- Robert Hinkley
Focus on the System: Not the Symptoms
29 December 2021
For some time now corporations, advancing under the flag of the economy, have had the upper hand in keeping government from stopping their anti-social behaviour. Sometimes no laws are passed curtailing this behaviour. At other times, ineffective laws allow the abuse to go on largely unabated.
For corporate abuse to be contained more quickly and effectively, something needs to change. Either democracy needs to become able to rein in abuse more quickly or we need to curtail, or eliminate, the modern corporation’s inclination to continue harming the public interest.
The first alternative involves putting more effort into the strategies of the past. The heart of these strategies is passing new laws but passing them more quickly and making them tougher. The message here is for activist citizens to keep confronting corporate abuse. Just do a better job of it.
Activists confronting corporate abuse suffer from several structural disadvantages. Business has more money and presents better. They have full-time paid employees and lobbyists watching out for their private interests eight hours a day forty hours a week.
Those who want to protect the public interest, however, must organize a new coalition each time a new incidence of corporate abuse becomes evident. They usually rely on volunteers who are often unfamiliar with the ways of government, public speaking and presenting. It’s not surprising that the process results in business prevailing more than its opposition.
Volumes and volumes of ineffective business laws and regulations are testimony to the fact that this strategy does not work. Since Rachel Carson wrote Silent Spring in 1961 legislatures around the world have passed tens of thousands of environmental laws and regulations. Is the Earth’s environment in better shape today than it was then?
I once heard the Canadian environmentalist David Suzuki tell an audience in Sydney how he felt he was a failure because the environment was in more of a crisis now than it was when he started campaigning to protect it more than 30 years earlier.
My wife and I are great admirers of Dr. Suzuki and know he is no failure, but his point is well made. The battle to save the environment is not being won.
Even when corporate abuse is confronted successfully somewhere, it isn’t always eliminated. Sometimes it just moves. With the rise of the union movement in the US and elsewhere, new laws were passed and working conditions in big companies improved. Long working hours were reduced. Workplace safety improved. Yet, these problems were not eliminated. Most of them just moved from a place where they were no longer acceptable to another where they were.
Companies did not stop taking advantage of workers. They moved their operations to places where there were no unions, or a lack of regulation allowed them to continue violating the human rights and dignity of those they employed.
I once lived in Manchester, New Hampshire, home of what at the beginning of the 20th century was the biggest textile manufacturing complex (also the biggest sweatshop) in the world. When these facilities unionized, what did the companies that owned them do? They moved to the South where there were no unions, and they could continue to pay low wages and impose lousy working conditions.
Then, when the union movement caught on in the South, they moved their operations to Mexico, Southeast Asia, China and elsewhere overseas. This saga continues today. We are now starting to see tee shirts in American stores made in Kenya and other African countries.
The problem of corporate abuse of the public interest will not be solved by imposing more laws and regulations that try to restrain anti-social corporate behaviour one abuse, one jurisdiction at a time. At best, this strategy only moves the abuse to other places where the local government is willing to accept it for a while.
This method of trying to legislate a stop to corporate abuse can be characterized as a “where” and “how much” strategy. New laws leave the modern corporation free to abuse as long as it’s someplace else or a lesser amount here.
Confronting corporate abuse in this manner is like treating the symptoms of a disease rather than its source. The source of the disease—the inclination of corporations to continue harmful behaviour—goes untouched. Consequently, corporate anti-social behaviour continues. Over time, the carriers of the disease (big companies) become less susceptible to treatment. They learn how to substantially cut back and sometimes defeat altogether government attempts to restrict their destructive behaviour.
The biggest problem with confronting corporate abuse one abuse, one jurisdiction at a time is that is just too hard. Take just one element of the public interest, the environment, to start.
In the case of the environment alone, there are thousands of different toxic chemical compounds that are too dangerous to discharge in our streams, dump in our landfills or emit into our atmosphere. This list is ever expanding.
Now multiply this number by the number of countries of the world that must outlaw the discharge, dumping or emission of these chemicals if we are to rid the Earth of the problem. There are approximately 200 countries. Some of these (e.g. the US, Canada and Australia) leave regulation to their states or provinces adding to the list of places where new laws need to be passed.
For a new law to be passed in each of these jurisdictions, a majority of the elected representatives there needs to be convinced not only that a law is necessary, but also that the people they represent want it. This requires organization. In the face of locally based corporate opposition, this organization is difficult to muster.
And no wonder. We are all unique. We look at the world differently. We think differently. Different things motivate us to action. The information we process and upon which we make decisions comes to us through different filters. To some extent, each of us is susceptible to clever public relations campaigns. These things make it harder for us to agree on solutions to complicated problems and sometimes even agree there is a problem at all.
There are other factors as well. Human beings of the 21st century are also incredibly busy trying to earn a living, taking care of children and doing other things. Getting involved civically takes time that most of us just do not have.
It sad but true. Most of us just don’t have enough spare time in our lives to become politically active enough to successfully confront corporate abuse. But this raises the question, “Why should we have to?” Why should a democracy (of, by and for the people) create institutions that the people must devote so much of their time to policing? It doesn’t make sense.
Whenever the need for change arises, there are always those who argue that it is not necessary. This argument will usually come from those that are benefiting most under the current system. Their fear of losing benefits keeps them from recognizing the need to change the status quo.
In addition, there is the problem that sometimes the people who are benefitting from the abuse live in one community and the damage occurs in another. There is little likelihood a state, which uses locally mined coal to generate electricity, will vote to curb emissions that cause acid rain to fall on states downwind. Virginians and North Carolinians are happy to host manufacturing facilities that make cigarettes even though it will result in the deaths of hundreds of thousands of Americans. Would the situation be the same if the nearly 500,000 people tobacco killed every year in America were from just these two states?
Others will suggest that the community’s afflictions are not that bad and point out that corporations have done much to generate technological progress that has benefited humanity in the past. In making this argument, they give no credit to humankind’s ingenuity. They forget that corporations are not the reason for progress—people are. Companies only act through people. Every new piece of corporate invented technology is the result of a human being or group of human beings working together.
The company is just the employer. It provides the capital that employs the people. Essentially, these people are arguing that without capital aggregation there would be no progress.
In this respect, they may have a point. Large amounts of capital are often necessary to fund the research and development of new technologies. It is desirable for society to have a means to put this capital together.
However, investing doesn’t necessarily have to result in harm to the environment or other elements of the public interest. It now does only because existing law encourages, justifies, and exonerates corporate anti-social behaviour that serves investors exclusively.
There are also those who wrongly believe that change is not necessary because the market will sort it all out. They reason that those companies that are bad citizens will lose customers and go out of business.
Even if this were true, this position essentially means human beings should stand by and suffer the destruction of their communities and environment while waiting for the bankruptcies that put poor corporate citizens out of business. This line of reasoning is nonsense.
Look around at the bad corporate citizens which are destroying the public interest. It’s easy to see they aren’t being called to pay for their poor citizenship. They are getting away with it. People, the environment and our communities are being hurt while these companies profit.
The problem with thinking the market will sort out anti-social corporations is that on the surface it sounds credible. People pick it up as a sound bite, don’t question it and believe it to be true. This makes passing new laws to restrict anti-social corporate behaviour even more difficult.
In addition, there are those who have become convinced that change is not possible. These may be the most disturbing. They have given up hope. They consign humanity to a future where corporations make the rules and people obey them.
One line of thinking is that the inability of government to stop corporate abuse of the public interest is the fault of the people who do not participate. The frustration of activists who think this way is understandable, but their point is not very helpful. They turn their frustration on their fellow citizens who then become defensive and justify their lack of participation.
It’s easy to see from the foregoing how hard it is to create the grass roots support necessary to motivate elected officials to curb anti-social corporate behaviour one abuse, one jurisdiction at a time. Occasionally this may be successful. However, as a rule, it is not. There is just not enough volunteer time available for individuals and their non-governmental organizations to succeed consistently.
A system of government that only works when we all become full time activists, is not a very good system. It would make for interesting times if we were all politically active all the time, but how realistic is it?
It should not take continual and extensive human effort for the public interest to be protected. At the very least, it would be preferable if it did not. If we all aren’t going to be full time activists, then another solution must be found to allow government to protect the public interest.
To go from corporations being allowed to harm the public interest in the legal pursuit of self-interest to prohibiting them from harming the public interest is a big step, but not that big. It is not well known, but over 30 states in the U.S. already have provisions in their corporate law that allow, but do not require, corporate directors to consider various elements of the public interest in their decision-making. In other words, these laws give directors permission to protect the public interest in the company’s pursuit of its own interest.
Anyone who looks at these laws without understanding their history will likely be confused. If the law gives directors permission to protect the public interest, then why don’t they just do that?
When the law requires people to do something, most comply. Those that don’t are subject to being punished by the state. On the other hand, when the law merely gives people permission to do something they may or may not do it. In the case of the stakeholder statutes, the law gives directors the ability to protect the public interest but does not demand it.
Most directors of big companies, at least of big public companies, serve in what the Australians and English call a non-executive capacity. This means they hold no other position with the company and receive no compensation from the company other than fees they receive for being directors. Non-executive directors are contrasted with executive directors who work for the company in some other executive capacity (e.g. as CEO or CFO). Americans tend to refer to these two groups as “outside” (sometimes “independent”) directors and “inside” directors.
Non-executive directors generally treat their position as sort of a part time job. They attend directors and shareholders’ meetings, but they usually do other things as well, including sometimes being directors of other companies.
Directors, especially outside directors, do not want to get sued by their shareholders. Lawsuits take time to defend and can result in liabilities and bad publicity they want to avoid.
Stakeholder statutes give directors a defence to lawsuits brought by shareholders for failing to act in the best interests of the corporation. Unfortunately, the possible availability of this defence is not enough to get directors to protect the public interest at the expense of the corporation.
It’s just not worth it to them. Why should they even take the chance of getting on the wrong side of shareholders? After all, it’s the shareholders who elect them as directors. If protecting the public interest might get them sued by shareholders, their immediate reaction is to back away.
Another problem with the stakeholder statutes is their real-world application. Assume that directors of Company A decide to stop harming the environment. They don’t yet have the technology to do this, but they decide to run their plants at lower capacity (thereby creating less pollution) while they invest in developing a technological solution to the problem.
The result of this strategy is that Company A’s earnings will decrease until the solution is discovered. This in turn will have an adverse effect on Company A’s stock price. Even if it trades at the same price earnings multiple, the price will go down as its earnings per share decline. It may even trade at a lower multiple depending upon how investors feel about the risk Company A is taking in pursuing the new technology.
So now Company A’s stock price is languishing in the market when compared to other companies in its industry. The directors made a voluntary decision to protect the public interest. Their behaviour was legal under the stakeholder statute, but shareholders are not happy. The value of their shares has dropped.
To make matters worse, lurking around may be Company B (either a competitor or a private equity firm). Company B knows if it can get control of Company A, it can reverse the decision of Company A’s directors and return A’s earnings to full capacity by going back to harming the public interest. Overturning the decision of Company A will facilitate its takeover by Company B whose directors are less socially responsible.
The decision by Company A’s directors thus achieves very little. Their shareholders are angered. Company B takes advantage of their dissatisfaction by buying Company A’s shares at deflated prices. Company A’s directors all get fired and Company B replaces them with directors who decide to return Company A to its old polluting ways.
It’s easy to see why, in the real world, the stakeholder statutes are of no help to directors who want to pursue the good citizen option. In fact, it might cost them their company and position as a director. It is not surprising directors mostly ignore these provisions.
Stakeholder statutes (and by extension statutes establishing for benefit or “B” corporations) set an important precedent. Their existence recognizes that directors are capable of thinking about more than just the financial well-being/profit of the company. They are also evidence that the duty of directors in the corporate law can be changed in order protect employees, environment, local communities, and other elements of the public interest.
The solution to limiting corporate abuse of the environment and other elements of the public interest is to treat the source of the disease as well as its symptoms. Instead of solely trying to figure out “where” and “how much” corporate abuse the public should be required to suffer, government should begin to consider “when” it all should cease.
There should be no need to change democracy to allow it to be able to govern its own creations (corporations). Corporations only exist because of the laws enacted by government providing for their creation. From inception, corporate directors should realize their job includes protecting the public interest as well as making money for shareholders.
The duty of directors in the corporate law heavily impacts corporate behaviour. Change these laws effectively and you can change corporate behaviour so that it no longer does severe harm to the public interest.
The way to change them is not by giving directors permission to protect the environment, employees, and other elements of the public interest. It is by changing the duty of directors to demand it.
The Code for Corporate Citizenship (the “Code”) will achieve this by adding 28 easy to understand words to existing law. The duty of directors to act “in the best interests of the company” should be modified to ensure the fulfillment of this duty “not come at the expense of the environment, human rights, the public health and safety, dignity of employees or welfare of the communities in which the company operates.”
Robert C. Hinkley is a corporate attorney, the originator of the Code and the author of Time to Change Corporations: Closing the Citizenship Gap(2011) from which this article has been adapted. See: www.codeforcorporatecitizenship.com