greenhouse gases is another good example.
Government’s inability to pass laws one jurisdiction at a time which will limit global emissions to safe levels, is now readily apparent and, to many of us, frustrating. Big companies continue to emit greenhouse gases at record levels. Carbon is accumulating in the atmosphere. Temperatures are rising. Extreme weather is becoming the norm. We face a climate emergency.
Whether you blame government’s inability on corporate lobbying or something structural in the political system, doesn’t matter. Big companies in a few industries are causing severe harm and the governments of the world can’t make it stop.
Moral Compass
So, how do we change that? In each of these examples:
governments formed to protect the public interest (including the environment),
grant charters to large institutions (i.e., corporations),
some of those institutions knowingly continue to cause severe harm,
which governments find impossible to stop.
If government can’t force companies to stop inflicting severe damage, there is only one solution: Create less destructive corporations.
Instil in the corporate system a self-regulatory mechanism (i.e., a moral compass or conscience) that makes them stop on their own. A kill switch, if you will, on the pursuit of profit at the expense of severe harm to the environment.
The law must be changed to make it clear that severely destructive corporate behaviour is no longer acceptable. When it becomes clear a company is causing severe harm, its management must take responsibility for the ongoing damage and begin to act in the public interest until it stops.
This is where the Code for Corporate Citizenship comes in.
Under existing law, directors have one commandment:
“To act in the best interests of the corporation.”
The Code would give them another:
“That they do not allow their company to cause severe harm to the environment.”
Once enacted, the law will state clearly that all companies are required to be more socially responsible—at least to the point of not causing severe harm to the environment. When they go over that line, they will become liable for the continuing damage and, be subject to the costs associated with stopping or modifying their destructive behaviour.
The Code will thus introduce a threat that directors will not be able to ignore, will constantly monitor, and be sure to take steps to avoid. It will change the mindset of directors at every company—not just those which today are causing severe harm.
All directors will understand they now have a responsibility to not knowingly allow the company to continue severely damaging the environment. That’s not too much to ask.
Senior managers and other employees will quickly become aware of the directors’ additional responsibility and will incorporate it into their business plans, strategies, and daily operations.
The Code will empower all corporate personnel to raise concerns for the environment whenever new plans raise the potential for it to be severely harmed. Importantly, these concerns will be raised before companies already have billions invested.
A Call to Action
Corporations should not be allowed to continue running roughshod over the environment. So, how do we make it the law?
No matter how reasonable it seems, our elected representatives will not amend the Corporations Act to include the Code on their own initiative. They must be encouraged to do so by the people they represent, us.
Franklin Delano Roosevelt appointed the first woman ever to serve in a US presidential cabinet, Frances Perkins. Frances had a long list of progressive ideas she wanted the president to support, including the abolition of child labour, the 40-hour work week, and workmen’s compensation. FDR is reported to have responded, “Fine. Make me do it.” In other words, build the public support for it.
Mahatma Gandhi once said: “First they ignore you. Then they laugh at you. Then they argue with you. Then you win.”
The good news is conventional wisdom regarding corporate behaviour has moved a long way in the right direction over the last two decades.
In April 2000, the Australian Financial Review ran an op-ed I wrote on the Code under the subtitle: The Profit Motive Can Work with a Moral Motive. It was treated as sort of a “Man bites dog” story. Corporate Lawyer Suggests Corporations Should be Tamed. Some of my friends in the corporate law community advised, “Good luck with that.”
Back then, the corporate social responsibility movement was in its infancy. The term ESG, which replaced it, hadn’t even been conceived yet. Socially responsible investing consisted of a few mutual funds with less than $10 billion under management.
Shortly thereafter, in September 2000, the American magazine, Business Week, published a poll which asked Americans which of the following two statements did they agree with more strongly:
Corporations should have only one purpose—to make the most profit for their shareholders—and pursuit of that goal will be best for America in the long run. Or,
Corporations should have more than one purpose. They also owe something to their workers and communities in which they operate, and they should sometimes sacrifice profit for the sake of making things better for their workers and communities.
(The first statement, by the way, was then the position of the American Business Roundtable, an organization of 200 CEOs from America’s largest companies.)
The result of the poll was a surprise.
Ninety-four percent of Americans said they agreed more strongly with the second statement than the first. For many, it was a shock to find out they were part of a huge majority. Loosely translated, we all knew something was wrong with the corporate system, but we didn’t know almost everyone else felt that way as well.
Business started to get the message. Their customers wanted them to be less destructive. Consultancies sprang up to advise companies on how they could improve their brands by being more socially responsible. Business schools started to teach it. Socially responsible investing started to take off.
Corporate social responsibility took on a new name, ESG. In a little more than a decade, ESG has become a business discipline like accounting, finance, management, and marketing. Every business school now teaches it. Most major corporations at least pay lip service to it. Proponents of socially responsible investing now boast that more than $30 trillion is under socially responsible management.
In 2019, the Business Roundtable changed its position and determined that, in addition to shareholders, a corporation should take into consideration various elements of the public interest, including the environment and the interests of employees, customers, and the communities in which it operates.
Today, most businesses recognize the public relations value of being “green.” Public relations people tout how their companies take the environment into consideration.
Taking the environment into consideration is fine for the vast majority of companies which aren’t having a severe adverse effect on the environment anyway. However, it’s insufficient for those emitting significant quantities of greenhouse gases. These companies need to be pushed to do more than just consider the environment. The Code will do just that.
The Code should not be a partisan issue.
It isn’t a matter of being on one side of the business regulation debate or the other. It’s a matter of whether there should be limits on the damage business is allowed to inflict on the environment when government can’t make it stop. There must be limits. Everyone should be in favour of that.
All candidates running for office in the next federal election (in Australia) should be asked to go on record in favour of the Code.
There’s little doubt, that the companies which are most responsible for the climate crisis and have opposed efforts to curb their emissions until now, will oppose the Code.
Do not be afraid of them. Their number is very small. Big companies don’t always win.
The evidence is clear. People want business to do more to protect the environment. The technology is there to do it. It’s time the burning of fossil fuels to generate electricity and power our motor vehicles passed into history. The Code will make it the law.
Each of us can do something to help enact the Code and bring corporate destruction of the environment to an end:
Talk up the Code to your friends, family, and elected representatives.
Visit our websites: www.supportthecode.au. and www.codeforcorporatecitizenship.com.
Sign the open letter there in support of the Code.
Get the environmental organisation you support to endorse the Code.
If you belong to an environmental group which doesn’t yet support the Code, propose to them that they do.
There are thousands of environmental groups all over the world working separately to combat climate change. Most focus on reducing emissions locally.
They should all be encouraged to advocate for the Code’s enactment. It’s possible for them to do both: go after the common cause of their separate problems as well as work to contain local outbreaks. Doing both will enhance each of their individual organization’s prospects for success.
I’ve been talking about severe harm to the environment, but there are other instances where companies refuse to stop the severe harm they are now legally inflicting on other elements of the public interest, such as:
the public health and safety (e.g., tobacco and automatic weapons).
Human rights.
The dignity of employees.
The wellbeing of our communities.
The Code may be expanded to include protection of these elements of the public interest as well.
As Churchill might say if he was still here, we’ve tried everything else, now it’s time to do the “right thing.”
Conclusion
Democracy is a system of government which depends heavily on its citizens’ self-regulatory respect for the public interest. It’s called Citizenship.
Creating large institutions with all the rights of citizenship and none of its obligations, was never going to end well. The climate emergency proves that an economy based on companies proceeding without guardrails to protect the environment from severe harm is unsustainable.
Corporate directors must be obligated to protect the environment from severe harm at all times. Whenever a company is discovered to be severely damaging the environment, the Code will require its own directors to make it stop. Raising the bar on corporate behaviour in this manner will protect the Earth and inure to the highest good of all of us.
Please start sharing the idea with your family, friends, environmental groups, and elected representatives.
[i] Robert C. Hinkley is a retired US corporate lawyer and originator of the Code for Corporate Citizenship and author of Time to Change Corporations: Closing the Citizenship Gap (2011). He has written widely on the idea that the corporate law duty of directors should be changed to prohibit directors from knowingly allowing their companies to continue causing severe to the environment, human rights, the public health and safety, dignity of employees and the wellbeing of the communities in which they operate. See, www.codeforcorporatecitizenship.com. and www.supportthecode.au.